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SECTOR INSIGHT Retail
SECTOR INSIGHT//RETAIL
The Market &
Consumer Outlook IMPACT ON RETAILERS & CONSUMERS
Retailers’ profits margins are facing significant pressure from
the double whammy of sharp rises in both input (as a result of
Sterling’s post-referendum collapse) and operational costs. Looking
SURPRISING POST-BREXIT RESILIENCE...
ahead there is little further respite, with the latter being impacted
by increases in both the National Living Wage and the Minimum
Apart from the result of the UK’s Brexit Referendum, the resilience of the UK consumer is arguably the most surprising phenomenon of
Wage, alongside further rises in both fuel and utilities, piling further
the last 12 months. Experts predicted a sharp decline in spending post-Brexit, as consumers re-assessed their household finances and
pressure on retailers’ logistics / distribution infrastructures and store
tightened their belts, which should have slowed down the broader
estates. The controversial business rates revaluation, which became
economy. What happened was exactly the reverse, with consumers
effective in April, will impact retailers based in London and the South
spending aggressively in the latter part of 2016, buoyed by a resilient
East the most, though the Chancellor announced some concessions
housing market, low inflation and a continued appetite for personal
for smaller businesses to mitigate their impact.
debt. Consumers’ household incomes were further shielded post-
Brexit partially because many retailers had entered into longer-term
Higher ticket, discretionary purchases are typically first to face the
currency hedging contracts, thus avoiding any short-term price rises
axe from consumers’ budgets. When households feel more cautious
to goods.
they may defer larger projects such as a new conservatory or an
extension – which could impact home improvement retailers. Home-
...GIVES WAY TO THE INEVITABLE focused retailers who are extremely reliant on imported, dollar-
denominated, goods (electricals and furniture in particular) will
What we have begun to witness in 2017 is more attuned with the also be feeling the effects of the sharp rise in factory gate prices,
experts’ predictions, albeit slightly later than originally envisaged. accentuated by Sterling’s post-referendum collapse.
CPI inflation has begun to increase rapidly as the effects of a weaker
pound feed through to both input and subsequently, consumer Fashion retailers are also heavily exposed. The latest ONS inflation
prices. Currently sitting at 2.3%, the OBR forecasts CPI inflation report states that clothing and footwear prices increased by 2.0%
will peak at 2.4% this year (though this may be subject to further between February and March this year, following on from a 1.2%
upward revision), before settling towards the 2.0% target by 2019. rise between January and February. Retailers make most of their
The sharp increase in inflation since November has coincided with clothing & footwear purchases in US Dollars, and owing to buying
many retailers’ currency hedges coming to a close. cycles based on seasons, price increases will become most apparent
as the summer ranges are introduced. We expect this could lead to
a pronounced reduction in the very aggressive and unsustainable
discounting the sector has been accustomed to in recent years, as
retailers focus on maintaining margins that will be under considerable
pressure from a variety of factors.
USD/GBP EXCHANGE RATE VS CPI INFLATION FOCUS & FINE TUNING
1.6 2.5%
1.55 The retail environment will be turbulent during 2017 – and with success. The over-used term “developing a seamless omni-channel
1.5 2.0%
only a quarter of the year behind us – the worst is arguably yet to proposition” has never been more relevant, with retailers creating
come for consumers. It is all too easy for retailers to fall into the trap a unified experience regardless of which channel(s) consumers
1.45
of blaming a softening in consumer demand for their woes. With use, throughout the entire customer journey – from pre-purchase /
1.4 1.5%
demand potentially dampening, the competition amongst retailers evaluation, right through to the post-purchase phase.
USD/GBP
CPI
1.35
for consumers’ cash will intensify further.
1.3 1.0%
Retailers need to address the retail basics, optimise their omni-
1.25
It is up to retailers to bring their A-game and focus on their channel propositions and be agile in their decision making. The
1.2 0.5% propositions to generate more reasons for consumers to spend. sector is notorious for its unforgiving nature and with the bar being
1.15 continually raised, retailers must work hard to stay ahead of the
1.1 0.0% In the current age of digitally-influenced shoppers, retailers need game and prevent being hung out to dry.
