Is your retail business ready for 2022? Continuing the momentum from 2021 requires agility and resilience. You need to prepare now.
Q4 2021 closed out with a strong M&A performance, with 65 UK retail and consumer deals completed – the joint second-highest quarterly figure since 2015. This doesn't change the fact that the sector is facing a bumpy start to the economy in 2022.
In our Q4 quarterly retail review we analyse last year’s M&A activity and investment trends; provide guidance on how the sector can respond to regulatory changes; and share insights on what you can do to strengthen your cyber defences.
In Q4, traditionally the busiest time of year for retailers and shoppers, investors and trade buyers were on a spree of their own, acquiring 19 UK-based retail companies. This took the total volume of UK retail and consumer deals in 2021 to 65, the joint second-highest figure since 2015.
Figure 1: UK Retail M&A Volume/Value chart
Disclosed deal value for 2021 returned to pre-COVID-19 levels, up at £13.5 billion, compared to £7.9 billion in 2020. This reflects that deal activity all but ceased in the early days of coronavirus but returned in force in 2021.
A boost for bricks and mortar
Deep in the pandemic, there was a knee-jerk reaction among some to declare "the end of bricks and mortar". However, Q4 2021 has shown a recalibration of this to a more balanced approach, which values the importance of physical store presence within a strong omnichannel offering. Furniture retailer Loaf, which was acquired by Blue Coast Capital in November following Vendor Due Diligence performed by us, is a good example of such a business: its strong internet offer is supported by eight shacks across the UK.
Early in the quarter, before Omicron took hold and 'Plan B' was implemented in England, retail footfall was improving (though still not as strong as pre-pandemic levels), according to data from Springboard. Confidence in traditional retailing was also demonstrated by the Weston family’s December sale of Selfridges Group to Thai retailer Signa and Australian property group Central for a reported £4 billion.
Post-lockdown consumer habits continue to drive deals
Not only has COVID-19 altered the way we shop, but also how we live. In Q4, buyers continued to seek deals that capitalise on post-pandemic consumer trends:
Health and fitness – lockdowns drove many Britons to the great outdoors, including rivers, lakes, and seas. This inspired the sale of two inflatable stand up paddleboard brands: Red Paddle to Myers Family Office (another deal we advised on); and HIKS to Profound Commerce. Back on dry land, JD Sports acquired a majority stake in Wheelbase Lakeland Limited, which has three bike stores in the North of England.
Demand for home delivery – hybrid working has driven demand for doorstep delivery. In November, Turkish grocery delivery company Getir acquired Weezy, a UK grocery service that claims to deliver ‘products in minutes’. In December, we advised on the Series D fundraising of HungryPanda, an online delivery platform specialising in Asian cuisine.
Restructuring and recovery
In December, contemporary fashion house self-portrait acquired the luxury brand Roland Mouret from administration (Grant Thornton acted as administrators).
This was the only disclosed restructuring and recovery retail deal in Q4. This low number is no doubt due to government interventions, such as business rate cuts and the furlough scheme. In a boost for the industry, we believe measures such as these have given some retailers the breathing space to improve their online operations and exit the pandemic stronger than before.
Figure 2: Deals by acquiror domicile
Seven of the 19 deals in Q4 involved overseas buyers, showing that the UK is still viewed as a strategic entry point to mainland Europe (despite Brexit) as well as a strong market in its own right.
Looking forward: private equity and valuations in 2022
Figure 3: private equity involvement in retail deals 2010-2021
One of the biggest trends over 2021 was the proliferation of private equity (PE) into the retail M&A mix, particularly in deals involving eCommerce.
PE’s keenness on the sector and record amounts of dry powder have the potential to drive up valuations and price trade buyers out of the market. However, a softening of the performance of the retail sector in capital markets throughout 2021 may be enough to temper growing multiples. As we progress through 2022, we expect to see more realistic valuation expectations on both sides of the table.
For more insight and guidance on retail M&A in Q4 2021 get in touch with Nicola Sartori.
