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Consumer and retail trends drive M&A

Tech evolves, ecommerce thrives and ‘healthy’ powers change

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Smart Watch The M&A market in the consumer products and retail space is shaping up in ways that reflect a continuing evolution of data and technology use, and a continued trend toward health, wellness and convenience. At the same time, the uncertainty about the upcoming election has resulted in some dealmakers taking a wait-and-see approach while others are eager to get deals done. Valuations remain sky-high, but private equity (PE), venture capitalists (VCs) and corporate acquirers remain active and opportunities still exist to capitalize on trends in an industry that is experiencing significant change.

Key trends in the consumer products and retail space include:

  • Technology upping the game in the supply chain and elsewhere
  • Social media data usage increasing for marketing and market research
  • Health and wellness products and services driving deals
  • An apparel market that continues to decline driven by an ongoing shift to more casual attire; however, more private companies are reaching “unicorn” status with over $1 billion valuations
  • A food industry that expects continued growth in natural, organic and plant-based products

A tech evolution Amazon, a master of tech innovation, acquired nine companies in 2019, touching on mobile robotic order fulfillment as well as cloud computing, business computing software and streaming services. “Amazon has made over 100 acquisitions and investments in the past 10 years and continues to be aggressively acquiring businesses that help bring in new technologies and people talent, and to acquire potential competitors,” said Simon Jewkes, principal, Transaction Advisory Services, Grant Thornton.

Amazon is not alone in acquiring smaller brands to enhance products or marketing. “We see this trend across large retail and consumer products companies that are struggling to develop technologies and ecommerce capabilities in-house,” said Jewkes. Walmart acquired Aspectiva in early 2019, an Israeli-based company that specializes in machine learning and natural language processing capabilities. Aspectiva will be joining Walmart’s Store No. 8, the incubation arm launched by the retailer in 2017 to uncover ideas that will transform the future of commerce.

Big brands acquire smaller ones to enhance products, marketing and technologies. The supply chain continues to evolve with a merging of consumer products manufacturers and retailers. Over the past few years Walmart acquired a number of digitally native brands including Bonobos, Moosejaw, Modcloth and Eloquii. Growth through acquisition hasn’t proved easy for Walmart, and in 2019 it sold Modcloth and laid off employees at Bonobos. Yet Walmart has seen significant growth in its online grocery platform and has begun experimenting with the use of robots to grab and package grocery orders.

Nike acquired the predictive analytics company Celect in 2019 to improve its ability to foresee consumer trends and hone its retail inventory. It also previously purchased a computer-vision company called Invertex in 2018, which led to an expansion of the Nike app that enables consumers to measure their feet at home and find the right size shoe. The development of new apps continues across all consumer subsectors as people want food delivery, beauty, fitness, apparel and everything else on-the-go at the click of a button.

A marketing must: Social media Beyond the use of analytics for product development and marketing is the use of social media including Facebook, Instagram and Twitter, said Jewkes. “This presents a different way of using tech and data to anticipate customer trends by seeing what people are looking at and liking.” YouTube has become an expansion tool for some smaller, innovative companies. Dollar Shave Club, for example, began its life by marketing inexpensive razors directly to consumers through social media and gained market momentum via a guerrilla YouTube marketing campaign that went viral. The result was attractive enough that Unilever bought the company a few years ago and has since focused on new products like deodorant and body wash. Likewise, Edgewell, owner of the Schick and Wilkinson Sword razor brands, in 2019 announced the acquisition of Harry’s, an integrated, omnichannel business that owns several factories and does roughly half its sales in big-box stores; however, this transaction was reportedly abandoned recently because of competition concerns raised by the Federal Trade Commission.

Social media presents a different way to use tech and data to gauge customer preferences. These acquisitions reflect a trend in megabrands buying feisty start-ups that launched digitally. Yet scrutiny of such deals has ensued, with questions around how they actually translate to the bottom line. Can a start-up’s spirit get lost (along with customer loyalty) when a megabrand buys it? Will the acquisition of a growing start-up lead to profitable growth, and under what timeline?

