Black Friday Trends and Implications for Retail M&A

As the week progresses, many ardent shoppers are preparing for their favorite holiday: Black Friday. For these shoppers, the holiday offers great sales, long lines, and a flurry of holiday purchases. For everyone else, it offers headaches, traffic jams, and the occasional economic insight.

But this year may be relatively disappointing, especially for some retailers. According to a recent survey by Visa, 49% of consumers are un-wooed by the Thanksgiving sales, “and don’t plan to shop on Black Friday, Cyber Monday, Thanksgiving, or any of the other shopping days this weekend.” However, the relative inactivity may be more attributable to retailers offering sales for weeks instead of just one day. As it turns out, the NRF is still projecting overall holiday sales to hit $602.1 billion this year, a 3.9% increase over 2012. The consecutive year-over-year growth in holiday sales suggests that retail is transforming, not disappearing.

Regardless of the actual performance on Thanksgiving weekend, “Every retailer is worried about this Christmas season,”  explained Walter Loeb. “There are six fewer selling days between Thanksgiving and Christmas. The consumer has been apathetic in his shopping and every retailer has the hook out to pull customers into its store,” If consumer activity does not recover in the holiday rush, retailers will be reporting an underwhelming 2013.

The tighter environment has caused many retailers to seek alternative strategies — including M&A. As an FT article explained earlier this year, “mergers and acquisitions have emerged as a potential salvation for some low-margin chains that face stiff price competition from Amazon.” This increased competition and interest in M&A could explain the nearly 40% rise in deal flow in the retail sector in 2013 on Axial over the same time last year.

Wary Buyers

Buyers seem less eager to meet the increased deal flow. “As we move forward this year, it’s important to keep in mind that M&A performance remains heavily tied to the confidence of potential buyers,” explained a recent BDO report. “In other sectors, cheap financing has provided sufficient impetus for deal talk, but the retail industry has proven more finicky.”

One likely cause for the finickiness is uncertain consumer confidence — an indicator that often parallels retail M&A. As a recent PWC report explained, consumer confidence is waning. “Consumer sentiment steadily declined each month of Q3-2013 and fell to its lowest point since April. The Thomson Reuters/University of Michigan Consumer Sentiment Index was 77.5 at September 2013, which was down 8.5% from 84.1 at June 2013.” While confidence may be up year-over-year, the recent trends do not elicit confidence.

The report continued, “The declining sentiment trend, particularly in September, was driven largely by the risk of the approaching government shutdown. During the first half of October, preliminary surveys were indicating that the government shutdown was negatively impacting consumer sentiment, bringing the index to the lowest level since January 2013.” However, “Despite the monthly declines, the three month moving average remained relatively flat at 81.6, staying at peak levels since the 2008 economic downturn and rebounding from the decline seen in the first quarter.”

Rising valuations in the retail space are also discouraging some financial sponsors from partaking in transactions. As the BMO report explained, “Overall, there seems to be a relative shortage of companies that offer both a strong brand and considerable growth potential. This narrow list of promising prospects curtails supply, resulting in an upward pressure on the price of deals.” The combination of rising valuations and larger players coming down market has left many middle market financial sponsors and investors in a difficult spot — and waiting on the sidelines.

Technology is Key

While retail overall may be engaged in an uphill battle, the retailers equipped with the appropriate technologies are finding a distinct competitive advantage. As Nielsen learned, “nearly half of shoppers, 46%, plan to shop online, up from 30% in 2012.”

The importance of e-commerce is a well-addressed topic. The ability to avoid crowds, find the best sales, and stay on your couch is enticing — on Black Friday or not. As a result, retail businesses equipped with online shopping capabilities are realizing more successful businesses — and more successful sales. Internet Retail was one of the key leaders in the retail sector on Axial, with 181 deals and 810 pursuits in 2013.

Omnichannel retail is also gaining favor among financial sponsors — and quickly. As the PWC report explained, “Consistent with prior quarters, the trend towards omnichannel retailing continues to drive deal activity as retailers continue to look at acquisition opportunities to more quickly transform their businesses and capabilities.”

With omnichannel strategies, an evolution of multi-channel retail, “a consumer can use more than one sales channel to shop from a retailer for any given transaction,” explained Bill Davis in a recent interview. “They can buy online and pick up in-store for example, or use mobile in-store to research or make a purchase, or they can buy in-store and initiate a return online.”

PWC anticipates “continued activity in this area as investors see opportunity in the space and companies continue to attempt to gain a competitive advantage in using technology for data analytics.” Since interest is driving towards technology-enabled retail, it is an important theme for future business development. If a company is equipped with e-commerce and/or omnichannel retail, the current environment could be favorable for a sale; if the business is not equipped, it might be time to update the brick-and-mortar.