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BDO USA Consumer Business Practice, May 2017 Publication
“Despite headlines, brick-and-mortar is not dead. The traditional retail model is changing and that is especially impacting one-dimensional brands as consumers increasingly favor a few clicks over a trip to the store.”
Natalie Kotlyar, national leader of BDO’s Consumer Business practice
Digital Deals: Retailers Move Online Bit by Byte
Retailers have begun to accept the reality that a hybrid in-store and e-commerce presence is essential to their business model.
The National Retail Federation predicts online retail sales will expand between 8 and 12 percent in 2017, growing three times faster than the rest of the industry. To compare, brick-and-mortar is expected to grow at just 2.8 percent, illustrating the importance of robust omnichannel offerings, as e-commerce will spearhead growth.
The greater emphasis on online platforms and big projections for growth is driving U.S. e-commerce M&A. 2016 saw 105 transactions totaling $17 billion, a clear high over the past five years. Not to be outdone, U.S. PE buyouts also increased, reaching 30 completed transactions totaling $6.13 billion, up from $2.23 billion in 2015. As retailers look to fill gaps in their digital capabilities, strategic deals are the name of the game.
Traditional Retail Models Must Evolve or Risk Becoming Obsolete
Retailers are not immune to consumer desire for the latest and greatest technology, particularly those that deliver convenience. To resist becoming obsolete, many retailers are setting their sights on subscription and startup e-commerce models to reinvigorate brand loyalty and capture new markets.
Consider last year’s $1 billion acquisition of Dollar Shave Club by Unilever. This deal signaled a new trend for startups and subscription-based companies, showing that legacy brands have an appetite for these types of megadeals. With Dollar Shave Club, Unilever gained a strong, high-growth potential company that has proven to be excellent at direct-to-consumer brand building.
This strategic deal begs the question: Will this prompt Proctor & Gamble, owner of Gillette, to make a move for similar razor startup, Harry’s? There are several recent deals that indicate that possibility is not out of the question. Look to examples like the 2015 flash-sale startup Gilt Groupe’s sale to Hudson’s Bay Co. for $250 million or Bed Bath & Beyond’s $100 million acquisition of One Kings Lane.
Is the Price Right?
Dealmaking can be a fast-paced game. Wait too long and risk missing an open window of opportunity, jump the gun and risk paying too much. How do retailers know when the timing is right?
Late last year, Walmart quickly scooped up Jet.com, aiming to bolster its e-commerce presence and be more competitive with Amazon online. Jet.com was purchased at a premium ($3.3 billion) compared to its valuation ($1.35 billion), but it might have been the right move at the right time for Walmart. This deal was both a high-value, high-profile acquisition, and it filled a serious gap that Walmart was missing in e-commerce. In 2016, Walmart’s global e-commerce sales increased 15 percent from the previous year, and its U.S. e-commerce sales gained 36 percent.
But striking fast doesn’t always deliver such clear wins. The Hudson’s Bay Co. and Bed Bath & Beyond acquisitions enabled the buyers to enter the flash-sale space at a discounted rate, but the market ultimately slowed. Gilt Groupe’s sale now seems like a win; however, the brand was previously valued at $1 billion before losing its steam as the flash-sale scene slowed overall. A similar story was told for One Kings Lane. The total acquisition amount was never released, but estimates put the deal around $150 million, a far cry from the company’s previous valuation of $900 million. The measure of success here is less clear than with Walmart and Jet.com.
Retail’s New Reality
The retail model is changing online and off. In stores, traditional retailers are making big investments in technology and e-commerce to deliver a more holistic omnichannel experience. Macy’s and Target partneredwith e-retail startup ThredUp, enabling consumers to donate used clothing to ThredUp in exchange for store credit. Some retailers, like Lord & Taylor and Urban Outfitters, are partnering with technology companies to take advantage of in-store beacon technology to gather real‑time information about their customers’ shopping preferences and in-store traffic.
At the same time, historically pure-play e-retailers are expanding their brick-and-mortar footprint. In 2017, unicorn startup Warby Parker plans to bring its brick-and-mortar store count to around 70. Similarly, e-commerce king Amazon is in the process of opening a variety of brick-and-mortar concepts, from bookstores to groceries, and—possibly—clothing stores.
Proceed With Caution
Retail as we know it is rapidly changing. Just as the industry is different today from what it was 50 years ago, surely it will be a new environment in 2067. While the industry claws for market share online, buyers should beware—ensuring they’re buying with purpose, rather than to quickly fill a need. Those businesses with niche services should also proceed with caution, careful not to let a good deal slip through the cracks.
Internet retail is a large and dynamic sector, including U.S.‑based multinational e-retailers like Amazon and Overstock.com.
As these purely internet-based brands continue to grow and gain value in the industry, deals abound—evidenced by the number of internet retail M&A transactions in 2016. In addition, it’s reasonable to expect buyouts will continue on the upward trend as PE players look to get a foothold in this booming sector by snatching up distressed assets from traditional brands, then turning them around and moving online. While business flourishes for niche internet retailers, there’s chatter that several well-known young e-commerce brands are looking to an IPO in 2017, potentially raising the bar for internet retail exits this year as well.
Though apparel & accessories is a huge sector online, deal activity is relatively low.
Last year saw just 20 M&A transactions in the apparel & accessories sector—including deals like DSW’s acquisition of e-retailer Ebuys Inc. in February, five buyouts and one exit. As the industry continues to move online, we’ll be looking for notable trends in this sector, especially surrounding brick-and-mortar versus e-commerce expansion.
With the uptick in consumer sentiment through the end of 2016 into 2017, the consumer durables segment should benefit both online and off, considering sales for these retailers are closely tied to employment and wages. Should sentiment remain high, we’ll be watching for a related spark in activity in this segment.
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