Retail M&A

Perspectives

M&A in retail

Leveraging retail M&A for growth

Current macroeconomic trends are creating an environment prime for M&A in retail as an accelerated path to transformation, as well as opportunities for retailers to shift from “survive” to “thrive.” To emerge as a leader, retailers must evaluate how M&A strategy to margin improvement fits into their value proposition and long-term strategic goals—and take action.

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The tale of two retailers

COVID-19 created a tale of two types of apparel and discretionary retailers—leading retailers, poised to weather the storm, capitalize on technology investments, and take market share—and lagging retailers, whose fixed asset base and debt would ultimately prove detrimental.

Leading discretionary retailers were already investing significantly in innovation before COVID-19. Investment focused on products, services, and capabilities (e.g., enhanced digital presence), while also reevaluating existing assets (e.g., footprint rationalization). When it became clear that consumer purchasing was altered by the pandemic, these proactive players with agile delivery models and enhanced digital capabilities thrived. The retailers proved that they could move with speed and conviction to activate digital investments and put their downside scenario plans into action, ultimately positioning them to “weather the storm.”

On the other hand, lagging retailers who were surviving quarter to quarter—or who did not have the margin profile to invest proactively in innovation adequately—failed to rapidly address the accelerated change in consumer demands, leading to immediate diminishing profitability.1

M&A deals, which had already been in decline in the retail sector, fell to the wayside or were paused due to market uncertainty at the onset of the pandemic. As the economy rebounds and consumer sentiment begins to strengthen, the time is right for apparel and discretionary retailers to consider leveraging M&A for growth.

Macroeconomic trends driving buy-side and sell-side M&A in retail

Our analysis has identified three macro trends both buy-side and sell-side retailers can take advantage of through M&A and margin improvement strategies to accelerate growth and stay ahead of the competition.

Interest rates have been historically low,2,3 providing an opportunity to finance growth or capital at a lower cost. Given the expected Fed action around interest rate increases in 2022, the current rate environment is expected to shift in the near future, making now the time to take action.

  • Buy-side: With the ability to finance at lower rates, retailers interested in pursuing strategic acquisitions can secure funding with heightened confidence that associated debt costs will not increase in the immediate future.
  • Sell-side: Retailers are refining their focus, given new consumption behaviors in a post-COVID world. Through divestitures, sellers can obtain necessary capital and focus their effort and energy on core operations to proactively anticipate an evolving retail landscape.

According to Moody’s, debt default levels in retail and apparel will continue to remain well above the levels of the past 12 years, and the market likely can expect continued bankruptcies as retailers emerge from the pandemic with debt-filled balance sheets and a lack of liquid assets.4 After a period of heavy bankruptcies5 and increased debt-to-capital ratio,6 brands and assets are often not residing in their optimal long-term “homes”; we expect to see more disruption and opportunity to capitalize on this via retail M&A.

  • Buy-side: As lagging retailers struggle to maintain their current financial structures, leading retailers with strong balance sheets will continue to have ample opportunity to purchase distressed assets at discounted prices. Retailers that look to expand their product portfolios to enhance their existing offerings can ultimately accelerate their growth and broaden their strategic value proposition.
  • Sell-side: After a period of disruption, it is essential to take a deep look at the future growth profile of each portfolio line, given the new state of the consumer and the next horizon of possible scenarios that are going to unfold. Retailers should explore selling/divesting their businesses when they are “in the driver’s seat” to identify a more vital partner to help turn around the business and reduce liabilities instead of waiting until bankruptcy is the only option.

Retailers are continually looking to differentiate themselves from their competition and meet customers in an increasingly digital world as customers have shifted their focus to shopping online.7

  • Buy-side: Acquisition may represent an effective way to rapidly build digital capabilities, rather than trying to “go it alone” and struggle to enhance digital capabilities in an appropriate time frame. Beyond acquisition, partnerships or alliances with third-party providers may be an attractive option.
  • Sell-side: Small and/or struggling retailers may want to explore a sale to gain the required capital to pursue aggressive growth without capital to build capabilities.

Strategic buy-side and sell-side retail M&A considerations: A framework

Beyond macroeconomic trends, organizations must reflect internally and define how planned M&A in retail (including strategic partnerships) fits with their value proposition and long-term strategic goals.

In addition to “buy”/partner or “sell,” a third approach may be a more sustainable, attractive option for retailers: margin improvement. Expansion of margins can enable an organization to move from survival mode into a growth-oriented mindset with sustainable, competitive margins.

Our analysis outlines four primary considerations organizations should consider when assessing whether to buy, sell, or expand margins to optimize their portfolio.

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Looking ahead

As retailers emerge from the pandemic, the consumer has changed; there are new faces of competition, increased margin pressures from the third-party ecosystem, and the standard product playbook no longer contains the formula to win. Those who take the time to reflect on their differentiated strengths can take advantage of proactivity when making strategic retail M&A and/or transformation decisions. Those who take a wait-and-see approach will have those decisions made for them by their peers—and lose share along the way.

Most importantly, now is the time to act. The “safe” option of letting others go first in favor of a fast-follower strategy is not safe at all. Increasingly, nothing beats a move to just DO SOMETHING! to catalyze the future that works for you and what you want to achieve.8

Endnotes

1 Larry Hitchcock, Steve Maddox, and Adam Whiting, “A new formula for retail recovery and growth: The five paths to profitability,” Deloitte, 2020.
2 Christopher Rugaber, “Federal Reserve sees interest rates near zero, at least through 2023,” PBS News Hour, September 16, 2020; YCharts, “US 5-year CD rate,” accessed March 1, 2022.
3 Y Charts, US 5-Year CD Rate.
4 Ben Unglesbee, “Retail defaults to decline—but will still be high: Moody’s,” Retail Dive, April 8, 2021.
5 Charlsy Panzino and Chris Hudgins, “Retail market: Surprise sales jump in August; 4 new bankruptcies,” S&P Global Market Intelligence, September 20, 2021.
6 CapIQ data, top US public retailers with more than $1 billion in annual revenue.
7 US Census Bureau, E-Commerce Retail Sales as a Percent of Total Sales [ECOMPCTSA], retrieved from FRED, Federal Reserve Bank of St. Louis.
8 How Leaders Shape the Future by Overcoming Fatal Human Flaws. Page 138.

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