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With consumer sentiment still in the recovery phase, this year’s Australian M&A Outlook: Retail & Consumer pinpoints the sub-sectors and trends for dealmakers to watch. In 2022, consumer confidence, and as a result retail and consumer M&A activity, has been somewhat tempered by inflationary pressure (which is likely to push interest rates up faster than expected), the upcoming federal election, ongoing supply chain issues, recent floods in NSW and Queensland, and geopolitical tensions. And while the federal budget provided some short-term economic stimulus, this won’t fundamentally alter the deals landscape.
All that said, Australia’s retail and consumer sector still presents M&A opportunities for proactive dealmakers, particularly involving brands that remain agile and keep in step with consumer preferences and lifestyle changes.
Current landscape
In line with the global experience, Australia is now adjusting to the reality of COVID-19 in the community and seeing a continuation of several retail and consumer trends (e.g. more hybrid working, online shopping). Retail operations are encountering some speed bumps (e.g. inflation/interest rate pressure, geopolitical tensions, and supply chain disruption) and consumer confidence is slightly subdued in many categories. But M&A activity is expected to remain resilient in several market verticals and niche sectors, as we explain below.
- Health, beauty and wellness
- Branded food
- Pet products (and adjacent veterinary products and services)
- Hospitality and leisure
- Home, garden and outdoors
- Casual wear
Health, beauty and wellness
Health, beauty and wellness has remained resilient through the pandemic, as M&A is used to acquire complementary business models or gain a route into new markets. Compared with other retail categories, health, beauty and wellness retailers had fewer barriers to becoming effective eCommerce propositions because their relatively small-sized products are easy to ship.
Notable subcategories that may trigger more M&A activity this year include men's health and beauty, clean beauty (i.e. natural ingredients and no harmful ingredients or chemicals), and ingestibles (probiotics/prebiotics). There’s also a broad shift away from colour cosmetics towards skincare, which we anticipate to have some stickiness.
Recent activity has included the Go-To Skin Care and Flora & Fauna acquisitions by BWX, and Wesfarmers’ foray into the pharmacy sector (investing in API, which includes the Priceline chain).
Branded food
In 2022, this sector is likely to remain hot for deals in Australia. Two notable consumer trends are health (e.g. organic produce) and convenience (e.g. semi-prepared and shortcut foods, meal kits and home delivery). These trends have driven recent M&A activity including BGH’s investment in Hazeldene’s Chickens; Milk Run’s Series A funding, Quadrant Private Equity’s deal with My Muscle Chef; HelloFresh’s acquisition of Youfoodz, and Five V Capital’s acquisition of Metro Food/Keep it Cleaner (a ‘no nasties’ health food brand stocked by Woolworths, Coles and convenience stores).
Pet products (and adjacent veterinary products and services)
Before the pandemic, Australia was already a nation of pet lovers, and in the past two years pet ownership has surged even further. Pets are typically long-term family members, which makes Australia a compelling market for pet retailers, pet food businesses, and adjacent veterinary products and services. Retailers who offer fast delivery, competitive pricing and complementary services are likely to be brands of choice for consumers. As the year progresses, we expect further deals activity, with success stories such as Greencross attracting interest.
Hospitality and leisure
The unknown trajectory of the pandemic makes it hard to reliably predict how the hospitality and leisure sector will fare as the year progresses. If (as currently appears likely) health restrictions remain eased and borders stay open, Australia could see an upturn in deals activity.
At this stage, the general outlook appears to be one of consolidation. A small number of large groups with strong balance sheets will continue to build out their portfolios this year. Local pubs continue to be transacted and will remain desirable assets. The trend of old historic landmark sites being converted into gastro pubs will also continue, both in urban city centres and more regional Australian towns (many of which have seen growth in light of COVID-19 and a greater focus on domestic travel).
Home, garden and outdoors
In the coming months, we’ll see exactly how employers (and employees) decide to make hybrid working models more permanent. However, it’s already clear that consumers are spending more time at home in 2022 (compared to pre-pandemic levels), so we expect demand to remain high for home furniture, home décor, garden & outdoor equipment, and home storage solutions.
Recent deals include the private equity purchase of furniture retailer Coco Republic (which had doubled down on experiential retail and eCommerce investment) and Nick Scali acquiring Plush, which had been in receivership. When conducting due diligence on furniture retailers, potential acquirers should assess the reliability and flexibility of supply chains.
Casual wear
Apparel can be a challenging category, with M&A activity ebbing and flowing with consumer demand. In the past two years, lockdowns and widespread work-from-home arrangements have boosted sales of casual wear, including athleisure, which has attracted interest from corporate and private equity investors. We may see more streetwear/casual brands (e.g. Culture Kings) on the market in the months ahead, as consumers continue to embrace a more relaxed look, particularly among younger demographics. And digitally forward retailers are likely to maintain gains in market share, as consumers continue to seek convenience.
Market outlook for 2022
Divestitures, demergers, and local market exits
Historically, some major international players have entered the ANZ market and struggled in the absence of a dedicated local strategy and hemisphere-specific product range (e.g. Gap, Topshop). This market’s infrastructure and other dynamics can present challenges for overseas investors.
As part of a broader trend in portfolio reviews, we expect to see a number of divestitures by large corporates across the consumer markets sector, particularly where global players have small ANZ operations and/or non-core businesses. This is a continuation of a longer-term trend that has already seen the likes of Campbell Soup Company dispose of Arnott's, and Suntory’s sale of its ANZ coffee business.
Supply chain and logistics
In 2021, supply chain issues disrupted the sourcing of raw materials and transportation of finished goods to customers. As a result, Australia’s retailers are placing more emphasis on local supply chain and logistics solutions in 2022, leaning heavily on strong relationships within their manufacturing and supply network.
