This article will provide a high level discussion of M&A trends in the Consumer & Retail (C&R) sector, beginning with a brief summary of the activity we saw in 2019, what trends were anticipated to occur in 2020 and how the COVID-19 pandemic (the Pandemic) is expected to affect M&A in this industry.
Earlier this year, KPMG published their Global Consumer & Retail M&A Outlook 2020 Report (the KPMG Report) which reviewed deal activity in the C&R sector in 2019 and provided insight about the expected trends for 2020. As was seen in preceding years, the C&R industry experienced a slight decline in M&A activity in 2019. However, M&A in the area was still active. Global deal volume in 2019 totalled to 5,500 deals, which was only a 5% decrease from 2018. With regards to deal value, there was a 30% decrease from $345 billion in 2018 to $240 billion in 2019. This decline in deal value was noted to have been a result of a variety of factors, including weakened investor confidence due to uncertainty in the global economic environment stemming from trade wars and slowing economic growth, as well as a decrease in number of megadeals.
In terms of M&A trends that were expected to continue into 2020, the KPMG Report anticipated the following:
- Digital Transformation. Many large companies in the C&R industry are expected to continue using M&A as a way to improve their digital platform to reach new audiences and consumers and to stay competitive in this increasingly digital world. In 2019, companies had already been using M&A and alliances in the digital space to enhance operations, analytics, supply chain and innovation and this strategy is expected to continue.
- Sustainability. It was forecasted that companies will continue to use M&A as a tool to build out their environmentally and socially sustainable product offerings, including buying stakes in smaller companies focused on health and wellness or investing in green technology to develop sustainable packaging.
Impact of the Pandemic on Consumer Expectations and Behaviour
The Pandemic has brought about many high-profile bankruptcies in the C&R sector and dramatically changed consumer behaviour. McKinsey & Company conducted consumer surveys across several countries to gauge sentiments and expectations towards spending during and after the Pandemic. In Canada, the survey showed that almost half of Canadian consumers are planning to cut back on spending and over 40% plan to continue using online shopping platforms as the Pandemic subsides. Globally, consumers have also become more willing to shop at new retailers and try new brands if they perceive that they will obtain greater value and convenience. Not surprisingly, the survey results also showed that consumers care about the health and safety measures put in place by retailers in terms of hygienic packaging and caring for their employees and used this information to decide which retailers to purchase from.
How the Pandemic May Affect M&A
A recent survey conducted by Kearney of 100 executives in the C&R sector (the Kearney Survey) on the outlook of M&A opportunities in the wake of the Pandemic reported continued optimism and even a possibility of acceleration in activity. However, the survey results also suggested an emphasis on more cautious and tactical deals in the near future.
Less is More
In line with the trend of fewer megadeals, 57% of surveyed executives stated that they would look for deals with smaller valuations, in the $100 million range, and noted a preference for alternative brands. As well, despite liquidity issues causing more companies to be vulnerable to acquisition, it appears that the quality of a business still remains to be an important factor. From the Kearney Survey, 66% of respondents expressed that in terms of M&A efforts for this year, they are focusing their attention on thriving businesses.
There's an App for That Now
According to the Kearney Survey, while digital transformation remains a common goal, M&A strategies will differ depending on the types of products a company sells. For example, grocery retailers will focus on developing their e-commerce and delivery capabilities as there has been an increase in consumers purchasing groceries and personal care items online. Meanwhile, retailers of "non-essential" items, such as apparel, appliances and entertainment products will likely seek to develop or leverage their online presence through online communities of consumers and loyalty program platforms to foster customer engagement and retention.
Who's Still Shopping?
Not all retailers were negatively impacted by the Pandemic. McKinsey & Company noted that food, drug, and mass-merchandise retailers with effective e-commerce capabilities have been able to weather the Pandemic and as a result are in a strong position to look for M&A opportunities. Whereas the smaller, specialty companies in the same industry are likely to become targets. Lastly, private equity firms, which entered 2020 with approximately $1.5 trillion in dry powder, are also expected to invest in M&A in the C&R sector.
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