Ben Hughes, senior managing director at FTI Consulting
Whilst the retail sector wasn’t flooded with transactions in 2023, there was still some eye-catching M&A activity. In the mainstream M&A arena, deals of note included Iconix’s investment in Hoodrich and Next’s continued strategy of investing in brands, with an increase in its stake in Reiss and acquisition of FatFace.
Special situations M&A activity was relatively muted compared to prior years but as we saw with ABG’s acquisition of Hunter Boots and BlueStar Alliance’s acquisition of Scotch & Soda, established brands with global recognition remain attractive, even when their financial performance is challenged.
As we enter 2024, strong brands with efficient operations will continue to be in demand from both strategic and financial investors and there are some notable businesses already in the market [such as Kurt Geiger], or expected to be in the market in the first half of the year.
However, there are also a growing number of retailers facing significant top line and cost pressures which are likely to cause liquidity issues in the year ahead. Given this dynamic, I expect to see an increase in stressed and distressed companies needing to find a new owner who can provide the necessary funding to turn the business around.
Charlie Edwards, investment director at Alteri Investors
In 2024, we expect scaled omni/multi-channel operators with a compelling proposition and first-rate execution to be the long-term winners, but even their growth will be checked by inflationary pressures, a higher-for-longer interest rate environment and stubbornly weak consumer confidence.
Pureplay online retailers faced a torrid time in 2023 and this will continue in 2024 with certain segments such as luxury and fast fashion particularly vulnerable.
The online business model is being severely tested by high operating cost inflation, particularly in CPC [cost per click], a pull-back in consumer demand partly linked to a desire to return to stores, and chronic over-stocking throughout the sector. We anticipate a year of continued consolidation and that the strong will get stronger.
It is often in periods of dislocation that the best investments are made and 2024 should provide plentiful opportunities for private capital. However, mainstream investors in both debt and equity are very wary having had their fingers burned in the sector previously. We do not expect this to change in 2024, which will favour specialist investors.
David Maddison, director of UK retail and leisure at HSBC
Consolidation through M&A will persist, with typically larger well-capitalised businesses snapping up brands that are either distressed, or undervalued and hold the promise of providing a genuinely strong return on investment. Weakness in single branded, mid-market, clothing and apparel businesses will likely see an increased level of activity in this space compared to 2023.
We see a looming possibility of deflation, characterized by softened demand, diminishing cost pressures, and an inventory reset that could drive prices downward. While this may bring good news for consumers, navigating the challenges of maintaining brand equity and integrity in such a deflationary climate for brands can be difficult.
However, amid the turbulence, the ongoing trend of M&A activity and potential distress holds the promise of eventually balancing the consumer demand and retailer supply equation. Those resilient enough to weather the storm could not only survive but thrive in the aftermath.
In the face of another potentially challenging year, price-conscious consumers are anticipated to explore alternatives to fast fashion. Pre-loved shops, circular platforms, and peer-to-peer networks are likely to gain traction as discerning shoppers seek sustainable and economically viable options.
Anticipating the future, next-generation materials are poised to take a larger role in mainstream fashion, weaving their way into the fabric of the industry and becoming increasingly visible from catwalk to closet.
Erin Brookes, managing director and European retail and consumer lead at Alvarez & Marsal
2023 saw more consolidation in fashion retail and it shows no signs of slowing down next year. The Christmas period is likely to have further polarised the market in terms of “winners” and “losers”. As the cost-of-living continues to bite, shoppers are being more selective with their purchases and are demanding on both value and quality fronts, while mindful of waste and the environmental impacts of fast fashion.
Once the dust has settled following the festive period, it’s likely that volumes will be down, leaving some retailers in stressed situations, compounded by the rising cost of capital and excess stock hampering cashflow. We could therefore see stronger players that have been acquisitive in 2023, like Frasers, Next and M&S, taking their pick of smaller fashion brands that are struggling.
These larger groups will be able to select the best options for their business and have established an operating model to load brands onto their platforms to provide newness and further customer acquisition. However, not all retailers in distressed situations will be snapped up. Acquirors will be looking for a strong brand with good levels of customer loyalty; complimentary to their current stable. As the pressure mounts, would-be buyers may also wait to get a better deal on an acquisition target by purchasing it out of an insolvency process.
Andy Pear, partner at Moorfields Advisory
Despite a relatively slow 2023, we expect M&A activity to grow at a steady pace in 2024, with cooling inflation, interest rates peaking and volatility in the market becoming the new normal. We expect the distressed M&A market to play a part. On the positive side, the global economy is expected to perform better than many assume in 2024 with most large economies managing to avoid recession.
Private equity firms are sitting on a large amount of dry powder and we expect them to have a diverse M&A plan for the next 24 months. Department stores and supermarkets are also likely to be prominent players as they look to diversify offerings and secure supply chains, which is likely to result in an increase in brand and IP [intellectual property] sales with further activity in the market for online brands similar to the likes of Next and Made.com.
Deal activity is often driven by structural changes in the market and we foresee savvy operators pursuing deals that will deliver on the following strategic objectives: (1) greater use of AI to improve customer experience and making home deliveries, tracking and returns easier to manage, (2) greater shopper engagement and omnichannel, mobile market places alongside personalising the shopper experience and (3) sustainability, repair hubs and recycled products.
