Rumours of the death of the UK’s high street may be a little premature. While the COVID-19 pandemic has certainly been a strong headwind over the past 12 months – and the emergence of the Omicron variant threatened vital Christmas trading – many retailers appear to have weathered that storm. Of course, it’s not the only storm they are facing. But from an M&A perspective, demand for British retailers has never been so buoyant.
For some, the New Year brings a festive hangover or a case of the January blues, but many retailers are feeling bright-eyed and bushy-tailed. Sainsbury’s, JD Sports and Dunelm all enjoyed Christmas trading strong enough to justify increases in their profit forecasts. Fashion chain Next said its festive sales came in £70m ahead of expectations, while Marks & Spencer analysts hailed the group as having finally turned around its long-term fashion decline.
Across the board?
Moreover, last year’s success was widely based. At the top end, Burberry is another to have increased its forecasts, with sales across the luxury goods sector exceeding analysts’ expectations. In a very different part of the market, the discount retailer B&M is also celebrating – its sales between April and December exceeded £3bn, up 24% on the same period the previous year.
But it’s not all good news. In the most competitive areas of the market, some businesses have found the going much tougher, particularly given added pressures of supply-chain disruption. In electricals and electronics, for example, Currys PC World has trimmed its profits forecast. Argos, owned by Sainsbury’s, also struggled.
Still, as a whole, it’s fair to say the retail sector has defied expectations. According to Lisa Hooker, consumer markets leader at PwC: “Retail has had a good pandemic. Not least, people have had less opportunity to spend money elsewhere.”
This success has not gone unnoticed. According to Refinitiv, the value of M&A deals with UK involvement reached $48.2bn in 2021 – 93% up on the previous year and an all-time high. While that figure was boosted by a number of mega transactions – most notably, the hotly contested auction of supermarket WM Morrison – deal numbers were up 62% on 2020 to 615 last year.
Those figures were dominated by transactions where a UK retailer was the ultimate target. Indeed, there were 496 such deals worth $41.1bn last year. Only the US saw greater M&A activity in its retail activity.
Why so much interest in UK retailers? One factor, says Hooker, has been pricing. “There’s a real feeling that some of the UK’s listed retailers are undervalued – legacy retailers in particular.” Private equity buyers have taken advantage.
State support
Moreover, the UK’s policy response to COVID-19 has often worked in retailers’ favour. Those providing essential goods have been able to remain open throughout the pandemic. And certain sub-sectors – from home improvements to leisurewear – have seen demand increase because people were stuck at home.
In addition, while the strictest periods of lockdown left parts of the industry unable to trade – and accelerated a pre-existing trend towards online retail – government emergency financial back-up provided retailers with the headroom to address digital deficiencies. Nicola Sartori, head of M&A retail and consumer brands at Grant Thornton, explains: “That support gave some retailers a breathing space. It gave them the time to improve their multi-channel proposition, so that they could emerge from the pandemic in a stronger position than when they entered it.”
Many of the biggest deals of the past year reflected these themes. The acquisition of WM Morrison by US private equity group CDR was the culmination of a bitter battle with rival Fortress. Selfridges was sold to retailer Signa Holding and property company Central Group, underlining the health of the luxury sector – and the demand internationally for UK brands. Wickes demerged from Travis Perkins in the home improvement sector. The purchase of Depop by Etsy, meanwhile, highlighted the appeal of online retail platforms.
But beneath these headline grabbers, a wealth of smaller transactions has also proliferated. “Digitalisation has led to fragmentation,” says Sartori. “There’s this ability to create and scale a business more quickly than ever before.” These disruptive start-ups then become targets for investors – or even for trade buyers looking to add to their digital capabilities.
However, there is a growing acceptance that digital is not the be-all and end-all. Linda Ellett, head of consumer, retail and leisure at KPMG, argues: “Digitisation is here to stay – there’s no going back. But this does not mean the end of bricks and mortar. There’s still appetite for a great physical shopping experience and retailers have been getting smarter at driving more immersive experiences for their customers.”
These ongoing trends provide a supportive backdrop for further M&A in the sector during 2022: by the end of the third week of January, a dozen UK deals worth almost $800m had already been announced.
Slowdown in 2022?
However, the big challenges facing retail cannot be ignored. The rapidly rising cost of living, tax increases and interest rate hikes have the potential to squeeze consumer spending. Retailers, moreover, face cost pressures of their own, as commodity prices spike, supply-chain disruption continues and tough labour markets drive wage inflation.
In such an environment, the KPMG-backed Retail Think Tank is forecasting retail sales growth of 1% to 2% in 2022 – against as much as 7% last year. And within those figures, the growth areas of the industry could shift, argues PwC’s Hooker, as the impacts of COVID-19 change. “We’re going to see more excitement about areas of the market connected to going out, such as fashion and travel, notwithstanding the impending cost of living crisis likely to squeeze discretionary spending.”
In which case, deal activity may slow, at least a little – particularly as the market considers how the dust is settling following the pandemic. Laura McNaughton, a partner in the retail and consumer team at BDO, says: “One challenge currently is the balance of risk between buyers and sellers, and how this plays to valuations. Acquirers are looking at sales levels over the past two years, and the challenge of whether growth has been accelerated by COVID-19 and what is more normal.”
However, there’s good reason to expect the slowdown to be modest. After all, PE investors continue to deploy record sums of capital in areas of the market that will deliver yield. Corporates continue to focus on consolidation and strategic development.
Further mega deals are possible. Walgreens, the US owner of Britain’s biggest pharmacy chain Boots, is widely rumoured to be looking for a buyer for the business, with private equity suitors rumoured to be mulling a £7bn price tag. And Unilever’s failed £50bn bid for GSK’s consumer health business underlines the ongoing appetite for big-ticket deal activity among corporates, too.
