The Australian M&A Outlook: 2023 Retail and Consumer Industry Insights

Caution is the watchword in a subdued sector – but hidden potential can still be found.

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Retail and consumer (R&C) market conditions, particularly in more discretionary categories, present several challenges for dealmakers at present. Cost-of-living pressures have put the bite on discretionary spending, while businesses are being squeezed by rising costs (e.g. wages, rent, energy, foreign exchange, general input inflation). Trade players may transact in search of cost efficiencies, customer experience (CX) technology and/or supply chain security. And we expect to see some ‘opportunistic’ deals involving distressed/challenged businesses.

M&A forecast: Purpose-driven deals involving trade players

In the coming months, dealmakers will be driven less by passive motivations and more by purposeful intentions, such as:

  • seeking cost efficiencies through scale

  • accessing technology for improved CX, or

  • vertical integration to secure supply chains.

As a result, particularly in more discretionary categories, we expect most M&A activity will involve trade players, as opposed to private equity (PE) firms (many of which are focusing on optimising existing portfolio companies instead).

Hits and misses in the coming months

Australian consumers are generally dialling down their discretionary spending. Demand is quieter in several categories including clothing and accessories, restaurants and cafes, and home furniture and appliances (the latter coming off a COVID-high). Consumers are also switching to lower cost products and services (which are typically lower margin).

Still, investors with their ears to the ground will be monitoring certain subsector trends, such as health, beauty and wellness, baby, and pet food and pet care. The margins of these businesses are generally robust, giving them room to move when it comes to cost inflation, and making them attractive prospects within the R&C marketplace. 

Sustainable and ethically sourced products, as well as health-based foods, are having their moment. We also anticipate more resilience for businesses that cater to younger (<25-year-old) and older (55+) adults who are less exposed to mortgage rates and rent increases than adults between these ages. As such, we expect to hear some positive noises in certain areas of travel and tourism, and categories that cater to digitally native brands.

Given the challenging market conditions, there will likely be some M&A arising from distressed retailers, particularly towards the end of 2023. For dealmakers with capital to deploy, these opportunities will require the agility to move fast.

Other areas of hidden potential

In the coming months, proactive dealmakers will be alive to opportunities in public-to-private transactions (e.g. the recent acquisition of Blackmores), as well as corporates divesting non-core brands.

Given the challenging market conditions, there will likely be some M&A arising from distressed retailers, particularly towards the end of 2023. For dealmakers with capital to deploy, these opportunities will require the agility to move fast (and possibly to move despite imperfect or incomplete information). 

Response to tech changes could impact value 

Technology continues to rewire the R&C sector, and proactive dealmakers are keeping a close watch on these developments. 

The costs of digital marketing will increase in the coming months, as retailers and digital brands race to comply with enhanced customer data and privacy protections. To gauge the likely impact on individual assets and companies, it’s worth considering how and where the cost of customer acquisition has risen in overseas jurisdictions (e.g. in response to the GDPR laws in the EU).

Dealmakers are also beginning to see the impact of generative AI in the consumer landscape. Businesses that harness this technology wisely could make themselves highly attractive to investors; while the reverse may be true for those that fail to adapt to the risks and opportunities.



Next steps for dealmakers

The softening economy presents a chance for retailers and consumer brands to rethink their current strategies, stabilise, and reset for future growth – including, in some cases, to transact to transform. This, in turn, spells opportunities for dealmakers, and we’ve compiled three ‘no regrets steps’ for doing deals in the current climate: 

  1. Go deep: Right now, the challenge lies in deal execution and we’re seeing greater emphasis on due diligence than ever before. R&C is a data-rich sector. Dealmakers should make the most of available data (including financial, customer and other operating metrics) to really understand what’s driving a target business, its underlying performance and trends over time. Acquirers need to know what’s happening on a store-by-store, customer-by-customer and, in some cases, transaction-by-transaction basis. 

    Meanwhile, macroeconomic uncertainty means scenario analysis is essential. (e.g. What might possible further interest rate rises mean? How has the business responded to changes in trading conditions so far?) The emphasis on deeper due diligence is here to stay. 
  2. Go broad: It’s also critical to understand the wider competitive landscape to assess whether trends in consumer behaviour, cost development or store performance are consistent within the industry or specific to the acquisition target. Coupling financial analysis with broader strategic and commercial insights can open up greater opportunities.
  3. Go early: It’s never too early to start doing the groundwork for a deal, and integration and execution should be considered at the outset of M&A. From CEOs to shareholders, conservative thinking creeps in during a downturn. Combat conservatism with early conversations about unlocking value via deals.

 


Next steps for R&C brands

For retailers and consumer brands, we’ve pinpointed five proven tips for thriving, not just surviving, during the current downturn. Whether you’re planning to transact in the short-term (or not), it’s good discipline to:

  1. Plan for tomorrow: Businesses face ongoing rising costs, coupled with long-lead times on inventory. Take a long-term view, and structure your business for where you want to be in five years’ time, rather than limping from crisis to crisis.
  2. Re-examine your funding requirements: Those businesses with less cushion in their balance sheets may feel exposed, while those that have taken on debt will be feeling the effects of consecutive interest rate rises. Engage with your banking relationships. Fight inflationary pressures by investing in your finance function. Always test your forecasts robustly. And ensure your scenario planning is well thought through.
  3. Manage your cash, capital, and inventory: Credit is increasingly hard (and expensive) to come by, and active cash management is more important than ever. Meanwhile, supply chains are still shaky in places, and many businesses are overstocked as a result. They need a renewed focus on managing inventory.
  4. Engage early with your landlords: Many retail leases are pegged to CPI increases, which compounds over time (as opposed to market rate increases). Reduce CPI pain by talking to your landlord about your situation as early as possible. Also, consider an early-exit clause, which may attract a premium but can be a smart investment in the medium-term.
  5. Be buy now, pay later (BNPL) aware: BNPL products are facing possible regulatory change in the coming months. Given 2% of all Australian card purchases are made using BNPL products, any changes in this space could have major ramifications for businesses, especially retailers whose core customers are under 25 years old.

Explore our national findings plus other industry insights as part of this series
 

Contact us
 

Elizabeth Fritts
Retail and Consumer Deals Leader

Andrew Pryde
Retail and Consumer Deals Partner

Daniel Walley
Deals Business Restructuring Services Partner

Adam Colley
Deals Business Restructuring Services Partner

Will Jeffries
Retail and Consumer Deals Director