COVID-19 has undoubtedly impacted some retail businesses more adversely than others and accelerated a number of pre-existing trends. However, we have also seen some boom, with many of these able to take a share of others or make acquisitions.
Pre-pandemic, we saw an increase in consolidation and partnerships as retailers tried to optimise their cost base in the face of margin pressure or acquired new capabilities or routes to market. COVID-19 accelerated this shakeout and some took advantage with opportunistic acquisitions.
We expect this trend to continue apace in 2021.
We’ll see retailers revisit business models and take action to successfully recover, as others look for opportunities through acquisitions. For winning retailers, that means making acquisitions, while for others it means being acquired or separating non-core businesses.
1. M&A hotspots
Our global M&A Industry trends show that M&A activity over the past six months has evolved along different geographic themes. We’ve seen several hotspots in UK retail throughout 2020, many of which we expect to be active again this year.
Grocery and health and wellbeing have performed strongly in the second half of 2020, maintaining their position as category winners. Elsewhere, the pet industry has increased as spending on pets continues to rise throughout the pandemic, which has led to increased demand for consumables, particularly at the premium end. We’ve also seen growth for home, skincare and beauty, DIY and active purchases (e.g. cycling, sportswear) as consumers spend more time at home.
An accelerated consumer channel shift has predictably seen e-commerce giants benefit and a rise in partnerships and collaborations between businesses with online platforms.
2. Buying into rulebreakers
From the start of the pandemic, we’ve seen consumer behaviours change rapidly and market trends accelerate: the greater importance of digitalisation, increased direct-to-consumer sales, a convergence of technology with in-store experiences, contactless delivery and payment options, and ESG. With consumers increasingly open to change, new entrant rule breakers have disrupted traditional retail with significant success.
Because business models now need to match the rapid pace of change in customer shopping habits, these disruptors make attractive acquisition targets. Gymshark, for example, has become a compelling investment opportunity because of the rapid growth of e-commerce, an increasing focus on health and wellness, and its substantial social community.
We fully expect M&A involving rule breakers to be one of the key drivers in 2021.
3. Redefining the core
Portfolio redefinitions were a key driver of M&A activity in 2020. We saw large retailers, FMCGs and conglomerates show resilience and focus on value-creation strategies, such as disposals by the likes of Unilever and Coty.
For many, M&A transactions have created value through acquisitions in growing categories, channels and markets or divestitures of non-core business components and planned exits from non-strategic markets.
4. Building in super resilience
We saw a number of retail and consumer businesses use M&A as a strategic option to diversify supply chains, integrate vertically, look at digital transformation and preserve liquidity. Others are planning restructurings to build resilience into their business models.
As well as M&A activity, businesses have also looked at partnerships for new markets and channels and to leverage digital capability. Hotel Chocolat, for example, signed a five-year deal with e-commerce giant The Hut Group to launch its direct-to-consumer chocolate business in the US.