But to what extent will 2022 bring more distress-driven activity, which has been thin on the ground in the retail sector so far? McNaughton forecasts: “This may be a year of reckoning, particularly as the rent moratorium on commercial properties – preventing landlords taking tenants to court over unpaid rent – comes to an end in March, and there are continual challenges with supply chain and inflation.” That said, many large retailers have already been through substantial store consolidation programmes.
An example is France’s largest supermarket chain, Carrefour, which has been through a “hard and unglamorous” turnaround, in the words of its chief executive, Alexandre Bompard, who took over in 2017. He has overseen aggressive cost-cutting, slashing prices to win back customers, as well as investing to catch up in e-commerce and disposing of operations in unprofitable markets, including China. A lot of cash has gone on software, logistics, warehouses and skilled workers to build its online offering. It hopes to triple its e-commerce revenue to €10bn and add €600m to its operating profit.
Inevitably, Carrefour is being talked of as a takeover target. Canada’s Couche-Tard showed an interest in 2020, before that was scuppered by the French government. International buyers will always face that problem. Carrefour’s smaller domestic rival Auchan had a bid rejected in October last year and may well revive its interest.
Channel convergence is also likely to loom large. Legacy retailers continue to focus on digitalisation, but there’s room for other types of deal, too. The $2bn acquisition of mobile engagement platform Rezolve in December is an example of the potential for tech-enabled retail. And digital-only brands don’t necessarily want to stay that way – fitness goods retailer Gymshark, for example, is to open its first bricks-and-mortar location later this year.
Will 2021’s M&A records be challenged once more this year? Maybe not, says Hooker, but retail is poised for further dealmaking. “There will be nervousness about the prospects for the sector, but those strategic drivers for M&A have not gone away.”
Rise and rise of ESG
Sustainability increasingly matters to consumers. Research from KPMG shows that more than half of US shoppers now say they are prepared to pay a premium for sustainable products – although price, choice and convenience remain important factors, too. That increases the pressure on all retailers to improve their environmental, social and governance (ESG) performance – and potentially raises the value of retail sector targets with the strongest ESG credentials.
Aspects of retail are under ever-increasing scrutiny, from sustainably manufactured products – including ingredients, components and packaging – to pay and conditions for people in supply chains, to carbon footprints in logistics, to the ethics of customer data.
One good example is last year’s acquisition of Depop by Etsy for $1.6bn. Depop sells vintage and other second-hand clothing, largely to millennial and Generation Z consumers, who have embraced the brand for its eschewal of fast fashion and its commitment to reducing waste.
Transactions in the food and drink sector also reflect the trend towards ESG and greater interest in health and wellness. Last year saw Swiss giant Nestlé buy Mindful Chef, for example, while Ferrero picked up Eat Natural.
The ESG trend could even drive more vertical integration. The supermarket group WM Morrison announced last year that it was buying its supplier Falfish, which has supplied the supermarket since 2004, as part of its focus on sustainability and local sourcing.
Home comforts
The acquisition of Devon-based home and lifestyle brand Nkuku by Bridges Fund Management in 2021 came amid soaring sales at homeware retailers during the COVID-19 pandemic – but it also reflected the growing demand for ‘ethical retail’.
Founded by Alistair and Alex Cooke in 2003, Nkuku sources handmade home and lifestyle products from artisans around the world, combining the appeal of traditional craftsmanship and sustainable natural materials.
“Nkuku’s unique approach – the direct relationships it builds with its suppliers and its commitment to sustainable materials and traditional crafts – is proving to be a strong differentiator in a market that’s growing rapidly,” says Emma Thorne, investment director at Bridges. She believes that even post-COVID-19, people will spend more time nesting at home and predicts sales growth of 10% a year in Nkuku’s market.
Nkuku started out as a wholesaler, selling its products to independent stores across the UK, but a focus on e-commerce enabled it to begin selling direct to consumers. The retailer also has a shop in South Devon.
Horses for courses
In March 2021, UK mid-market private equity firm LDC took a minority stake in Hampshire-based equestrian brand LeMieux. Originally known for saddle pads, the brand has expanded into most areas of equestrian equipment and now sells premium rider wear and accessories. For those in the know, there’s a signature LeMieux look.
The deal was reported to be a £20.8m investment for a 39% stake. LeMieux, whose products are sold through more than 500 traditional and online retailers in 69 countries, as well as its own website, was on track for turnover of £22m last year. The business was founded in 2004 by Robert Lemieux, a former professional event rider, British National Champion and Olympian, and his wife Lisa. They relocated to purpose-built premises in 2019, having grown by more than 30% each year since 2008.
The Lemieuxs lead the management team and, as part of the deal, LDC brought in non-executive chairman Colin Porter – the retail veteran and ex-CEO of British clothing brand Joules. LDC’s Joe Tager and Christian Bruning led the deal and also joined the board.
Porter says: “The business is now at a very exciting point in time, where there’s a significant opportunity to scale up and make it a real household name in the industry. Collectively, the team has a wealth of experience in taking retail brands to the international stage and growing e-commerce, which makes this partnership a very exciting opportunity.”
Tager says they have identified rich growth opportunities, including international expansion, broadening the product range and investment in digital sales and marketing.
LDC was advised by BDO, Goodwin Law, Grant Thornton and LEK; LeMieux was advised by Clearwater International, DSA, Onside Law and Alvarez & Marsal. BDO partner Laura McNaughton (pictured top left) says: “LeMieux is a great brand with incredible customer loyalty. Our role was to provide sector insight into the process, looking at changing consumer behaviours and the key value brands have, both today and over the years to come.”