Consumer goods companies turn defensive on acquisitions to maintain market share

New Delhi: Fast-moving consumer goods (FMCG) companies have pivoted their mergers and acquisitions (M&A) strategies as they shift from diversification to strengthening their core businesses, according to a report by Deloitte. This shift is driven by a greater focus on profitability amid increasing inflationary pressures and competition, the report said.

While M&A activity in the FMCG sector peaked in 2023, with more than 175 deals valued at ₹87,750 crore, there's been a notable trend towards acquisitions within core business categories of late. More than 60% of deals in 2022 and 2023 were focused on core areas, compared to 30% in previous years. There were 94 such deals in 2021 and 140 in 2022, according to data sourced from Merger Market by Deloitte.

The Deloitte report said, “This trend reflects a strategic move by companies to strengthen their market positions and enhance profitability as they face increasing inflationary pressures. By acquiring firms that align closely with their primary operations, FMCG conglomerates aim to consolidate and leverage cost synergies, thereby protecting their bottom lines.”

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A clear example of this shift is in the food processing industry, including sectors such as spices, sugar, and tea processing, which have seen a notable rise in M&A activity. Some key deals include Tata Consumer Products’ acquisitions of Organic India and Capital Foods, and investments by funds in several direct-to-consumer brands. Several large companies have also acquired spice brands to expand their packaged food portfolios.

From offence to defence

In the years just after the pandemic, companies and funds lapped up assets to consolidate their foothold in the market after the pandemic brought about shifts in consumer behaviour such as an increased affinity for wellness products, new-age brands, and packaged foods and snacks. 

However, more recently, FMCG companies have shifted their focus to from diversification to realising greater value from past acquisitions. That’s especially because volumes in the FMCG space have remained under pressure on account of high household inflation and increased competition. 

“Executives are now under pressure to extract tangible benefits from these deals, moving beyond initial expansion goals. As volume growth slowed and margin pressures increased, companies realigned their M&A strategies to prioritise core business operations and enhance their bottom line,” the report said.

Also read: Danone doubles down on India, six years after quitting its dairy marke

As a result, companies have adopted a more defensive M&A strategy, characterised by consolidation within core markets, acquisitions that align closely with long-term goals, and prioritising operational integration to improve efficiency and profitability. That said, inorganic growth will continue to be a major area of focus for the FMCG sector as incumbents defend their market share from regional players, direct-to-consumer brands and private labels.

“Dynamic changes in consumer behaviour through the emergence of new business models such as quick commerce will necessitate M&A of brands offering convenience, health and sustainability,” said Anand Ramanathan, partner, consumer products and retail sector leader, Deloitte India.

PE firms will look to cash in

While private equity firms have played an important role in incubating direct-to-consumer, regional and niche players, they will seek to cash in on the opportunities created by the pressure on established players to defend their market shares. "The established players will continue to focus on their core to protect margins, which are being eroded by the growth of modern trade and e-commerce," he added.

Also read: FMCG makers to report low-to-mid-single-digit volume growth in Q2

In a recent interview with Mint, Tarun Arora, chief executive of Zydus Wellness, said the company could invest in both international and domestic markets. He added that the BSE-listed company would drive growth through innovation, organic expansion, increasing market penetration, and acquiring new businesses. In 2018 Zydus Wellness acquired 100% of Heinz India for ₹4,595 crore. It then bought brands such as Glucon D and Complan. The focus will be on “specific and right sized" acquisitions, Arora said, adding that the company could spend ₹100-200 crore on these.

Recently, French dairy company Danone said while it has an appetite for M&A in India, expanding the core business will remain its priority.