PwC’s Neil Sutton emphasises understanding business’ core value, impact on M&A valuation in the digital era

Gain a deeper understanding of how companies are adapting to changing consumer demands and aligning their strategies with the rapidly shifting FMCG sector.

Today's ever-evolving business landscape, particularly the Fast-Moving Consumer Goods (FMCG) sector, has witnessed a series of transformative shifts. Consumer preferences, fueled by digital advancements, have spurred remarkable changes within the industry.

To gain deeper insights into these trends and understand the strategies that companies are employing to stay ahead, we turn to Neil Sutton, the Asia Pacific Corporate Finance Leader at PwC in Hong Kong.

With over 25 years of experience in corporate finance and a specialisation in mergers and acquisitions (M&A) within the retail and consumer sector, Sutton is a seasoned expert who has successfully completed over 80 transactions.

In this interview, Sutton sheds light on his perspective on the current state of the FMCG sector and shares valuable insights into the industry's dynamics, evolving consumer behaviours, and the strategic responses of companies.

With your extensive experience in Corporate Finance and M&A, how would you characterise the current state of the Retail and Consumer Sector, particularly FMCG, in terms of trends and developments?

It has been a volatile period when new consumer trends are being formed:

a. Post-COVID opening up (especially for China with late open-up) where revenge spending has been taking place, but mostly in the form of experience (travel, service, dining);
b. Significant economic uncertainty and property market slump dampened consumer confidence and trade-up appetite;
c. Young consumers continue to be key driving forces in spending, but have brand and product preferences very different from the other consumer groups;
d. Digital continues to be important, and social sharing of experiences has a much larger influence on a purchase decision than a conventional e-commerce platform.

Overall, M&A buyers remain cautious given the economic uncertainty and difficulty in assessing whether some of the trends (and hence the sector to pick) would be short-term vs. long-term structural changes. They need to have higher conviction before they are willing to acquire/invest.

Consumer behaviour and preferences have evolved significantly. In your opinion, what factors have been driving these changes, and how are companies adapting their strategies to meet these evolving demands?

a. Trying to ensure that they have the right proposition to trade down consumers;
b. Investing behind key social channels to ensure they have the right platform to build brands/influence consumers;
c. Try to ensure internal operational efficiency to cope with the economic uncertainties;
d. Leverage M&A as a strategic lever to help gain competitive edges/expand into new areas but also need to be convinced of the strategic value/synergies of the potential targets;
e. Other drivers are consumers’ increased health-consciousness, climate change and rising awareness of sustainability. 

E-commerce and technology are reshaping how consumers interact with brands. From a corporate finance perspective, what are the implications of this digital transformation on business models and financial strategies in the sector?

In contemplating M&A, it is crucial to understand where the main value of a business lies and how this can impact its valuation. It is crucial to understand the extent of reliance on online shopping income relative to the total P&L and be able to forecast if and how your customers will shop with you in the future. In a few situations, pure online players have geared up significantly as revenues expanded during COVID but did not always anticipate some loss of sales as customers returned to stores. This has created some less profitable active businesses, and valuations have reduced for pure direct-to-consumer models.

Financial structuring plays a critical role in M&A deals. How do you foresee financial structures evolving within the FMCG sector to accommodate the changing dynamics and demands of the industry?

In the future, there will be greater emphasis on impact/ESG, particularly in the supply chain. In financial structures, we will see the pricing of finance linked to established ESG criteria (governance and carbon reduction). 

Consumer trust and brand reputation are paramount. How do companies balance their financial goals with maintaining a strong brand image, especially in an era where transparency and accountability are highly valued?

In certain parts of the world, companies are using external validation to establish trust amongst customers. Accreditations such as B-Corp are globally prevalent, particularly in the FMCG sector. But in Asia, B-Corp and other standards are not as much recognised as in other parts of the world. As per the 2022 list of top 20 countries with the most companies that enjoy B-Corp accreditation, Australia (#4), New Zealand (#15), Taiwan (#17), and China (#20) have the main representation in Asia. 

As a judge at the FMCG Asia Awards, what specific qualities do you believe differentiate exceptional initiatives and strategies within the FMCG Sector? 

Combining innovation and really knowing who your customers are is key to establishing a winning, future-proof product and product proposition.