The figures from M&A make Q4 2021 look good on paper, but the reality is that the impact of Omicron on Christmas shopping and the impending return of 20% VAT indicate a slow start to the year.
Christmas shopping was done unexpectedly early this year. This resulted in the UK economy growing by 0.9% in November and finally ascending beyond its pre-COVID-19 level for the first time. The ‘Golden Quarter’ consumption boom saw the size of the economy grow 0.7% beyond its March 2020 level.
The average household spends around £2,500 each month in the UK, according to the Bank of England. But in December this jumps up by 29%, seeing us spend £740 more. New events like Black Friday and Cyber Monday have changed retail habits in Britain, as consumers take advantage of deals and opportunities to get their festive shopping done cheaper and earlier. And the pandemic has only accelerated the existing trend of shopping more online and less on the high street. ONS data suggests 30.1% of retail shopping was performed online last month, in contrast to around 10.3% a decade ago.
Who profited from stay-at-home Christmas?
Barclaycard’s December figures show that economic growth is being driven through growing consumption, with consumer card spending 12.2% higher than the same month in 2019. This surge revealed supermarkets to be the biggest winners, as fear of the Omicron variant constrained people into celebrating their Christmas at home. Tesco, the UK’s largest retailer, posted a 3.2% sales increase over the six weeks leading up to 8 January 2022 in contrast to the previous year’s Christmas period.
But not everyone in the retail industry was feeling as festive.
And who didn’t?
The rapid spread of Omicron, the fear of infection and the mass cancellation of Christmas parties drove consumers yet again back to the home for their social lives. The result was that restaurants, pubs and bars missed out on £3 billion in festive sales. Sales were down 60% on Christmas Day, 31% on Boxing Day and 27% on New Year’s Eve in comparison with 2019.
There’s no light at the end of the tunnel either, with the government due to return VAT on the hospitality sector from 12.5% back to 20% as well as increase business rates.
Recovery in jeopardy?
Rising inflationary pressures, energy costs and tax rises are adding to retailers’ woes in 2022. The chief executive of trade association Energy UK this week warned of domestic energy prices increasing 45-50% in the spring. There are also planned National Insurance rises and predictions that the Bank of England will raise interest rates twice throughout the year.
When taken together it’s highly likely that households’ real purchasing power will shrink over the next year, constraining the post-pandemic recovery retailers were hoping for.
In these economic conditions additional investments might seem like a low priority, but the move to e-commerce means you need to strengthen your cybersecurity. Malicious attackers are targeting vulnerabilities in retailers and their supply chains.
The retail sector has been under immense pressure over the past 18 months, with front lines battered by successive lockdowns shuttering stores across UK high streets. This is now being compounded by major supply chain issues and staff shortages as businesses strive to return to normal trading patterns.
To add more difficulties to an already tough situation, cyber security threat actors have been maliciously targeting the retail sector.
Severe disruption to business
An independent report from Keeper Security found that successful cyber attacks against retailers resulted in severe disruptions to:
These results are reflected in numerous other industry reports which indicate that retail was one of the two most attacked industry sectors in 2019 and fourth most attacked in 2020.
Requirements of online retail makes sector vulnerable
Unfortunately, the long term risks for retail look set to have increased in 2021, with the huge consumer-driven shift to eCommerce during coronavirus, where simply implementing more cyber security solutions is not straightforward. In order to compete and encourage consumer spending, online retail requires user-friendly interfaces, a pleasurable shopping experience and ease of purchase. Consumers may see more robust cyber security measures as a complicating factor that makes the process less pleasurable.
In 2020 management consultants Oliver Wyman identified a reluctance by online retailers to implement best-practice cyber security steps, such as two-stage purchase verification, fearing it might lead to shoppers abandoning their purchases if they felt it was too difficult or time-consuming. More sophisticated hackers are likely to see such reluctance as an invitation to target retailers whose security is weaker or lags behind best practice.
