The Era of M&As
How often have you caught yourself wondering: “Who will be acquired next by this company?” or “Which conglomerate will now acquire this new venture?” If your answer is “very often, of late,” I am with you.
Reflecting on the last decade, we have probably seen mergers and acquisitions happening almost as quickly as businesses are being launched, particularly in the CPG world. Think… Ben & Jerry’s… Burt’s Bees… Kashi… Goose Island… Annie’s… Tom’s of Maine… Naked Juice… Vitamin Water… Lagunitas and the list goes on. But you get the idea.
So, why are M&As a new mantra for CPG?
Needless to say, growth is the primarily underlying motivation for acquisitions. However, thinking specifically about CPG companies, there seem to be two compelling incentives for acquiring other companies:
- Scale Consolidation
- Capability Building
Some acquiring companies, particularly CPG behemoths, have the resources and bandwidth to invest in smaller brands that are gaining traction among consumers or to take over existing brands that are in need of reinvigoration. Leveraging existing capacity and consolidating categories that would benefit from economies of scale and synergies makes strategic sense for an acquisition.
However, often, consumer goods companies leverage acquisitions to keep pace with emerging trends and consumer desires within the marketplace. An acquisition of this nature is a CPG company’s solution to fill in an innovation gap within their R&D efforts. Several large beverage companies in the recent past have diversified into the energy drinks space, and several traditional companies have branched out into the natural or organic space through acquisitions. These acquisitions tend to help larger, more traditional companies build complimentary capabilities that are sought by consumers today.
What seems to be working better?
Based on research done by Booz & Company in 2011, acquisitions within the CPG industry that are aimed at capability building versus simply scale consolidation, prove to be more effective and beneficial since they offer expansion through complimentary offerings and help accelerate growth.
Since such acquisitions also help companies fill in their innovation gaps, I believe they are likely an easier solution for companies with deep pockets rather than investing in R&D in the hope of creating a pipeline of product offerings that would resonate with consumers.
Implications for the CPG landscape
As CPG companies begin to realize the difference in likelihood of success between acquisitions carried out for economies of scale and those carried out for building capabilities, their focus and commitment towards innovation could potentially take a backseat. Instead they would likely focus their attention on being ready for a potential M&A opportunity that could arise in the marketplace.
This shift in focus will likely result in two potential archetypes: one, the global giant who would sharpen their capacity to acquire companies and the second, likely smaller, start-ups that would hold the innovation torch.
If this scenario pans out, there will likely be a shift in innovation from the bigger companies to smaller more nimble companies, and likely not the demise of innovation.
But, as all things, that remains to be seen!