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sept-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
to ensure they have a comprehensive understanding of the entire
USD/GBP CPI Inflation %
customer journey – and investing in digital will be fundamental to this
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SECTOR INSIGHT//RETAIL
ONGOING DOMINANCE OF TRADE Europe, which should also benefit from Steinhoff’s significant global
Strategic buyers continued to dominate M&A activity during 2016, sourcing capabilities.
accounting for 63% of all sector transactions. International trade
acquirers accounted for 25.6% of all M&A, the highest level for ACQUIRING DISRUPTERS
several years. Notable cross-border deals include Dutch window The retail sector continues to undergo considerable structural
coverings manufacturer Hunter Douglas’ acquisition of online retailer change, which has only intensified more recently. Principally driven
Blinds 2 Go and South African retail group Steinhoff’s acquisition of by online, retail disruption is up-ending many sectors, resulting in
fixed price retailer Poundland, for £610m. the emergence of fast-growing, nimbler online operators, who are
shaping up to be key competitors to more well-established players.
Private equity was more subdued as an acquirer group in 2016,
though several enjoyed very attractive exits: Beringea (My Optique), The merger of the two largest online pharmacies, Pharmacy2U and
3i and YFM (Go Outdoors) and Octopus Ventures (Vision Direct) all ChemistDirect.co.uk, backed by a £10m investment from the BGF, is
benefitted from very successful sales to strategic acquirers. clear evidence of the rapidly growing impact of online prescription
and doctor services on the sector.
UK Retail M&A Volumes, 2013-2017YTD Rapidly growing online glasses and contact lens retailers Vision Direct
60 and MyOptique Group were both acquired by Essilor International,
demonstrating how their disruptive online models share made the
50 channel a viable alternative option in a sector traditionally dominated
by high street opticians.
40 22
With online sales of just over 7%, homewares retailer Dunelm has
17 14
30 identified the channel as a key strategic growth objective. The
13
acquisition of home & garden pureplay retailer Worldstores (out of
20 administration) was an opportunity too good for Dunelm to pass.
30 Worldstores provides Dunelm with a strong technology platform
23 25
10 20 and significantly bolsters its range in furniture, while also providing
3
substantial back-end logistics infrastructure to support its home
4
0
delivery proposition.
2013 2014 2015 2016 2017YTD
So what were the key themes driving retail M&A?
PLATFORMS FOR GROWTH
There are several markets where incoming acquirers
M&AREVIEW
have acquired businesses that have the combination
of critical mass and a strong proposition in order to
seize growth opportunities. Midlothian Partners &
Hattington Capital’s acquisition of garden centre
chain Dobbies is a case in point: With over
Charting the key M&A trends and 2,300 centres across the UK, less than 10% of
developments in the Retail sector which are owned by the top five operators,
the 34-strong Dobbies chain provides a solid
platform from which to further consolidate
HARSHA WICKREMASINGHE
one of UK retail’s most fragmented sectors. UK Retail M&A Sub-sector
Breakdown, Jan 2016-2017YTD
M&A OVERVIEW 2016 got off to a flying start, with three deals alone accounting Australian DIY retailer Bunnings – famous
The UK retail sector witnessed a slowdown in M&A activity during for a combined £1.9bn, led by the break-up of Home Retail Group. for its sausage sizzles, excellent customer
2016, with 39 completed transactions, down almost 40% from Australian conglomerate Wesfarmers’ Bunnings fascia acquired service and comprehensive range authority,
the dizzy heights of 2015. One is instantly drawn to Brexit as the home improvement chain Homebase for £340m and Sainsbury underpinned by everyday low pricing – believes
cause (or excuse), yet this is not the case. 52% of transactions in pipped South Africa’s Steinhoff to acquire general merchandise UK customers will be attracted by ‘how they do
2016 occurred post-referendum, indicating that confidence in the retail Argos, for £1.23bn. Bridgepoint-backed online retailer Wiggle DIY retail down under’. Bunnings is investing
sector, much like the UK consumer, has weathered the storm and announced a merger with online rival Chain Reaction Cycles, in a £500m in converting stores to its format, which will
confounded many observers’ predictions that M&A activity would fall deal reportedly valuing the latter at £300m. The newly merged entity see the Homebase name phased out by 2022.
