Retailers look to M&A as an avenue of growth

Retailers remain upbeat about sector growth and performance, using mergers and acquisitions to maintain their competitive advantage.

Retailers are optimistic about the sector economy and financial performance, according to the latest EY Global Capital Confidence Barometer.

Almost three-quarters (72%) of retail executives see the retail economy as growing, with more than one-third saying their view has improved in this regard over the last six months. Similarly, over the past 12 months, 68% say sales have improved, while 65% say margins have increased.

This optimism seems to be fueled by growth, given a net increase in store sales in the UK in 2019 and more store openings in 2019 in the US compared to last year, according to Coresight Research. However, retail remains a clearly disrupted market, with many retailers struggling to implement change fast enough or stay relevant to meet the needs of demanding consumers. There were nearly 9,000 store closures in the US and nearly 500 in the UK as of October 2019.¹ Many are predicting, at least in the US, that the number of retail bankruptcies will continue to climb.

Retailers express confidence about sector growth and performance

Looking ahead to the next 12 months, 75% expect an increase in sales, while 74% say they anticipate better margins. Meanwhile, only 37% of retailers say they expect an economic slowdown in the near to mid term, versus 52% of consumer products (CP) companies.

Overall, retailers are as confident — or more confident — than CP companies in terms of sector growth and performance. These surprising results have us wondering whether retailers are effectively keeping an eye on the longer-term road ahead or are more focused on surviving in the present.

This isn’t to say that they aren’t worried. Like their CP peers, 69% of retail executives agree that in five years, it will be more difficult to sustain profitable growth in the sector than it is today. These executives acknowledge their focus on cost cutting comes at the expense of delivering growth, and in general, as a whole, they believe they need to be bolder in the actions they take. As they look for new opportunities to cut costs, raise capital and optimize performance, more than half (53%) plan on outsourcing or divesting some of their current operations, with half of those (49%) seeking to divest back-office functions. Our recent article, Three rules for retailers to break and make, discusses how retailers can use partnerships to adapt to the future consumer now.

Encouragingly, a larger percentage of retailers versus CP executives understand that they need to make significant changes to their business operations (68% versus 59%), cost structure (63% versus 59%) and capabilities (61% versus 59%) if they are to survive and thrive in the future.

M&A remains an important lever for growth

Dealmaking remains an important lever for retailers to achieve their growth. In our latest M&A survey, 45% of retail executives say their company is actively pursuing M&A in the next 12 months, up from 36% from a year ago.

Of those who plan on acquiring, 42% are targeting assets that offer transitional capabilities, while 30% are looking at bolt-on deals. The main strategic drivers for these acquisitions are split among securing the supply chain in response to regulatory or trade and tariff issues, acquiring talent and acquiring technology. Acknowledging China as a leader in retail technology and driver of innovative experience, retailers identified China as a top destination for acquisition. Other top countries include the UK, the US, France and Germany.

Retailers remain upbeat about maintaining their competitive advantage

Despite the tough times many retailers are experiencing, even in a healthy market, retail executives remain upbeat about their prospects to maintain their competitive advantage in the future. Eighty-seven percent are confident that they are scaling innovation, 78% are confident that they’re integrating technology at speed and 83% are confident that they are putting the customer first.

They also understand the importance of creating collaborative ecosystems to keep pace with changing customer needs, exploit white space and gain economies of scale. Developing these ecosystems is essential for retailers to rise above the challenges that are bringing near-record numbers of their peers down.