Quarterly retail review Q1 2022

Inflation may be disrupting consumer spending, but robust deal activity shows M&A buyers are focused on the long-term. Nicola Sartori explains the recent trends and key deals.

Record inflation has put household budgets under immense pressure and squeezed consumer spending. However, this did not dampen appetite for retail assets in Q1; there were 18 deals, the second-highest quarter since the start of the pandemic.

UK quarterly retail M&A volume/value chart

Q1’s £1.5 billion announced deal value was more than double that of Q1 2021, but was down on Q4’s 2021 £4.4 billion (although this included the £4 billion Selfridges sale).

The road to net zero: Q1’s biggest (reported) deal

March 2022 – Antin Infrastructure Partners sold UK motorway service operator Roadchef to Macquarie Asset Management for a reported £900 million. As the UK moves towards net zero, Macquarie intends to help Roadchef roll out electric vehicle recharging facilities and invest in retail partnerships.

ESG and health and wellness remain active areas

Environmental, social, and governance (ESG) factors and health and wellness remain hot sectors as post-pandemic consumers focus look to nurture the planet and themselves.  

ESG deals

Giving back

February 2022 – Inflexion Private Equity acquired Blue Light Card, an omnichannel marketplace that offers discounts to members in the UK emergency services, NHS, social care sector, and armed forces. This deal stands out as it specifically targets the ‘social’ aspect of ESG. 

Health and wellness deals

 A healthy deal

March 2022 – Norwegian consumer goods brand Orkla acquired the Guernsey-based Healthspan Group. The deal gives Orkla a route to the UK market through Healthspan’s established D2C retail channel.

The return of trade buyers?

While historically trade buyers have always seen good opportunities through retail M&A, conditions created by the pandemic precluded many trade from pursuing an acquisition strategy. Trade accounted for 59% of deals in Q1 2022, compared to 90% a (largely) pre-COVID-19 Q1 2020. The drop can be explained by two key reasons:

• Retailers were focused on challenges, such as temporary closures, in-store health measures, and furloughing staff
• Multi-channel retailers had first-hand optics on the coronavirus-bounce effect, making them more cautious about valuing companies based on trading during the pandemic.

As ‘post-coronavirus’ trading has stabilised, these concerns are less relevant. We've seen an increase in interest over the last two quarters and expect to see the proportion of trade deals increase in coming quarters as these complete.

The rise of trade deals

March 2022 – personal hygiene giant PZ Cussons acquired UK baby and child personal care brand Childs Farm. It's what Cussons terms a ‘must win brand’ – those that hold leading positions in its priority markets. The larger company will use its brand-building capabilities to increase Childs Farm’s market share as well as help it grow internationally.

Cross-border activity

Overseas acquirers accounted for 39% of deals in Q1 2022 (37% in Q4 2002). Headline deals included US-based Sycamore Partners offer for Ted Baker. This represents a growing interest from US buyers in UK chains that tick the following boxes, such as Wolverine World Wide’s 2021 acquisition of Sweaty Betty and General Atlantic’s 2020 investment in Gymshark:

• it has established sales in the US
• it has a clear growth story that features the US.

Capital markets: IPOs on hold

Global stock markets have been hit by several material macroeconomic factors, initially concerns about record inflation and interest rates and subsequently geopolitical tensions. As a consequence, institutional investors have paused their support for new IPOs with an expectation that activity will start to recover most likely after the summer.

Restructuring and Special Situations

In February 2022, Frasers Group acquired Studio Retail from administration. Studio sells a mix of cut-price own-brand products, giving shoppers the option to spread payments over many months.

This was Q1’s only restructuring deal. As we mentioned in a previous report, we expect to see more restructuring and special situations deal activity driven by the tailing off of COVID business support measures, the ending of restrictions on landlord recovery actions in March, and the dampening of consumer spending confidence from rising cost of living.

What’s next for 2022?

Retail-sector watchers will be keeping a close eye on allocation of household spending. Inflation will introduce a new set of choices for consumers: should I forgo eating out to save for a holiday; new clothes or spend on the house?

