Retail M&A Outlook Brightens as Dealmakers Operate With More Certainty

In 2023, rising interest rates, inflation, and less discretionary spending squeezed some consumer and retail companies. This year, even though some of the same factors are still at play, there is greater stabilization and along with it increased interest in pursuing mergers and acquisitions (M&A) activity.

In fact, this activity is already appearing on Datasite’s platform, which facilitates around 14,000 global new deals annually. Global consumer sell-side deal kickoffs on the platform are up 22 percent for the six months between November 2023-April 2024, compared to the same time last year, while global consumer buy-side deal kickoffs have increased even more: up a whopping 55 percent in the same six months compared to a year ago. Since these are deals at their inception rather than announced, it gives a good indication of what's to come in the next six months to nine months.

Some of this activity is the result of improving market conditions. Consumer confidence rose in May after three prior consecutive declines, while the National Retail Federation (NRF) showed consumer spending at U.S. retailers was up more than 2 percent for the first quarter of the year.

Other M&A activity is being driven by private equity investment in e-commerce and omnichannel strategies that are aimed at redefining the shopping experience. First quarter 2024 PE investments in consumer staples and consumer discretionary businesses were around $12 billion, up from $9 billion for the same time a year ago. Investments might include online businesses seeking physical settings to interact with customers or improving the digital capabilities of brick-and-mortar businesses to better understand and predict consumer behavior.

Consumer and retail companies are also investing in technology powered by artificial intelligence. Businesses can’t afford to fall behind the pace of innovation via available technologies, and M&A offers one route to fulfilling these objectives. In fact, the industry is among the top five identified by global dealmakers to be disrupted by AI, especially generative AI, in the next five years. Dealmakers expect it to help streamline processes and increase productivity. Additionally, as collaboration between industry players and governments continue — Europe just set a global benchmark for regulation of the technology — AI adoption will likely become a greater focal point this year.

Some consumer and retail businesses are also divesting non-core businesses or business units that are unsustainable. There are also concerns around U.S.-China economic relations, which may mean consumer businesses will need to reconsider their sourcing strategies, if they haven’t already, to have dual supply sources or potentially even sever ties with Chinese suppliers.

Also, with inflation persisting — in the U.S. it remains above the Federal Reserve's 2 percent target — the consumer wallet is straining. In response, several U.S. retailers have lowered prices to attract dollar-stretching shoppers.

Given all these factors, deal activity in consumer and retail sectors is likely to remain steady for the remainder of the year. The good news is dealmakers may find they're able to complete the due diligence process of a deal in less time and complete more transactions than before. After two years of climbing, due diligence times for deals on Datasite are dropping again, while deal closure rates are starting to inch up, following a significant decline in 2023. U.S. diligence times decreased by an average of 10 days in Q1 2024, compared to the same time a year ago, while deal closure rates increased to 53 percent in Q1 2024 from 51 percent in Q1 2023.

Still, buyers are seeking deeper insights, necessitating greater disclosures from sellers, and reflecting a more discerning approach to deal making, where thoroughness is prioritized over haste. This is evident in the number of documents being uploaded to Datasite’s platform. Last year, documents and artifacts associated with new deals on Datasite increased by double-digits compared to a year ago, and this trend shows no sign of stopping with first quarter tallies up year-over-year by more than 40 percent.

For now, dealmakers are operating with more certainty. And while it’s difficult to know what’s next, consumer and retail companies that are deal ready will reap the rewards.

Mark Williams is chief revenue officer, Americas, Datasite, a provider of virtual data rooms for M&A deal making.