M&A in Retail Will be Shaken, Not Stirred
May 19, 2021
An impressive number of retail stores and brands that we know of today were founded in the 19th century: Brooks Brothers, Lord & Taylor, Macy’s, Bloomingdales, Saks Fifth Avenue, Carters, Uhlman’s, Montgomery Ward, Foot Locker, Target, Sears Roebuck, Abercrombie & Fitch and Kmart. Yet many of them that made it through volatile periods in U.S. history, from the Great Depression and two World Wars, have struggled just in the past two decades.
Some, like smaller department stores, went quietly bankrupt or were acquired by larger companies, but high-profile bankruptcies of brands like Brooks Brothers, J.C. Penney and Barneys New York opened the industry’s eyes to the massive shift that was happening in consumer shopping behavior. Today’s global retailing environment is moving faster than these legacy brands could keep up with, and the constant redefinition makes it even harder to get ahead. It’s almost as if they were weighted down by their own history.
Yet now, the frenzy of mergers and acquisitions isn’t just limited to traditional retail holding companies. Today’s retail ecosystem is driven by digital marketplaces, with Amazon holding firm as the most valuable retail brand, followed by Alibaba. In fact, even if you combine the value of all of the other iconic brands in the Top 10, including Home Depot, Louis Vuitton, Nike, Starbucks and Chanel, they still don’t even come close to the value of the digital marketplaces, where nearly $2.7 trillion is spent annually.
Even though Amazon clearly dominates, others like Walmart, Target, Best Buy, Wayfair, Overstock, Ulta, etc. are capturing more market share as consumer demand grows at a lightning fast pace. And new ones are popping up every day. Out of the top 100 marketplaces, 50 of them launched in 2011 or later. This includes retailers that have been around for a while, but have recently begun allowing other merchants to sell on their sites.
Even just in the past 10 years, the very nature of buying and selling has changed. With such drastic shifts in the retail industry, it’s clear that equally dramatic shifts can and will occur at the business level, as companies identify new opportunities for defensive M&A strategies, such as salvaging value by divesting non-core or distressed assets, winding down non-performing businesses, and identifying rapid turnaround situations. The separation of Saks.com and Saks Fifth Avenue is an interesting move that we have our eye on, as the ecommerce entity is worth $2 billion – 30% more than what the entire parent company of Saks Fifth Avenue (Hudson’s Bay) fetched when it went private a year ago.
Yet there is also plenty of room for offensive M&A strategies, such as acquisitions that facilitate vertical integration, as companies seek to gain more control over their value and supply chain. Where we see massive opportunity is in acquisition of early stage, high-growth businesses from the innovation ecosystem, especially when they can fill gaps in the current business and/or accelerate digital transformation.
As an example of that, take a look at the $175 million vote of confidence that Heyday just received. It is less than a year old, yet is projected to cross $200 million by the end of 2021 and $1 billion in revenue by 2023. The company partners with entrepreneurs to acquire, launch and incubate brands to be successful on all those digital marketplaces mentioned above. Perhaps more importantly, they are offering a marketplace-native technology, data and operations stack to empower those brands to scale.
That’s the trick: Scale. Out of the hordes of DTC brands that have emerged recently, they might be backed by venture capital, but how many of them have been able to move past the early stages of true direct-to-consumer, where customers buy from the site or app? To fully scale, you must have presence on digital marketplaces. The real question is: How many of them were able to do this alone?
What makes Heyday so successful is the fact that DTCs hit a certain level of growth and distribution, but they inevitably hit a point where they must go into marketplaces, both online and offline. Not only do they need help to do this successfully, but this is also where the sticker shock sets in. Broader, holistic retail has massive overhead, so any brand moving into those channels will see their margins cut. In many cases, it makes more business sense to partner directly with the retail giants through some sort of acquisition.
While we do think that retail is long overdue for M&A activity, and much of the change that needs to happen in the industry will be brought by it, there’s another shakeup occurring, and it’s within the legacy brands themselves. Many fashion companies, for instance, took the time during the pandemic to reshape their business models, streamline operations and sharpen customer propositions, observed McKinsey in its State of Fashion 2021 report.
It’s not just limited to fashion. Lowe’s is taking steps to change its org structure to match those of other big box retailers like Walmart, Target and Home Depot so that its online and brick & mortar teams get aligned on goals, versus competing with each other as they have in the past. These changes show that retailers are seeing the importance of a holistic and collaborative strategy, reports Cleveland Research. And as more brands realize the benefits of this approach, there will undoubtedly be even more.