Improving Market Conditions and Strategy Shifts Reveal Growing Opportunities in Retail Dealmaking

The retail industry relies heavily on the health of consumer spending. Consumers’ budgets and sentiments play a direct role in corporate profitability, subsequently impacting mergers and acquisitions (M&A) and private equity (PE) deal activity. But ongoing economic uncertainty, inflation and inventory stockpiling by retailers trying to avoid the supply-chain woes of 2020 — resulting in surplus and steep discounts — have raised concerns about the outlook of the consumer market.

Data from SS&C Intralinks’ Retail Industry Dealmaking: Investors Shop for New Opportunities, produced with data from PitchBook, however, indicates not all headlines are bad news, with the retail industry showing cautiously optimistic signs of recovery.

Defying expectations

As inflation eases in many regions, and central banks’ policies to tame the pace of interest rate hikes are taking hold in some countries, industry players are starting to apply strategy shifts to adjust to the evolving retail landscape, thus defying market pessimism with a handful of recent strong initial public offerings (IPOs).

Ares-owned Savers Value Village, for example, displayed strong performance at its market debut, generating USD 2.6 billion through its IPO. Similarly, two large exits from China’s new IPO system — Ziel Home Furnishing Technology and CECport — drove total exit value year-to-date (YTD) by each generating nearly USD one billion through their listings.

Furthermore, M&A deal activity experienced a slight decline in quarterly deal value and count in the first half of 2023, but deal-type trends have held consistent since 2021, with strategic deals driving the majority of total value. Recent notable acquisitions include the Overstock.com purchase of Bed Bath & Beyond following bankruptcy proceedings, and food retailer Kroger’s USD 25 billion acquisition of Albertsons, a deal that — if approved by regulators — will bring 5,000 stores under one roof in 2024, creating the fifth biggest retailer in the U.S.

The rise (and rise) of e-commerce and mobile technology in Retail

An important part of the retail equation is the growing popularity of the mobile retail market — a factor that’s taking the industry by storm. E-commerce is evolving at light speed. As traditional retail growth continues to slow, and consumers increasingly leverage the convenience of online shopping, businesses are refocusing, restrategizing and aggressively upping their digital game to scale offerings and keep up with higher expectations. Data shows mobile e-commerce sales reached USD 2.2 trillion in 2023 and currently make up 60 percent of all e-commerce sales around the world.

This rapid retail revolution is impacting M&A and PE dealmaking. The changing landscape is bringing with it a plethora of opportunities to capitalize on favorable consumer preferences and cost efficiencies and expand investors’ reach in high-growth areas. Since size can be everything in Retail, larger players are consolidating smaller players to build brands and resilience. An example of a retailer acquiring to scale is German grocer Aldi’s announcement in August to acquire 400 Winn-Dixie and Harveys Supermarkets to help the company compete against big-box stores.

Mastering the art of strategy in Retail

Adapting to changing consumer behavior will require omnichannel strategies on the part of industry players. PE operational proficiency will play a pivotal role in private market dealmaking as the retail industry grapples with recession concerns and economic recoveries.

As companies consider inorganic growth opportunities, assessing new capabilities and technologies will be crucial in scoping deals. Applying emerging strategies like social selling — which generates leads through social media channels, experiential retail — which transforms brick-and-mortar locations into immersive and interactive experiences, and monitoring return on investment (ROI) on new technology integration will be critical to success.

Finding the right opportunities will depend largely on enhanced value assessment — including strategic alignment, a strong capability road map, execution and talent evaluation, as well as an emphasis on prioritizing artificial intelligence (AI).

Continued diligence and smart investing: a firm foundation for the road ahead

M&A has played a key role in shaping the growth of the retail industry for decades. It’s an essential source of progress for consumer goods companies and a proven path to creating value. The trend is only expected to increase.

But to thrive in today’s retail landscape, both dealmakers and retailers will be compelled to apply continued diligence and smart strategies to align with current consumer trends, and, with each other. From touch-free shopping to checkout-free transactions, retailers will have to invest in tech infrastructure and continuous improvements for integrating online and offline retail formats.

On the bright side, surveys indicate consumer sentiment is showing positive cues of increasing stability, with half of surveyed consumers planning to increase their online shopping activity through the remainder of the year across all Retail and in sectors including Travel, Luxury Products, and Entertainment and Leisure.

As technology drives the industry further and digitalization opens the door to newer trends, opportunities remain in Retail. Savvy dealmakers will just have to adapt to find them.

To gain additional insights into the state of the retail industry, read our report here.