off a precipice following the UK’s historic vote to leave. It is more a – WiggleCRC – now has a market share in cycling similar to that of
function of a return to more ‘normal’ levels of M&A for the sector, just market leader Halfords and plans to grow to £1bn of sales spanning South African retailer Steinhoff was stalking the UK high
5% below 2014, but 15% ahead of the volume of transactions in 2013. the broader outdoor sports & pursuits sector. street for a suitable acquisition several months prior to its
purchase of Poundland. The fixed-price discounter fits well with
Steinhoff’s existing European price-led retail business and there
is a clear opportunity to roll-out the format throughout continental
Source: Mergermarket, Bureau van Dijk, Livingstone Analysis
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SECTOR INSIGHT//RETAIL
IDENTIFYING POTENTIAL LEADERS IN DISTINCTIVE NICHES OUTLOOK
Private equity continued their trend of identifying and acquiring We remain optimistic regarding the level of M&A activity in the
key businesses that have clear potential to become leaders in their sector for the rest of 2017. Private equity will continue their trend
respective niches. Womens’ outsize fashion retailer Long Tall Sally of investing in fast-growing specialist retailers who focus on distinct
was acquired by Equistone-backed direct fashion retailer TriStyle. market niches. Trade acquirers will become increasingly active in
Fast-growing online furniture retailer The Cotswold Company, which sale processes for strong online retailers, lured by their technology T R A N SAC T I O N H I G H L I G H T
generates annual revenues in excess of £35m, was acquired by True and deep understanding of customers through big data and analytics.
The Cotswold Co.
Capital. Finally, international acquirers (both trade and financial investors),
buoyed by the weakness of sterling, may view the current uncertainty
Market-leading book recycling business World of Books (WoB) surrounding the economy as an opportunity to invest in UK retail –
received a £13m investment from Bridges in November 2016. WoB reinforcing the long term positive outlook for the sector.
has developed a strong proprietary technology platform and operates
in a market which is growing at 15% per annum. Livingstone’s Consumer sector team advised the shareholders
of Blackbird Retail Holdings, owner of one of the UK’s largest
ADMINISTRATIONS online furniture retailers, The Cotswold Company, on the sale of
The highly competitive UK trading environment requires retailers to a majority stake to True Capital, the retail and consumer sector
be agile in their decision making, possess a deep understanding of specialist investment firm.
their customers and to focus their investment on providing a top-class
customer experience. Yet again several retailers (many more than in Founded in 1996, The Cotswold Company, which was acquired by
2015) failed to adapt to the constantly changing landscape and fell by Blackbird Retail Holdings in a purchase led by Kevin Johnson and
the wayside during 2016. James Birtwhistle in 2009, sells high quality oak, pine, painted
Geographic Split of M&A Acquirers, 2016-2017YTD furniture and accessories with a market-leading value proposition.
Kevin Johnson, CEO of The Cotswold Company said: “The
Livingstone team, with their strong e-commerce expertise
and track record, really understood our business, its culture
and what we were looking for from a partner. Their hands-on
guidance and support was invaluable as we worked quickly to
complete a deal that all of the team are delighted with.”
Source: Mergermarket, Bureau van Dijk, Livingstone Analysis
Most recently Jones the Bootmaker was acquired by Endless and
sister group Brantano has so far failed to find a buyer at the time
of writing. Fashion retailer Jaeger’s private equity owner Better
Capital appointed administrators earlier this month, having failed to
find a buyer willing to match the £30m sought for the loss-making
business. There seems little chance of any respite from the tough
trading conditions facing high street retailers (further perpetuated by
the ongoing shift to online), resulting in a strong possibility of further
retailers falling into administration as the year progresses.
