Harnessing the power of analytics helps companies get ready to divest. Read our 2018 divestment study to learn more.
Harnessing the power of analytics helps companies get ready to divest. Read our 2018 divestment study to learn more.
Divesting non-core assets may offer the best growth prospects.
Ryan Burke

Ryan Burke

Global Transactions Leader Consumer Products & Retail

Ernst & Young LLP

+1 214 969 8609

ryan.burke@ey.com

Divestment Study for Consumer Products and Retail

As digitalization continues to transform the way in which consumers identify, assess, buy and use an ever-broader range of products and services, consumer products and retail (CP&R) businesses are facing constant change. The disruptive forces sweeping the sector threaten to overwhelm those companies that are unable to show agility and flexibility.

For many CP&R companies, the response to these forces has taken the form of portfolio reassessment, driving a wave of M&A and divestment activity as companies look to raise capital and invest in digital innovation. The most eye-catching deals highlight the shifting sands of CP&R as both digital and physical brands reshape themselves for the omni-channel environment.

Consumer Products and Retail divestment study
Consumer Products and Retail divestment study

However, if digital technologies are forcing CP&R companies to think carefully and more frequently about the businesses and assets they now wish to divest, then emerging technologies can also be a powerful enabler of this process.

Traditional tools and models based on static reports can be time-consuming to prepare and difficult to analyze. New analytics tools will provide the means to make smarter decisions at every stage of the divestment life cycle using real-time data, from powering more disciplined portfolio reviews to building a value proposition for buyers and then executing on the transaction.

Companies that have focused on cost savings are finding it increasingly difficult to grow their top line due to a lack of funding for investments in market-leading technology and analytics tools. Savvy executives have sold non-core or non-strategic assets in the past 18 months, taking advantage of the high multiples and investing the funds into new tools.

 

As digital disruption challenges consumer-facing businesses to rethink their operating models and strategic plans, the pressure to relinquish assets with less growth potential will increase.

Almost two-thirds (60%) of CP&R executives say they recognize the importance of divesting such brands. That represents real progress, but CP&R companies must follow through on these good intentions. Just 11% of executives say selling non-core brands will be a key part of their divestment strategy over the next 12 months. The remainder worry that they do not have the resources to prioritize these actions, or that current market conditions are not optimal for disposals.

Consumer Products and Retail divestment study

The pace of digital disruption in these sectors is so rapid that there may not be time for the wait-and-see approach. Companies need to:

  • Transform through organic development or M&A activity that generates the capital needed for investment in innovation
  • Use divestments to raise funds for acquisitions and ventures, or free up resources for deployment elsewhere
  • Prioritize resources against the transformation strategy and agenda

Some 39% of CP&R businesses worry that regulatory uncertainty will get in the way of their divestment execution, while 36% are concerned that a divestment might leave the business open to an unwanted takeover approach as its value diminishes.

The macro environment is clearly uncertain:

  • Tax reform is still in its early stages in the United States: many signs seem to be positive for a continued strong deal market, but long-term impacts are still unknown.
  • In Europe, Brexit negotiations continue to dominate, with little visibility of how they will conclude.
  • In Asia-Pacific, trade negotiations, both within the region and with the rest of the world, are dragging on.

There are no easy answers to these uncertainties, but executives in the sector cannot afford to wait. Companies need to:

  • Harness technology for effective scenario planning to assess and mitigate the potential impacts of external challenges.
  • Invest in robust analytical capabilities to improve portfolio review effectiveness and timeliness.
  • Build this discipline into transaction execution processes to become more agile and flexible as conditions on the ground change.

Companies that successfully communicate their strategic intent to the marketplace are likely to reap the rewards. If portfolio planning is strategic and well-articulated, divestments may boost valuations.

Consumer Products and Retail divestment study

More strategic portfolio planning will help the 21% of companies struggling to reach an agreement on how divestment proceeds should be invested.

The pace of change in the consumer marketplace demands more frequent strategic evaluation. Almost three-quarters of CP&R executives (73%) say they are conducting portfolio reviews more frequently and in greater depth. More than half (52%) say they conduct such reviews at least twice a year, while 38% say it’s an annual process.

Many in the sector are already convinced. A third of executives (33%) say they are conducting reviews more regularly because they need to respond more quickly to consumer demands, while a further 18% reflect that market disruption has forced their hands.

