M&A activity in the retail sector fell sharply during the first half of 2019, as uncertainty and digital disruption continue to put pressure on the sector .

There were just 54 deals in the retail sector during the first half of 2019, compared to 84 transactions that took place during the same period of 2018. Deal values fell even further than volume, down 43 percent to US$9 billion.

The industry continues to see a shake-out as spending migrates from physical stores to online, taking its toll on traditional chains that have not been able to embrace digital transformation with sufficient speed. Already in the first four months of this year, retailers announced that 5,994 stores would close in the US, more than the number of stores closed in all of 2018, according to retail industry research firm Coresight Research.

This disruption is now having an impact on M&A. The largest deal in the first half by some margin, ESL Investment’s purchase of Sears out of bankruptcy, followed the collapse of the iconic retailer in the face of tough competition, including from online rivals. Further activity around distressed assets is likely in the second half of the year and beyond.

The rise of e-commerce is also driving a different kind of deal, as leading players target new markets, or team up with bricks-and-mortar chains.

Amazon's purchase of Whole Foods two years ago continues to be closely monitored as the online retailer is reportedly striving to prove its Prime customer base is the right market for its new subsidiary, while also apparently contemplating price cuts to drive sales increases.

Similarly, Walmart's purchase of a majority stake in Flipkart last year is an example of a leading bricks-and-mortar retailer diving into both e-commerce and overseas markets. India’s largest online retailer also offers an invaluable source of expertise on technological innovation, particularly in artificial intelligence. If Walmart can make a success of the deal, competitors may want to pursue similar transactions.

On valuations, retail businesses have continued to attract premium prices, both from strategic buyers and private equity firms, which have often taken on significant debt to fund transactions.

That leaves little room for error in the successful execution of the value plan for these deals—and could leave buyers vulnerable in the event that any significant downturn in the US economy affects the sector, especially where significant leverage is employed.

However, for now at least, the backdrop for the sector remains strong, with an economic environment that is generally supportive of consumer spending (which grew 3.2 percent year-on-year as of May 2019, according to the National Retail Federation, a trade association).

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