Different: interest rates are headed up

After an unprecedented period of extraordinarily low interest rates, we now see rates inching up around the world. In the US, inflation has picked up steam, fueling expectations that the Federal Reserve will continue to raise interest rates throughout this year. The Fed most recently raised its benchmark interest rate in March, the sixth increase since rates hit near zero in 2008. However, even with the rise, we are still nowhere near historic high points—if anything, we are still near record lows—and we expect minimal disturbance to the M&A market as a result.

The Kearney 2018 M&A strategy outlook

If last year offered the M&A market a moment to pause—and perhaps plan ahead—then 2018 is about capitalizing on opportunities or being left behind. Here are our four strategic insights to help consumer and retail companies and private equity firms navigate the next year.

Legacy consumer and retail companies fight back

After years of disruption and ceding market share to innovative upstarts, the consumer and retail industry stalwarts are ready to test the age-old notion that the best defense is a good offense. Eighty percent of the executives we surveyed noted that traditional retail and consumer product businesses will be active in the M&A market this year. For many, that means driving growth by aggressively pursuing targets that have mastered different consumer segments, innovative go-to-market models, and new technologies or brands. This will include convergence across traditional sectors and will fundamentally become part of the new growth model (see sidebar: Alibaba offers lessons in convergence).

Alibaba offers lessons in convergence

Amazon’s acquisition of Whole Foods dominated M&A headlines last year. But when it comes to convergence plays, Alibaba has truly paved the way.

In 2015, the e-commerce company launched the high-end supermarket chain Hema in China as a way to reinvent grocery shopping. The stores are a far cry from traditional Chinese grocery stores, providing shoppers with a seamless blend of online and offline experiences—and giving global competitors a taste of what the future of retail could look like.

The brick-and-mortar stores provide 30-minute grocery delivery to nearby customers who order online. Come into a Hema store and you can dine at the in-store restaurant, scan QR codes for product ingredient information, and pay for items on the spot using Alipay.

All the while, Alibaba is collecting customer data and using it to serve shoppers with personalized food and product recommendations, related recipes, and even information about exotic foods via the brand’s app. It’s the stuff of digital-retail convergence dreams. But is
it working?

Alibaba reports that the average customer makes 4.5 purchases a month and 50 purchases a year. Conversion rates for people who open the Hema app are up to 35 percent. And online orders account for more than half of total orders.

However, operating physical stores is an expensive endeavor. Analysts have said that it takes tens of millions of yuan to outfit a Hema store, and Alibaba hasn’t said whether the chain is profitable. Time will tell.

In the meantime, the e-commerce heavyweight is demonstrating the massive opportunities offered when tech and retail converge.

General Mills’ acquisition of Blue Buffalo Pet Products offers a prime example. Blue Buffalo is General Mills’ largest acquisition in 18 years, and the company’s first foray into natural pet food. With the purchase, General Mills didn’t just add natural pet food to its product lines, it bought additional top-line growth and new customers in an expanding market. Kellogg’s made a similar move when it purchased RXBAR for $600 million last year. The acquisition provided the legacy food maker with easy access to the growing body of consumers who prefer more natural food.

With growth on their minds, more legacy companies are expected to follow suit this year. As newer players disrupt the retail and consumer product space, the choice for the old guard has become clear: use M&A to help pivot business toward the future—otherwise, face losing relevance or being acquired.

Global M&A deals heat up

With many of investors’ high-level questions answered regarding foreign elections, global interest rates, US tax reform, and other events, the global M&A market is primed for continued activity. Eighty-six percent of our survey respondents expect outbound M&A to increase or stabilize this year. Seventy-nine percent expect inbound M&A to do the same (see figure 4).