Fashion & home retailer BHS and menswear brand Austin Reed
were the most high profile (with both making a comeback online
under new owners and the latter set to return to the high street
once more). Several other notable failures include stationery retailer
Staples, 24-strong bedroom and kitchen furniture chain Betta Living,
the 140-store My Local convenience chain (former WM Morrison
stores) and Icon Live – an £80m turnover designer, wholesaler
and concession retailer of jewellery and fashion accessories. Most
recently Jones the Bootmaker was acquired by Endless, whilst sister
group Brantano has so far failed to find a buyer at the time of writing.
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SECTOR INSIGHT//RETAIL
The various touchpoints along the omni-channel customer journey
DIGITAL
PERSONALISED OFFERS & PROMOTIONS
EMAIL MARKETING
Piecing
WEBSITES/LANDING PAGES
PAID CONTENT MOBILE APP/SITE
SOCIAL MEDIA
BLOGS, RATINGS & EMAIL
REVIEWS
SEARCH WEBSITE
LOYALTY PROGRAMME
CHAT
BLOGS,
RATINGS &
together the
REVIEWS
PRODUCT SOCIAL SITE SURVEY
TWITTER/SOCIAL
IN-STORE KIOSKS
AWARENESS CONSIDERATION PURCHASE POST-PURCHASE LOYALTY & RETENTION
omni-channel
WORD-OF-MOUTH RECOMMENDATIONS
CALL CENTRE
& FEEDBACK
STORE
REPRESENTATIVES
DIRECT MAIL
RETURNS & EXCHANGES
PR
RADIO
TV STORES
PRINT
puzzle
OUTDOOR
MANAGED TOUCHPOINT
PHYSICAL
EARNED TOUCHPOINT
Pureplay retailers have realised that in order to succeed and drive long-term customer loyalty, they need to create experiences that
cannot be replicated online – and stores play a key role in achieving this. Amazon has spearheaded this charge launching its own
physical bookstores in 2015, and more recently trialling a cashless and checkout-free format, Amazon Go, at the end of 2016. Several
The phrase “the rise of online shopping has sounded the death knell other pureplay retailers have also launched stores in a bid to engineer a stronger connection with their customers in a way that cannot
for traditional bricks-and-mortar retailers” is probably one of the most be replicated digitally. Fashion retailer Missguided and furniture retailers Made.com, Loaf and Sofa.com are just a few such examples.
overused, factually incorrect statements we have come across for a long
time. Despite online retail’s rapid ascent, which has fundamentally altered Integrating stores with online is the real challenge that many retailers have either failed, or poorly executed, to date. Having the latest
the structure of the retail landscape, the channel currently accounts for technology is one thing; how you collect the data, analyse it and use it to learn more about your customers and meet their demands is
just c.14% of total retail (though penetration varies considerably across another matter.
different sub-sectors) and is forecast to account for approximately one-
fifth of overall retail sales by 2021. Personalisation – creating a dynamic offline experience customer loyalty programmes. Harmonising these systems provides
an opportunity for enhanced operations across the business. For
Whilst the perceived disadvantages of having an expensive and Personalisation is not a new concept in retail – we have all received instance, from enabling store representatives with connected
demanding store estate are many, having a physical presence has emails from retailers for years addressing us by our first names. That devices to offer in-depth product information, real-time stock
numerous advantages which have become more apparent as both was Personalisation 1.0: The evolution of this is something far more availability & fulfilment options and personalised recommendations
the digital and physical worlds have become ever-more intertwined. complex, and in the omni-channel era it requires retailers to deliver to consumers, to enabling online purchases to be returned in-store
Consumers increasingly demand a more immersive, personalised a unique experience for shoppers regardless of which channel (there remain an alarming number of retailers who do not accept
experience when shopping – and stores are ideally placed to exploit this they utilise. It is therefore of little surprise that personalisation will returns in-store for products purchased online).
sensory trait. continue to be one of retail’s hottest trends this year.
