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With economic uncertainty and volatility now hitting a third consecutive quarter, the M&A market—both in beauty and across other sectors—has experienced a significant slowdown. The Financial Times recently reported that US M&A activity has dropped 40% year on year in volume terms—a clear signal that the economic challenges that began to bubble up at the start of the year are still dominant and affecting nearly every sector and business. As we edge toward 2023, the overall economic outlook continues to dim as global economies fight high inflation, rising interest rates, labor shortages, recession concerns, and an escalating energy crisis.
Even amid all the doom and gloom, however, there have been a few bright spots. Equity capital markets saw some modest activity during the summer months and issuers in need of capital slowly returned to the market, albeit at lower volumes and a much slower pace than what we witnessed in 2021. McKinsey also recently reported that while 2022 M&A activity has declined, the current numbers are not far off from pre-pandemic levels. But even so, IPO activity remains quite limited, deal announcements have slowed, and the transactions that are happening are unfolding on much longer timelines.
The debt markets have felt the brunt of much of this volatility. As a result, the more traditional bank lending institutions have become highly selective and competitive with more red tape and restrictions than usual. Even some private credit lenders have become more cautious than in past years.
With the outlook for M&A murky, there is still an expectation that M&A activity will return to previous levels once the markets stabilize and the financing environments normalize. While no one can predict how economic and geopolitical conditions like inflation, interest rates, supply chain issues, and oil prices will play out in 2023, general consensus is that the holding pattern we find ourselves in now will eventually give way to an uptick in demand for M&A deals.
When exactly that shift will happen is, of course, anyone’s guess. But that doesn’t mean that brands should sit idle, waiting for the market to stabilize. There is much work for brands to do to ensure they will be well positioned when M&A activity returns.
An October report from Morgan Stanley identified inventory as a “key risk” to retailers and manufacturers, calling out retailers like Best Buy, Gap, and Williams-Sonoma as the most exposed to inventory risk. At a time when retailers are typically beefing up their warehouses to prepare for the holiday season, we’re seeing orders slashed or cancelled altogether ahead of the busy year-end, as inventory levels continue to far outpace sales across many industries.
Beauty is one of the few sectors that historically seems to have escaped major inventory challenges. Cosmetics and beauty product inventory typically turns over at a good clip thanks to natural product life cycles and customer demand for new products. And because beauty brands can reach their customers through a variety of distribution channels, and at various price points, many companies seem to be faring well in the current environment.
One of the tricks to weathering this unstable economic climate is finding the right inventory mix—a balance between having enough product to fulfill customer needs, but not so much that it will require heavy discounts to sell. As always, maintaining a lean inventory position is key to being well positioned down the line when the market recovers.
Diversify the Supplier Mix
While supply chain disruptions have thankfully eased a bit this year, many beauty companies are still battling challenges related to port congestion, freight cost increases, and labor shortages. Diversifying the supplier base and seeking out the best fulfillment partners—with the best terms—should be a major priority to stay ahead of any future slowdowns or disruptions.
In beauty, it’s not always feasible or practical to be overly selective with partners since many of those relationships are dictated by a brand’s formulas or specific product parameters. However, this is a critical time for brands to take stock of their supplier relationships. Every component supplier and logistics and 3PL provider should be carefully vetted to make sure that products ultimately make it to store shelves and to customers on time. If your suppliers aren’t delivering on their commitments, now is the time to make an adjustment.
Manage Expenses and Focus on Profitability
With declining macroeconomic conditions, beauty brands must tighten their belts and make every effort to keep a close eye on expenses and concentrate on staying profitable. Brands must price products appropriately, change course when necessary to respond to inflation concerns, and continue innovating and developing new products to appeal to customers. Perhaps most important, is managing the increased costs of doing business in this uncertain market. Whether it’s procuring raw materials, finding cost-effective sustainable packaging, or adjusting marketing and advertising budgets to capture new customers, controlling costs is vitally important to maintaining a strong position with potential investors.
While M&A may be subdued right now, that does not mean that there aren’t other viable shorter-term financing alternatives available to beauty brands. It’s important that brands use this time to explore different avenues for funding and financing that may not necessarily require giving up equity or diluting ownership in your business, especially at a time when most brands can’t afford to do so. Financial partners that work with bigger brands and retailers and regularly deal in high-volume orders are perhaps the safest bet in this environment. Many come to the table with existing relationships with reliable suppliers—and more favorable terms —that allow beauty brands to secure raw materials and products more quickly and deliver them to customers without interruption.
The right financial partner can also help alleviate cash flow concerns and provide much-needed working capital to support the business at a time when it’s important to show investors that the company’s financials are sound. The right financing solution in the near term may allow a brand to not only wait for the M&A market to improve, but also to bolster the company’s financials and P&L to secure a more favorable valuation down the line.
Patience is key in this market. Now is the time to get your house in order, align your business with the right partners, and know your options—all of which will position your brand well for when the market rebounds and M&A is back on track.