Mergers and Acquisitions (M&A) in Retail Industry Post-COVID-19

Mergers and Acquisitions (M&A) in Retail Industry Post-COVID-19

As a global pandemic, COVID-19 professes mind-boggling humane challenges, and the economic repercussions on the lives and subsistence of the battles to restrain the infection is the strongest in a century. Retail is one of the areas most afflicted by COVID-19, in both positive and adverse ways. Grocers, pharmacies, and e-commerce marketplaces are providing consumer access to essentials—food, medication, toiletries, and chosen “at home” categories—while aiming to shield customers, employees, and suppliers. At the same time, store closures and explicit slumps in discretionary consumer spending have weakened luxury. Many retailers have to make difficult decisions, including briefly or forever shutting doors, furloughing employees, and likewise.  Notwithstanding this challenging situation, studies of past crises have revealed that there is, however, the potential for value creation through mergers and acquisitions (M&A) in the retail industry post-COVID-19, which may empower retailers, brands, and investors to shape the subsequent normal post-crisis.

Move to online and digital buying. As shelter-in-place orders increases and customer apprehension about the virus continues, consumers over age groups have now shifted spend to online channels. The more prolonged the impasse continues, the higher the probability that online and omnichannel procuring will become the next normal. While this change gets pronounced in grocery and additional primary categories, the channel shift within the fashion and luxury labels and retailers have not come near to addressing up for the missed brick-and-mortar sales.

Hence the change in consumer spending online will pose a problem regarding the future—and purpose—of their brick-and-mortar locations. Propelling unique in-store experiences will grow even more crucial than it has been to push traffic, promote the Omni-experience, and grow profitability.

To be robust, secure, and local. One of the most significant hurdles confronting retailers is the requirement to shield customers and employees from contracting or spreading COVID-19. Anxieties about health and safety have never figured more vital for customers and suppliers across the value chain. The retailers with the highest level of touchless automation may enjoy a definite competitive advantage as they stand the lower risk to their overall operations. Growing focus on enhancing health joined with heightened demand for fresh food, could induce longer-term habits focused on salubrious lifestyle and subsistence.

Move to value for money. As in any economic downturn, a post-crisis recession will presumably drive consumers to command value for money across retail sectors. It is now occurring in essential categories, as private-label sales at grocers and pharmacies are growing, and pricing and promotion strategies are highlighting value. 

The elasticity of labor. The COVID-19 dilemma emphasizes the necessity for more flexible resource allocation that deploys work across a more extensive array of activities. It could expedite the movement toward more agile and productive resourcing from stores to distribution centers to corporate offices. It could encourage new models of collaboration between retailers and their stakeholders to address scarce capabilities and allow the labor pool to move more fluidly to satisfy demand across priority activities.

Loyalty hysteria. The scarcity of products has driven the trial of new brands, as customers buy up and down. Globally, we have observed store and brand switching due to the vicinity, availability, comfort of use, and safety concerns, building opportunities for new habit creation. 

Mergers and Acquisitions (M&A) through and following the COVID-19 crisis

Before COVID-19, we discerned four fundamental deal patterns, though the retail sector did not witness as much deal action as other sectors. 

  1. Like-for-like acquisitions, that is, the purchase of a close competitor, who operates in the equivalent categories and channels to achieve scale and unlock cost synergies.
  2. Channel expansion, that is, acquiring into a distinct channel to enhance growth exposure and expand the product offering to the customer.
  3. New business models and adjacencies, typically used in an attempt to vertically integrate up or down the value chain to improve scale and charge in the supply chain to establish the definite value proposition of the retailer
  4. Capabilities that is, targets that offer new platforms, tools, or talent to improve the value proposition and increase service to the end customer.

When we analyze the above deal strategies, maximum value creation gets achieved for models 1 & 4.

Given developments in consumer spending across channels as well as steadfast concerns about wellness and safety, and notwithstanding the more uncertain economic forecast, I anticipate retail M&A activity to expedite as the crisis stabilizes.

However, post-COVID-19, not all retailers, can seek M&A. Companies with leading ecosystems and influential e-commerce sites that concentrate on essentials or companies less influenced by the crisis and possess an unusual blend of comparatively low financial leverage, access to investment-grade debt, and a cash-rich balance sheet will acquire. Specialty players are less inclined to prosper, as they are usually less capitalized and may need the size and expanse of e-commerce abilities—or the financial muscle to develop them—needed to gain in short to medium span from alterations in consumer spending. These companies may become targets for resilient competitors.

Subsequent actions for retailers

Retailers contemplating mergers and acquisitions (M&A) should perform the following actions.

Determine the next normal—and competitive edge. The initial action to redefining the M&A strategy is to know what the next normal would be for each brand and retailer. The new truth will depend mainly on how core consumer divisions, including behaviors and spending practices, get affected by COVID-19. Where are the growth areas now, and where will they be in tomorrow? Where are consumers paying money—which channels? Recognizing the possibilities for growth in the next normal—and which areas can get accelerated by M&A—will be the first move to reshaping the M&A strategy.

Evaluate the potential to execute M&A in retail. A realistic appraisal of balance-sheet health and capability to perform acquisitions independently, as well as the capacity to obtain financing in the post-crisis conditions, will be a crucial step to developing M&A strategy. For acquirers with restrained cash availability or challenging financial strength, partnerships with other firms to blend commercial sources while addressing strategic priorities could get analyzed.

Conceive through value creation upfront. Retailers should produce data-backed views about market trajectory, new-normal situations post-crisis, and the risks of additional disruption. Shortlisting top-priority spaces and obtaining executive and board involvement to M&A will expedite decision making as possible targets get discovered. In the post-COVID-19 frozen credit market, I anticipate the synergy capture expectations, and track record will value to investors, which causes it still further relevant to study through synergy goals and value-capture strategies upfront. Hence it is pertinent to deliberately examine through how a deal can serve to hone and reposition the joint entity’s value proposition to attend customers’ requirements adequately.

Examine opportunities to uncover new deals and partner with more influential companies. Companies without the cash and financial strength to seek acquisitions should recognize likely assets to liquidate or possible partnerships to shore up the balance sheet until the crisis transpires. The implications of COVID-19 are as crucial for likely sellers as they are for potential acquirers.

1 Comment

  • […] Sectors most vulnerable to the COVID-19 pandemic have witnessed a more marked slowdown in 2020 due to lockdown restraints and business slowdown, with the industrials and consumer sectors individually exposed. As enterprises look to develop resilience to resist future shocks or crises, transactions across all sectors have concentrated on obtaining sought-after capabilities and developing new routes to market, rather than winning market share. […]

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