The Prospect of Significant Rewards
The customer journey is far more complex and unpredictable than ever Beacon technology has emerged as a key weapon in developing
before, characterised by consumers surfing between several on-and- a multi-faceted interaction with the connected consumer in-store. Yet several challenges persist when it comes to effectively crafting
offline touchpoints in the run-up to, and during, a transaction. Whilst Beacons not only provide a range of analytics on customers for and implementing a successful omni-channel strategy. Key hurdles
shoppers leave behind a traceable ‘digital footprint’ of their behaviours retailers, but can also enhance the shopper experience in-store to overcome include breaking down channel silos, democratising
and preferences online, this is far harder to capture in a store-based by offering real-time personalised mobile offers and helping data, selecting and funding new technologies, allocating resources
environment. consumers to navigate around stores, for example. and, arguably most importantly, security.
Other initiatives include digital mirrors in dressing rooms, interactive Retailers need to gain an in-depth, holistic view of individual
shop window displays and Chatbots (chat-based automated robots customers and their preferences by amalgamating the wealth of
that simulate human conversation) through messaging apps like data and insights obtained across various channels. This enables
WhatsApp or Facebook Messenger. them to offer more personalised, targeted experiences which
engender greater customer loyalty, resulting in higher conversion
Omni-channel also has a considerable impact on store operations, rates and more purchases.
particularly those that are critical from an operational perspective
including; logistics & fulfilment, payment and HR systems and
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SECTOR INSIGHT//RETAIL
T R A N SAC T I O N H I G H L I G H T
Long Tall Sally
Livingstone’s Consumer sector team advised the management team of Long Tall Sally, a leading
multi-channel retailer of fashion for taller women, on the £30m acquisition of the business by
We’d like to find out
Equistone-backed TriStyle Mode GmbH.
how we can help you.
Founded in 1975, East-London-based LTS, led by CEO Andrew Shapin and backed by Amery Capital,
has offered taller women real choice and up to date fashion through its 26 stores located in the UK,
Canada, Germany and the US, and its online offering. The business will continue to be operated Whether you are looking to sell, acquire,
independently by the existing management team led by Shapin and Amery Capital Chairman Maurice raise or manage debt, or manage a special
Helfgott post-acquisition, with both Shapin and Helfgott reinvesting in TriStyle. situation we can help your business succeed
Andrew Shapin, CEO of LTS said: “The team at Livingstone were instrumental in guiding me and my
team through the process, demonstrating real creativity in ensuring shareholder and management
interests were aligned and optimised. Without question they were an integral part of our deal team
and made a real difference in working with each side to help complete the deal in a satisfactory
way for all stakeholders.”
LET’S DIVE IN
RECENT RETAIL TRANSACTIONS
leading independent producer
renowned design company and leading retailer and supplier of
leading online wooden furniture of high-quality contemporary
online fashion retailer agricultural machinery and feed
retailer has been sold to handmade rugs has sold a
has been sold to has acquired
majority stake to
Livingstone is an international mid-market M&A and Debt Advisory firm, with offices in Beijing, Chicago, Düsseldorf, London, Los Angeles,
Madrid and Stockholm. Its 100 staff complete c.60 deals per annum.
We focus on five core industries, with dedicated teams across our offices serving the Business Services, Consumer, Healthcare, Industrial and
Media & Technology sectors, drawing from our experience of closing over 850 transactions.
leading multi-channel retailer leading retailer and distributor
dedicated online and mail
of fashion for taller women has of fashion accessories and leading online retail specialist
order supplier of ironmongery
been sold to TriStyle Mode travel goods has sold a minority has been sold to
products has been sold to HARSHA WICKREMASINGHE SIMON COPE-THOMPSON
GmbH, a portfolio company of equity stake to
+44 (0)20 7484 4748 +44 (0)20 7484 4706
hw@livingstonepartners.co.uk sct@livingstonepartners.co.uk
This document may include facts, views, opinions and recommendations of individuals and organisations. Livingstone Partners LLP does not guarantee the accuracy, completeness or timeliness of, or otherwise endorse, these views, opinions or
recommendations. The content in this document, including any research and opinions, does not constitute any form of advice, recommendation or arrangement by us and is not intended to be relied upon by users.
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