Consumer Products and Retail divestment study

This diligence pays dividends. Our Global Corporate Divestment Study finds that businesses conducting portfolio reviews twice a year, rather than on an opportunistic basis, are:

  • 41% more likely to achieve a sale price above expectations
  • Three times as likely to complete their exit sooner than expected
  • 46% more likely to achieve a higher valuation than expected

Businesses that have not made the adjustment must now play catch-up or risk losing competitive advantage to rivals with better-managed portfolios of assets. That may require further investment in the analytics capabilities that sector leaders now employ in reviews.

Among the quarter of CP&R businesses (27%) that have not stepped up portfolio review activities, 61% haven’t done so because they don’t yet have access to the right data or to good analytics tools. Almost as many (57%) point to a lack of overall resources holding them back.

Consider taking a lead from the buy side: in many cases, CP&R businesses have been quicker to implement new analytics technologies in the work they do to identify potential M&A targets. Bringing that skill and experience into the discipline of divestment will now be important.

CP&R executives will need to invest the proceeds of divestments strategically to maximize returns. Technology will be an essential part of any inorganic growth strategy: 50% of companies say they are more likely to make divestments in the coming year because of the need to fund new technology investments.

On the organic growth side, 72% of executives say business efficiency is a priority for reinvestment, followed by supply chain and operations (58%), and a range of product development and market entry strategies.

  • Relative to costs, many CP&R businesses are exploring robotic process automation tools to strip out expense and improve bottom-line performance. Outsourcing non-core activities to third-party providers may also generate efficiency improvements.
  • For top-line growth, the imperative is to identify and invest in existing core assets that will generate value in the digital marketplace, and to move into new product or market areas. Distribution will also be a priority as CP&R sales channels proliferate.

Do not overlook the value of divestments in raising funds for new ventures that reposition the business: 57% of companies intend to invest sale proceeds in acquisitions that enable them to move into new products in growth markets. A lack of divestments will directly impact the funding available for the most innovative products from a company.

With 78% of businesses planning to prioritize acquisitions that boost their core products in their core markets, consolidation is set to be an M&A theme in 2018.

Our Global Corporate Divestment Study found companies that apply consistent data-driven analytics to drive decision-making in their portfolio reviews are 33% more likely to achieve a sale price above expectations. The opportunity for consumer-facing businesses with a growing data pool at their disposal is vast.

While businesses in the sector are stepping up their use of analytics to secure value from this data, including during the divestment process, many are not yet confident about the quality of the source information. This can undermine any insights delivered by analytics.

  • Evaluate external data sources: More than a third of executives (37%) are not confident in their industry trend data as it relates to the divestment process. Companies need a better understanding of the markets in which they operate and how these are changing. Just over a quarter (26%) of executives do not have confidence in their social media monitoring, despite the importance of such data in understanding consumer preferences.
  • Focus on the granular: Only 39% of companies are very confident in their own product data. The ability to allocate cost and revenue data at a granular level, drilling down to product and stock keeping unit, is vital for divestment planning. Companies should identify assets that are under- or over-performing and develop a crisp equity story. Doing this in advance will also smooth the separation process, potentially reducing deal execution time.
  • Leverage point-of-sale data: Some 44% of executives are confident that their point-of-sale data helps them understand consumer buying patterns. Use of predictive and prescriptive analytics tools will extract even more valuable insight around issues such as channel mix — physical versus digital — store footprint and supply chain configuration. This will improve divestment decision-making and secure better outcomes.
  • Build third-party data: Only 12% of companies are very confident in the data they have on where competitors are putting their money. Just over a quarter (27%) have full confidence in their wholesaler and distributor data. Getting access to this data could highlight changing customer buying patterns and identify where disruption will occur — and indicate where the portfolio needs to change.
Divest with confidence — and with strategic intent

Radical change demands a radical response. CP&R companies are already transforming ad hoc portfolio reviews into a much more strategic and programmed process.

But now the sector must raise its game further, exploiting data and analytics tools to improve decision-making and secure better outcomes from assets selected for divestment.

CP&R companies recognize that changing preferences and habits of their customers demand a different asset mix to thrive in the future. Data analytics and tools will help identify non-core assets early, allowing companies to react promptly. The pace of divestments has already sped up and will continue to accelerate. Readiness will improve buyer interest and sale price.

New technology is both the trigger for this imperative and the answer to many of the challenges it presents. Data and analytics tools offer a means to identify growth prospects in the changing environment, pinpoint non-core assets (whether current or in the future), build a value case for buyers and enhance speed and value during the execution of the transaction.

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