“[Deals] are still moving, but they're moving at a pace that we saw during the pandemic. It's just very, very slow, so that's further impacting companies in their cash flow cycle. I think this is, unfortunately, a new norm, and it's likely going to continue through the year's end and into next year. So, companies really must think about all their options.”
Moving the ‘light switch’ from growth to profitability
As interest rates rise and consumers pull back on spending, CPG companies are struggling to raise enough money to keep their business open, and bankers and investors are more cautious about lending, she said.
“The food and beverage industry particularly has faced a big capital crunch this year, and it doesn't seem like it's going to improve very quickly,” Palmer said. “It's been a difficult year for a few reasons, including ... the impact of inflation and [reduced] consumer spending, and margins are reduced... Many businesses are also missing their top lines, and companies need financing, but the banks are tightening their lending standards. Equity is very hard to come by, and debt is expensive ... due to the rising interest rates.”
In response, CPG companies have shifted away from placing greater importance on growth to now prioritizing profitability, she said.
“For the longest period of time, it was all about top-line growth, and I don't want to say growth at all costs, but that was certainly the priority. Then this light switch went off, and then all of a sudden, it was path to profitability,” she added.
The common response to the shift towards profitability has been to lay off employees to cut costs from the budget, Palmer said. However, “layoffs can negatively affect [a company’s] ability to compete in the market,” and “hanging on to ... talent and employees is actually a key to continuity and long-term success,” she added.
Additionally, CPG companies should be cautious about how much they scale back their marketing efforts, as they can quickly lose market share to their competition, Palmer noted.
“Marketing is an engine, and if you take your foot off the gas pedal, it takes a long time when we put it back on to see the fruits of your labor. So, stepping out of the market is not something that we would ever suggest. You can tweak your acceleration, but you should never take yourself fully out of the market because to reengage is only going to take longer, and then your competition is going to be ahead of you.”
Assessing traditional or venture capital
Some companies are hesitant to use credit because of current high-interest rates, but CPG companies should analyze their current situation and see if borrowing money can help fuel growth, she added.
Many food and beverage startups have turned to venture capitalists, who invest for part ownership of a company. However, companies need to think about how much of their company they are willing to give up and how that might cost them more in the long run, Palmer said.
“I have spent my career trying to educate borrowers on the differences between debt and equity. I always say debt is like dating, [and] equity is like marriage. Equity is supposed to be forever, and if it's not, it's very expensive and hard to unwind. Where debt you can just sort of go about your separate ways. Debt is definitely far less expensive than giving up equity.”