Retail Outlook 2021: Using M&A to create value

A look at where the opportunities might arise for dealmakers in retail.

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.

What have we learned in 2020?

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.

Actions to take in 2021

Be ready for M&A to accelerate

We expect a polarised market this year, with key trends of M&A activity in 2021 to include further distressed M&A transactions and consolidation, particularly amongst brick-and-mortar non-food retailers (notably fashion apparel and department stores) and certain pockets of hospitality and leisure (travel and restaurants), while resilient businesses look for opportunities.

As government support begins to taper, we’re likely to see more insolvencies and, with it, more opportunities to acquire businesses. Not just in fashion - which saw the most casualties last year - but across a wide range of retailers, particularly those with less sophisticated or no online offerings, for example.

We also expect to see acquisition of up-and-coming brands and those that have seen big success in 2020, such as direct-to-consumer brands and subscription services.

Find the new opportunities

We expect to see businesses look to acquire new brands, channels or capabilities. But those that do will need to be clear on the criteria they are interested in so that activity matches strategy. Significant value can be lost in executions, and often unconsidered factors - such as understanding people, culture and purpose - can be really important.

While there will be good M&A opportunities around, they might still be risky in the current environment. Some retailers may be better placed looking towards partnerships as a chance to tap into new customers, new routes to market and change business models. We’ve already seen success in this arena in prior years, with M&S announcing its joint venture with Ocado, for example.

For others, there will even be good opportunities in the bad, with distress giving some brands the chance to rightsize or restructure the business.

Return of the IPOs

Retailers that have been successful or strong over the last few months - many of whom capitalised on the growth of online shopping - are likely to look to IPOs as investors look to alternatives to low returns from interest rates and bond yields. Last year, in the largest IPO since 2015, The Hut Group raised £1.88 billion, with interest driven by huge sales online and a 51% revenue jump in the last quarter. Doc Martens demonstrated the success of its brands and global appeal with its IPO in February this year

Moonpig also tapped into the public markets after benefitting from brick-and-mortar closures in 2020 and an increase in customer acquisition. With an already 60% share of the market - the group hopes to further increase customer base and position itself as a technology company, rather than a retailer, leveraging its customer data and predictive technology.