M&A activity in the retail and luxury space is continuing to grow, with some statistics suggesting retail M&A has increased by 21% in the last year despite overall M&A activity within the UK falling by 15%. Is this a trend due to continue through 2023? Possibly but this may be due to opportunistic acquisitions of distress sales and a need to benefit from economies of scale whilst attracting new customers, rather than a genuinely buoyant market.

Unlocking new customers through acquisitions

One of the key drivers for increased M&A within the retail and luxury markets is businesses seeking to expand their customer base, by acquiring brands whose customer base emulates their target market or markets which they have not yet tapped into. There are some interesting and clear examples of this trend such as M&S’s acquisition of The Sports Edit. This has opened up the lucrative sportswear and athleisure market (an ever-growing market since the pandemic as it is now also “work from home wear”, at least in my house).

As of 2022, 76% of consumers around the world consider themselves loyal to one or more brands, an increase in 13% from 2021 (credit: emarsys). Given brand loyalty often takes several years to build, the goodwill within a brand has become more valuable and acquisitions provide the opportunity to harness a loyal brand following.

Consolidation and innovation

As we are all aware costs have gone through the roof, so it is no surprise that businesses are looking to consolidate and benefit from economies of scale including (where appropriate) sharing digital platforms and e-commerce sites.

The offering of a range of brands on one website – offering a “one stop shop”, an approach businesses such as M&S and Next have been taking, also appears to be a winning formula for some. This increased brand choice can drive the website traffic in a similar way that brands sharing retail spaces can attract increased physical footfall, but without the additional overheads of the physical space.

Use of innovative technology can also provide unique selling points as well as better use of assets. The metaverse for example has created more opportunities, especially for luxury brands who are able to sell virtual luxury items which may never need to physically exist. Taking aside the cost associated with the technology itself this approach could not only lower costs and overheads (no physical materials, minimal storage etc.), but has the added advantage of opening new markets in the ever-growing “gaming” communities and attracting a new generation of customers (a key aspiration of many luxury brands). This was aptly demonstrated by Gucci’s partnership with Roblox (an online gaming platform), selling luxury items that can only be used within the platform. Those brands that can genuinely harness the innovative technologies could be well placed to ride out the potential storm and fend off competitors.

Distressed sales

It would be remiss to discuss the increased M&A in the retail market without discussing the increase of distressed sales. The figures could make you believe the retail market is buoyant and thriving, which to some extent it is, but there has also been a string of acquisitions of struggling businesses such as Next’s acquisitions of MADE.com and Joules.

If we consider what we have been subject to in recent times: a pandemic, conflicts including the conflict in Ukraine, increased energy prices and Brexit just to name a few, it may not come as a surprise that businesses are struggling, especially in the retail sector which often relies on the disposable income of its customers.

Looking forward

A new year presents new opportunities, and the retail sector in particular has an interesting future. The trends noted above are likely to continue into 2023, as well an increase in digitalisation and e-commerce, but equally we expect to see the number of distressed sales increase and spotting the warning signs within the supply chain early may well be key to fending off a subsequent crisis. Keeping the brand relevant and the customers happy is likely to continue to be the mantra.

New research has found that the number of retail mergers and acquisitions has increased by 21% in the last year.