Parcels are being shipped in increasingly sizable volumes while demand for fresh grocery deliveries has rocketed, putting the focus squarely on speed to consumer. Retailers who rely more upon air freight (as opposed to sea) will likely find it easier to service customers in a timely manner, albeit likely at a cost impacting margins. Digitally native businesses require end-of-mile solutions for logistics and we expect to see more small carriers popping up to assist in providing such value-added solutions, alongside the traditional big logistics players. A growing number of technology companies will harness data analytics to refine and improve supply chain processes and enhance customer experience. Last year, Allegro Funds acquired Toll, and we may see further deals in the supply chain and logistics sector as 2022 continues to unfold.
Supply chain disruption has also prompted businesses to hold a lot more stock on hand than they might usually do. In M&A transactions, this extra volume should be considered in context; it’s a risk mitigation measure to ensure stock reaches customers promptly but also represents an increased funding requirement for higher levels of working capital.
With so much freight being delivered to consumers, another notable market trend is a preference for environmentally responsible packaging. This is just one example of how consumers (and business valuers) are increasingly holding brands to account for their ESG performance, transparency and disclosures (e.g. modern slavery, carbon footprint, Indigenous reconciliation, etc).
Platforms and eCommerce
Digitally native businesses typically have the edge on traditional bricks and mortar retailers when it comes to online platforms, data capture and eCommerce capabilities. With government support (e.g. JobKeeper) disappearing into the rear-view mirror, there may be some twists in the road for retailers who haven’t yet acquired the digital agility to pivot and keep pace.
Astute retailers have used the past two years to not only uplift their digital capability but also optimise their broader operations (e.g. renegotiating better lease terms with landlords, cutting loose non-economic wholesale relationships, etc) and these will be the M&A winners in the period ahead if we continue to see consumer demand and cost headwinds.
Another notable trend for dealmakers has been the increased protections for consumers in areas such as online privacy and traceability. Brands that have organic customer engagement through unpaid reach, owned platforms and/or owned profiles will be better equipped to thrive than those that rely on more traditional online advertising models, where there are diminishing returns for cost of customer acquisition (CAC).
Ultimately, value in eCommerce deals should come back to the fundamentals: Is the business profitable? Is cashflow healthy? Is the growth sustainable? Does it have a loyal customer base?
What's next for dealmakers?
Consumer confidence is experiencing some volatility this year (e.g. coming interest rate rises, federal election season, geopolitical tensions involving Russia and China, etc), but the overall M&A outlook for retail and consumer markets remains largely optimistic. In the near-term, investors will continue to have capital to put to work and, while there is inflationary pressure in Australia, it is not anticipated to reach the levels anticipated in the US, the UK and Europe.
To protect against volatility, companies will need to continue to innovate and digitise their business models. They may also use M&A and consolidation to acquire scale to lessen inflationary pressure. So, now is a good time for dealmakers to take a rational look at their portfolios and build up capabilities, while divesting non-core businesses.
Explore our national findings plus other industry insights as part of this series.
National findings
Deals market ripe with opportunities and buzzing with activity
National findings
In 2021, Australia was a hive of M&A activity across most market sectors. The buzz is continuing in 2022, driven by growth ambitions and access to capital, although geopolitical tensions and possible interest rate rises may temper valuation expectations among bidders.
Financial Services
A buoyant market with many more deals bubbling up
Financial Services
With another wave of deals coming this year, our Australian M&A Outlook: Financial Services reveals what’s brewing beneath the surface. While incumbents will be hunting for growth, scale and capability, and private equity firms will explore various sub sectors of financial services, there may be macroeconomic storms ahead.
To succeed in these conditions, dealmakers, more than ever, will need clarity on their strategic priorities to allow them to act decisively when opportunities arise.
Health
Busy year for dealmakers with capital, competition, and valuations all high
Health
Following a record year for deals (in terms of volume and value), this year’s Australian M&A Outlook: Health suggests another flurry of deals will be struck in the healthcare services sector. This is underpinned by increased competition for transactions, new sponsors, available capital, and strong valuations.
Energy, Utilities and Resources
ESG is prompting companies and investors to nail their colours to the mast
Energy, Utilities and Resources
This year’s Australian M&A Outlook: Energy, Utilities & Resources (EU&R) underlines just how important environmental, social and governance (ESG) performance has become to both buyers and sellers. More than ever before, ESG is driving deals activity across the EU&R sector (in Australia and overseas). In fact, the global push towards decarbonisation has made ESG the leading factor when determining, protecting, and creating value in many EU&R deals.
Infrastructure
With competition and capital both high, buyers are thinking outside the box
Infrastructure
This year’s Australian M&A Outlook: Infrastructure signals another busy year ahead. While traditional government privatisation (or ‘capital recycling’) deals remain thin on the ground, funds still have capital to deploy, so more creative transactions and ‘Core Plus’ strategies will dominate. For buyers, that means thinking outside the box.
Technology, Media and Telecommunication
How dealmakers can capitalise on Australia’s red-hot TMT sector
Technology, Media and Telecommunication
Australia’s Technology, Media and Telecommunications (TMT) sector has had its hottest year in deals in a decade, with M&A activity hitting a ten-year high in 2022. This year's Australian M&A Outlook: TMT signals dealmakers are seizing opportunities as the three key trends driving deals – demand for data, digital transformation, and a re-evaluation of traditional asset ownership strategies – remain dominant this year.
Our latest insights
Contact us
Partner, Advisory, Retail & Consumer Deals Leader, PwC Australia
Tel: +61 406 240 335