Retail: Why now is the time for pre-sale preparation and value creation
Retail is detail. But right now, retail is also pre-sale, and savvy consumer-facing companies are using the current consumer spending slowdown as a chance to reassess their portfolios and prepare their businesses for sale. From fine-tuning strategy to planning international expansion, these leaders are looking beyond the lull to adopt a value-creation mindset. That way, when consumer spending springs back, and M&A activity in consumer markets picks up, these retail and consumer (R&C) companies will be ‘deal-ready’.
Here, I explore three key current themes in Australian consumer markets, as well as three ways dealmakers can capitalise in the year ahead. First, though, some context about the marketplace.
Growing certainty (if not confidence)
High interest rates, stubborn inflation, and cost-of-living pressures continue to curb consumer spending, especially in discretionary sectors. PwC’s Voice of the Consumer Survey 2024 found inflation overwhelmingly ranks as the number-one concern for the year ahead according to global consumers. Meanwhile, R&C deal values in Australia remain suppressed in 1H2024 (down 60% for the same period last year), and volumes are still sluggish (122 deals were completed in 1H2024 versus 176 in 1H2023).
Australian Retail & Consumer deal volumes and values 2020-2024
Source: PwC Analysis - Summary of Global AsiaPac and Australia M&A Trends for 2024 Outlook
And yet there’s consistency in this “new normal”. Interest rates might be higher, but they appear to have stabilised. This at least gives consumers more confidence to make spending decisions, which in turn affects the R&C areas that are more (or less) attractive from a growth and investment perspective. It’s a low-growth economy but it’s an increasingly predictable one.
So, which subsectors are proving popular? Health and wellness remains an M&A hotspot (especially skincare), as seen in L’Oréal’s AUD$3.7bn acquisition of Melbourne-founded cosmetics brand Aesop. Similarly, wellness technologies such as subscription-based wellness apps are thriving. Meanwhile, Australia’s love affair with pet care continues; one of the largest local R&C deals in 2023 was Woolworths Group’s purchase of specialty pet retailer PETStock for AUD$586m.
Influential factors in the months ahead
In addition to the hotspots I just described, the following themes will shape M&A activity during the remainder of 2024:
- International buyers: Australia’s top three R&C acquisitions in 2023 came from overseas buyers (L’Oréal’s acquisition of Aesop; Kirin’s AUD$1.9bn buyout of Blackmores; and Advent International’s AUD$1.7bn purchase of Zimmermann). Global investors are particularly interested in quality Australian R&C businesses, with an emerging trend of Japanese investors following Kirin’s buyout of Blackmores, and Kao Corporation’s acquisition of skincare brand Bondi Sands for AUD$450m.
- Divestment of non-core assets: Portfolio reconfiguration continues as businesses shed non-core assets to focus on growing their core. Simplicity is key as global complexities such as geopolitics and macroeconomic uncertainty persist. Case in point: New Zealand dairy co-op, Fonterra, has announced its intention to sell its Australian consumer business and refocus on its core operations. Watch this space.
- Two-speed economy: Australia is increasingly divided into two classes of consumers: those who have mortgages or rent a property, and those who don’t. Those without mortgages generally have greater disposable incomes than mortgage-holders who are being squeezed by interest rates. R&C businesses catering to those without mortgages are more attractive to private equity bidders seeking year-on-year growth.
Three ways to capitalise on conditions in the coming year
- Go beyond exploring AI in your business: Any R&C business harnessing artificial intelligence (AI) to genuinely drive better customer experiences and/or cost-out and profitability improvements will be in demand, and investors are disinclined to buy organisations without AI embedded in their business plan. My advice? Lean into AI to genuinely integrate new technology in your business operations (back and front office) to drive consumer value. Be curious. See what other retailers are doing. Then learn more about developing and applying AI in your business.
- Reassess your portfolio: Build efficiencies and resilience in operations and potentially gain access to a larger share of consumer wallets via consolidations and adjacent acquisitions. For example, Myer has proposed acquiring Premier Investments’ Apparel Brands division. While the proposal is still in progress, the market has already signalled its approval for the deal, with Myer shares rising over 20%, and Premier up 4%. To reassess your portfolio, consider: Can you spin off non-core businesses? Can you create a stronger brand, which is more targeted to your customers, by focusing on your core? Can you leverage partnerships with other businesses?
- Prioritise due diligence: Finally, adopt an exit-ready mindset now, so you’re ready when opportunities arise. Be clear on your strategic plan and be prepared for a detailed and extensive due diligence process, especially when selling to overseas investors in the current climate. Because if there is one certainty in all this uncertainty, it is that M&A activity will bounce back.
Learn more: Explore PwC’s Australian M&A Outlook 2024
