Retail’s New Reality and the Effect on Private Equity

Written by Warren Averett on January 10, 2018

Retail’s New Reality and the Effect on Private Equity

Many legacy business models and industries are experiencing rapid change, with retail being an especially salient example. Traditional retailers are being bombarded with changing consumer expectations around the experiences they have with brands and technology demands they cannot ignore. In response, they’re expanding online and e-commerce operations and presences and turning multichannel approaches into omnichannel offerings. This means some online retailers are even building stores or doing pop-up shops to create in-real-life shopping.

Despite the consistent low grumblings about the “end of retail,” there has actually been sustained growth in deal activity due to retailers’ efforts to develop the right balance of consumer channels for their customers. General retail e-commerce mergers and acquisition activity reached $17 billion in 2016, representing an approximate eightfold increase from the $2.36 billion M&A activity seen in 2014, according to BDO research.

Optimistically, retailers expect the trend to continue. Forty-six percent of retail CFOs surveyed in BDO’s 2017 Retail Compass Survey of CFOs expected an increase in retail M&A activity this year, with more than two-thirds (38 percent) citing competition and consolidation as major driving factors. Much of this increased deal activity is driven by strategic buyers a trend we will see more of according to survey respondents, more than half of whom (56 percent) anticipated continued M&A activity driven by strategic buyers.

These facts indicate that there will be more, and more frequent, deals like Walmart’s $3 billion acquisition of in 2016. The acquisition immediately bolstered Walmart’s e-commerce presence and gave it a big step up in its growing competition with Amazon. Walmart took a chance, paying a premium compared to’s $1.35 billion valuation. However, the strategy worked; Walmart’s global e-commerce sales for 2016 increased 15 percent from the previous year, and its U.S. e-commerce sales gained 36 percent.

As with most trends, there are less dramatic results. The 2015 sale of startup Gilt Groupe to Hudson’s Bay Co. for $250 million and Bed Bath & Beyond’s $100 million acquisition of One Kings Lane are two such examples. Both deals were made to improve the buyers’ flash-sale abilities right before the flash-sale market unexpectedly slowed. Even the acquired firms didn’t do well; Gilt Groupe was previously valued at $1 billion, and One Kings Lane is assumed to have been sold for $150 million many millions of dollars less than their previous valuation of $900 million.

What does this have to do with private equity? One in 10 of the 200-plus private equity executives surveyed in BDO’s Annual Equity Study said the retail and distribution sector presented the greatest opportunity for new investment right now. The retail sector ranked fifth in that category, behind manufacturing, technology, healthcare and natural resources. Interest in the sector is driven by beliefs that retail and distribution valuations will come down, and sales to strategic buyers will remain viable exit strategies (67 and 69 percent, respectively).

Private equity firms focused on the retail sector are likely to see sustained competition from strategic buyers for deals, particularly when there is a plethora of companies like that can provide out-of-the-box, ready to roll e-commerce solutions. Private equity firms would be wise to identify traditional retailers with strong brand followings but just so-so omnichannel strategies. Approaching them about driving value by restructuring operations, bringing down real estate costs and building omnichannel offerings could result in major win-win outcomes.

The anticipated continued demand from strategic buyers will position private equity buys as less risky, with a clear path to exit. Private equity firms operating in the retail sector should proceed, albeit cautiously. Retail is changing quickly, but it’s been in motion since its inception thousands of years ago, moving from trading camels and bartering for services to completing transactions on tablet computers.

Those involved in and affected by retail need to know that transformation is here and continuing quickly, giving disruptors and innovators the power to shape what retail models will look like next year, in the next decade and well into the future.

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