By Daniel Hunter

Nearly half of consumer products companies have experienced a significant impact on their profitability as they look to pass on raw material price increases to already cash strapped consumers.

In a new survey of consumer products companies by business advisory firm Deloitte, 44% said they are feeling the consequences of higher agricultural commodity prices. Rising costs are primarily due to the impact of challenging weather patterns on harvests.

With consumer confidence likely to remain fragile over the next 12 months, renegotiating both existing supplier terms (38%) and prices with customers (34%) were identified as two of the business strategy priorities most commonly adopted in order to manage commodity volatility.

Conor Cahill, a corporate finance partner in the consumer business practice at Deloitte, commented: “Trading conditions remain tough for the consumer products sector. However, key players are developing tactics to relieve pressured profit margins. Many acknowledge the danger of continued heavy discounting on longer term growth strategies and recognise the importance of delivering quality and value at key price points, particularly at a time when consumers have a heightened awareness about the provenance of goods.

"One of the most prevalent trends highlighted was the way in which consumer product companies are looking to engage more directly with consumers, with some companies looking to sell directly to customers and thereby circumnavigate retailers. Social media is a key tool in helping businesses to implement this strategy, providing an outlet for companies to deal directly with their target market.”

Furthermore, as companies look to combat the impact of rising prices, merger and acquisition (M&A) opportunities are considered another key driver for growth. Pessimism regarding the outlook for European M&A activity in the sector has dropped from 32% to 17% over the last six months.

Cahill continued: “Distress driven deals are likely to provide a catalyst for activity, alongside market consolidation and international expansion. There are a substantial number of larger deals in the pipeline and we would expect to see the total value and volume of completions across Europe to increase over the next 12 months.

“International investment continues to be high on boardroom agendas as market leaders look to capitalise on growth opportunities in the expanding Asian and Latin American markets. Furthermore, overseas interest, specifically from China, India and Japan, in acquiring European consumer products businesses demonstrates the increasing importance for brands to have a global presence. The food and beverage sectors are particularly active, accounting for just under two thirds of last year’s European deals over €200m. This trend looks set to continue.”

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