Consumer deals: time to go broader and deeper on due diligence

Last week's announcement by the BoE of a hike in interest rates, along with all of the other cost-of-living increases will undoubtedly cause consumers to rein in spending. This brings yet another issue to the table when considering acquisitions in the consumer sector. This comes on the heels of COVID recovery and the subsequent supply chain cost squeeze and ongoing energy inflation.

On the  revenue side it will be key to understand brand strength, elasticity of demand, depth of discounting, repeat purchase frequency and ability to pass though retail price increases. Not all consumer products will experience the same impact: Leonard Lauder reportedly theorized about the nature of branded lipstick as an "affordable luxury" that proved resilient in downturns. Analysis of the top line will need to get under the skin of such hypotheses.

On the cost side: buyers will need to get comfortable not only with the exposure to spiraling energy, raw material and packaging costs, but also with the degree of forward price security and security of supply. How resilient are systems? Does management have the information it needs to make the right decisions fast enough to react to a changing situation? And if worst comes to worst: are there operational upsides that could mitigate downside revenue risks?

There are still good deals out there, but getting them done will need broader and deeper due diligence covering these key issues across financial, operations, technology and tax.