Leisure and Wellness

As the leisure and wellness categories continue to grow and merger activity among these companies accelerates, the targets of that activity are expected to be accretive. Food and beverage verticals, particularly in the better-for-you segment, are garnering significant attention as competitors seek to expand capabilities. Brand authenticity supported by a mission is impossible for the strategists to build and therefore must be acquired. On the manufacturing front, buyers are seeking new innovative solutions, technology applications, and a portfolio of customers that support long-term growth. While at the same time, sellers are trying to maximize their value. Segments including pet wellness, juvenile products, and specialty consumer products are seeing increased interest, and the sale of these niche businesses can be timed and structured to reap greater benefits.

On the personal care front, M&A’s attention is moving up the supply chain from skincare, deodorant, and other personal care products to include the specialty manufacturers and ingredients makers that support those products. For example, companies developing flavors and fragrances used in “better for you” wellness products tend to be highly attractive to investors, especially when they have healthy qualities on their own. This list can even include specialty ingredients makers who don’t necessarily categorize themselves as “better for you” but fit into the broader leisure and wellness supply chain.

Sustained post-COVID growth is the name of the game, in part because the industry saw growth spurts because of COVID. For over a year, anything that got people outside or allowed them to enjoy themselves safely was hot, spiking valuations and causing some over-estimation across the market. The winners and losers of this period are still flushing out, though those companies that can prove that their new heights are the new norm are expected to enjoy strong M&A interest.

To support the sustainable growth thesis, many buyers seek targets that produce consumable or add-on products that yield valuable repeat purchases. For example, you could buy a rooftop tent for your car and be set for 5-10 years, or a new golf bag every few seasons, but a personal care product like a specialty deodorant or high-quality face lotion can be purchased again and again, and if possible on a subscription basis. Repeat purchasers are more profitable than new customers as you do not need to spend as much on marketing to capture their wallet share. For that reason, those revenues are often seen as the most valuable.

However, that doesn’t mean that consumers are willing to buy just anything that aligns with their needs at any price. Yes, there are price premiums in the specialty wellness category, but consumers are demanding transparency in terms of ingredients, sourcing, and organizational culture, and the product needs to not only be high quality but often come from a brand with a mission. Despite higher demands from the consumer, products still need to be offered at a price that isn’t too far out of line with the market overall, especially in an era of economic uncertainty.

None of this is unusual, especially given today’s high inflation rates. Yes, functional products are seeing a large upswing in the market, from the manufacturers that make them, to the brands that sell them to the retailers that distribute them. But, at the same time, price consciousness among shoppers is rising as well, and running headlong into a category in leisure and wellness that traditionally commands a more premium price point. As a result, consumers are becoming more open to private label and unbranded products from grocery stores and retailers, especially when they offer the same or similar benefits at a lower price.

Given the growing consumer interest in leisure and wellness, there is also a new focus on buying from companies that “walk the walk.” Those that promote their adherence to organic standards or maintain a low carbon footprint are speaking directly to their potential customers who want to know that those they do business with are worthy of their dollars. This is particularly important in leisure and wellness due to the personal nature of these products and services.

Today’s consumers are also, particularly brand and ingredient-conscious. They care about what’s in their supplements, they care about their plastic bottles being BPA-free and they care that their shampoo has a very short ingredient list. The companies living that mission are those that are succeeding in differentiating themselves in a way that’s making them more attractive not only to shoppers but potential acquirers as well.

But that means doing more than just talking about using locally-sourced ingredients or touting a “low-carbon” approach. That kind of talk is cheap and doesn’t matter if the brand isn’t truly living those promises. In leisure and wellness, there are several B Corps that have met strict audit guidelines to ensure they are operating in a sustainable manner and are dedicating a set percentage of profits to related causes, as well as those that are truly mission-oriented and show it off regularly on their websites and in their communications. Companies like Patagonia, Lululemon, and others have built their reputations on publicly embracing sustainability and environmental, social, and governance (ESG) criteria as ways to connect with their customers and do good in the world. It’s core to their brands and how / where they manufacture their products and for wellness companies the types of ingredients and packaging that they use.

That focus on living the mission is key not only in terms of consumer engagement but also in leisure and wellness M&A, as investors in this category are typically very savvy about the companies they invest in and want to know these promises are backed up with real data. Because they know that leisure and wellness shoppers are doing the same thing.

That’s why companies getting the most attention from investors are those focused on offering direct benefits to consumers. On the personal care and consumer food and beverage front that might mean the addition of functional ingredients like plant protein or other supplements. There is broad interest in pushing the envelope to appeal to interested consumers and investors are watching those companies that do it best.