Restructurings and uncertainty are hitting the US consumer sector. Retail M&A deal volume dropped 11 percent year-on-year to 459 deals, while deal value dropped 36 percent to US$76.87 billion.

Consumer M&A activity declined in 2019, reflecting uncertainty around the future political and economic direction of the market as well as the longer-running trend of digital disruption in the sector. Further, the US is gearing up for a presidential election in 2020, and the Conference Board reported that consumer confidence fell for the fourth consecutive month in November 2019.

Restructurings—issues and opportunities

A number of high-profile retail restructurings and bankruptcies over the past few years—including Sears, Forever 21, Gymboree and Toys 'R' US—are dampening the appetite for M&A. Nevertheless, as ESL Investment's US$5.2 billion acquisition of Sears attests, these processes are also providing investment opportunities for those with an interest in turnarounds. The sector also continues to attract PE attention—as seen with Apollo Global Management's US$1.1 billion take-private of loss-making grocery chain Smart & Final Stores.

Convergence—disruptor and driver for delivery of products

Convergence has also provided opportunities for deals as e-commerce and bricks-and-mortar businesses continue to merge. Retailers are increasingly attempting to offer shoppers the best of both worlds: the convenience of online shopping with the ability to "try before they buy" in stores and receive goods without having to wait at home. Physical and digital retail groups are finding ways to provide consumers with a seamless omnichannel experience and, following on from deals such as Amazon's 2017 US$13.7 billion acquisition of Whole Foods, we'd expect more M&A activity between e-commerce and bricks-and-mortar groups to achieving these synergies.

$76.9 billion
The value of 459 deals targeting the US consumer sector in 2019

Change—consumers and China

Shifts in consumer habits and a need to diversify supply chains away from China are also likely to drive deals in the consumer sector. As spending patterns move towards more personalized experiences and brands with socially and environmentally positive credentials, we may see smaller and more targeted M&A activity. At the same time, a need to avoid US tariffs on Chinese imports is likely to push retailers to invest in new supply chains. As a result, PE, with its high levels of dry powder and access to relatively cheap financing, looks set to become more involved in the retail sector over the medium-term. The challenge for many of these players, however, will be to move away from more standardized approaches to retail businesses and to create the kinds of differentiated offerings that consumers are increasingly demanding.

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