Health and wellness gets a workout Health and wellness continues to drive the market, with continued growth of boutique fitness concepts that are competing with traditional exercise options. PE funds have backed many of these businesses including Barry’s Bootcamp by North Castle Partners, Lift Brands by TZP group, CorePower Yoga, acquired by TSG Consumer in 2019, and TPG Growth’s 2019 purchase of Crunch Fitness.

More broadly we are seeing a continued trend in consumers spending more money on wellness products and experiences. PE fund L Catterton took advantage of this with its investment in Steiner Leisure, and in 2019 successfully sold the skin-care brand Elemis to L’Occitane Group and sold One Spa World, which owns and operates spas on cruise ships and resorts, to the publicly traded special purpose acquisition company, Haymaker Acquisition Corp.

Consumers are also looking for more transparency in ingredients, and there is a growing “clean beauty” trend, which can be seen across several retailers including “Clean at Sephora” and other clean-beauty-only retailers. A significant transaction in this space in 2019 was Japanese Beauty Company Shiseido’s acquisition of clean-beauty brand Drunk Elephant.

Casual-wear rises, rental expands and the number of unicorn valuations grows People are spending less money on buying clothes, as there is less need for owning a wide range of clothes for different occasions as the workplace becomes more casual and rental options continue to expand. The “athleisure” movement, which extends to comfy shoes even in an office setting, is being driven by the fitness trend.

As folks go all-in on fitness, apparel tilts to “casual” and food choice leans “healthy.” Concepts such as Rent the Runway ̶ begun several years ago as a novel way for customers to rent designer clothing, tuxes and even wedding gowns ̶ has evolved with customer tastes and now offers basic fashion that consumers can rent to wear to work. The company received a funding injection in 2019 from existing investors at a $1 billion valuation, giving it unicorn status.

VC and PE are fueling ecommerce brands in virtually every consumer subsector, with a number reaching reported unicorn status. While these brands started online, many of them are expanding their physical store presence.

“Several companies have formed collaborations to offer clothing rental services,” said Kevin Kelly, partner and Retail Industry leader, Grant Thornton. “One example is Vince Holding Corporation offering its women’s merchandise through its subscription service, Unfold. And remember, the store is still very relevant. This is further evidenced by Le Tote’s acquisition of Lord & Taylor, providing a platform to offer online, in-store renting and buying opportunities for their customers.”

Natural, organic and plant-based food is driving sector In the food sector we are continuing to see acquisitions of fast-growing, better-for-you brands. PE and corporate acquirers have set up funds to focus on acquiring the next big brand. Trilantic Capital set up Sunrise Strategic Partners several years ago to invest in emerging brands and now has a portfolio of nine brands focused on authentic and better-for-you products. Corporates have also set up venture investment arms to enable them to invest in early-stage food brands, including Campbell’s Acre Venture Partners, Kellogg’s 1894 Capital and Danone Manifesto Ventures, and they typically provide minority investment and support for start-ups they consider exciting. In 2019, Danone’s Manifesto Ventures invested in Forager Project, a U.S. plant-based organic dairy company.

The strategy has carried over into the fast-food space as companies look at what millennials are buying, with natural foods at the forefront. Fast-food companies are trying to target that part of the market, for example by selling plant-based burgers. “Not long ago, you couldn’t even imagine that in a fast-food restaurant,” said Jewkes. “But trying to bring millennials into a restaurant or store is essential, as they drive so much traffic.”

Find more insights on retail and consumer products.

Contacts:

Simon JewkesSimon Jewkes
Principal, Transaction Advisory Services
Grant Thornton
T +1 212 624 5496

Kevin KellyKevin Kelly
Leader, Retail Industry
Grant Thornton
T +1 212 624 5270