Buyers of retail businesses will either be looking for compelling propositions that consumers will consider worthy of their shrinking budget, or robust models that will thrive regardless of macroeconomic headwinds (or at least ride them). In the latter case, they may look for lower multiples to counterbalance a foreseeable choppy consumer environment.

For more insight and guidance on retail M&A in Q4 2021 get in touch with Nicola Sartori.

Anyone who buys online knows how easy it is to compare the price of goods. Instant comparison has long been clear for products such as hotel rooms and airline tickets but this approach has now become increasingly ubiquitous across online retail of every type. 

Led by online giants with massive data on every consumer and their habits, retailers have developed models that seek to ensure that each and every pricing decision contributes to profit maximisation.

It’s a simple concept with some obvious benefits for retailers: sell the same product at different prices (that reflect the demand of a customer) to make the best contribution to overall profits. Sounds easy, right? But anyone considering using dynamic pricing needs to consider what makes for a successful setup and what pitfalls to avoid.

Three keys to a successful dynamic pricing set-up

1 Data feeds dynamic pricing

The first step in any dynamic pricing system is to model market demand, customer actions and reactions to your products. Considerable data is now available on customers and competitors, and when combined with powerful dynamic pricing models, you can achieve real-time results.

The second step is to remember that dynamic pricing, as with any pricing behaviour, is all about profit not revenue – a basic statement that many forget when inputting data. Profits may be easily destroyed from failure to allow for all costs, not considering the implications for stock management, making radical changes to basic repeat purchases and a range of other issues.

2 Walk don’t run

The quality and nature of the data used is everything. You need to ensure its quality, accuracy and suitability for what you are trying to do. So many pricing and optimisation models fail when retailers run before they can walk. Only once robust data collection, cleansing and cleaning has been achieved can dynamic pricing models be estimated and eventually implemented.

3 Bespoke or commercial

The development of focused, commercial models has mainly removed the need for bespoke price optimisation models. In many cases they are industry-focused and generally follow sound practices. But the danger here is reading a brochure and thinking any dynamic pricing model will work when in reality each has its own particular properties to consider – and sometimes bespoke models will be the wiser option. Getting independent expert advice from a source not connected to a system owner is a critical step.

With commercial models it is up to you to ensure they link with your other retail systems. This sounds simple enough, but anyone who’s ever been involved with adding dynamic systems to more static systems – whether that be finance, stock or other – will quickly realise that a failure to deal with compatibility issues can lead to much bigger issues than developing a bespoke system.

Dynamic pricing in action

Once your system is up and running, you might think your worries are now over. But here are two other issues for you to consider once dynamic pricing is switched on.

Firstly, you need to be clear on the implications of pricing on consumer behaviour. The nature of your product will affect how often people are willing to accept a change in its price. It’s harder for consumers to accept constant changes for repeat purchases than a bespoke price for a one-off or occasional purchase, for example.

Secondly, consider how omnichannel models – shorthand for the mix of physical and online sales channels – affects behaviour. People have to operate in a complex world where they take advantage of key insight but don’t fall back onto behaviours that remove the benefit of the data because they know better. This needs clear focus on the organisational behaviour requirements that allow dynamic pricing to happen. Put simply: it’s not just a back office operation.

Opportunities for all

While the greatest gains are for those with the most information, gains from dynamic pricing are available to most, if not all, retailers who are willing to be driven by data. As all retailers become omnichannel – in that even the smallest have online shops – all can gain (or at least keep up) from making smarter data-driven decisions. This opportunity is not just for the largest corporate conglomerate.

However, we also have to sound a note of caution. There are potential competition concerns over the use of algorithmic models, including pricing algorithms, and their activity. The Competition and Markets Authority (CMA) in the UK has announced its intention to consider this area and put a requirement on boards to ensure they are not breaching requirements. Regulatory issues are manageable but should be factored into the implementation of a system that you don’t fall into compliance problems.

Ultimately, dynamic pricing offers real potential to retail businesses but also, for those unprepared, real dangers. To ensure your journey in this area remains a smooth one, get in touch with Chris Williams

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