Types of retail cyber attacks
The industry is reporting more targeted attacks specific to the retail industry. For example, the Oliver Wyman report identifies an increasing number of scams in the following areas:
mobile in-store payments – using hacked customer login credentials to shop in-store using retailers’ own mobile apps
add new payment – hacking into existing accounts with a good purchasing history and adding stolen credit card information as a new means of purchase
return without receipt – a hijacked account can be used to purchase items online and then return the items in store for a refund
buy online, pick up in-store – similarly, scammers can exploit this value-added service by using hacked online accounts to secure goods in store
Our own cyber defence centre and incident response experience suggests that retailers are simply overwhelmed by these attacks, and struggle to put an effective cyber security defence and response plan in place – their strategy is simply to hope they are not attacked.
Strengthening retail cyber security
Retail is not only a cyber target because of its concern about customer experience, as in this sector extended supply chains can offer rich pickings as the threat actor compromises each part of the chain.
Threat actors are attracted by a range of weaknesses and businesses must be alert to wider risks. For example, IT systems often become disjointed – and vulnerable – due to growth by acquisition. Cost pruning may reduce the number of IT staff, let alone cyber professionals. Human error is also a common factor in cyber security vulnerability – if most of your workforce has poor cyber hygiene, this can create a tempting target.
The key to strengthening your cybersecurity is accepting that you can’t solve all its challenges by yourselves. To get ahead, consider contracting with third-party specialist cyber providers offering a wide range of cyber solutions such as Managed Data & Response, ediscovery, eforensic, and incident response expertise.
Key steps for protecting your business from cyber threats
Cyber attacks are not going away as retail remains a rewarding target for threat actors. To protect your business you need to invest in cyber security
cyber hygiene is a board level issue, so make it one and invest appropriately before it’s too late
engage with third party vendors who have professionally certified UK-based security operations with 24/7 monitoring services
ensure a cyber team can travel to your sites as required for advice and breach and remediation responses as required
ask the vendor for security assurance help which you can leverage for changes, updates etc
ensure all companies in your supply chain are adopting an equally robust approach to cyber defence
Finally, the new plastic packaging tax is another issue where you need to assess how problems for your suppliers could impact your business. Preparing for this means looking out for the introduction similar rules in other countries.
As part of the ‘E’ leg of the global environmental, social and governance (ESG) agenda, taxes are now proliferating on those commodities and products seen as having negative externalities, such as carbon, non-recyclable waste and plastic. The additional costs and reputational issues are already driving business change in some organisations, in particular around supply chains and supplier choice.
A timely example is the UK’s version of the plastic packaging tax (PPT), which comes in from 1 April 2022. Italy and Spain have already implemented similar (but subtly different) rules, and we expect more to come in response to the EU’s packaging waste levy.
Uncertainty over plastic tax practicalities
Such a tax is meant to drive behavioural change, much in the way we saw significant change following the introduction of the plastic carrier bag charge. But the implementation of a PPT into UK and global supply chains is a much more complex exercise than applying a levy on consumers for plastic bags.
With the PPT start date fast-approaching, most of the retail (and other sector) groups we work with are struggling to navigate the practicalities of the new tax. HMRC has been issuing updated guidance following webinars held in Q4 2021 where advisers and corporates alike asked practical questions on the regime. Much uncertainty remains, however, and the PPT is yet another administrative burden on top of the additional Brexit-related requirements in place from 1 January 2022.
HMRC has postponed a requirement to include a statement with the invoice that PPT has been paid, which was due to commence in April 2022. Those responsible for accounting for the tax as the manufacturer or importer of plastic packaging – including businesses that import packaging that already contains goods – have welcomed the delay.
Businesses are being encouraged to make the PPT that they have paid visible to their business customers, however. And to work with them to try to increase the amount of recycled plastic used wherever possible. In some circumstances, retail businesses may not themselves be strictly liable for the PPT – although they may have reporting requirements and ultimately face cost increases if their suppliers decide to pass on the cost of the PPT to retailers.
Assessing the impact of PPT on your business
Some retail groups have adopted similar impact assessments and exercises to their Brexit impact assessments, albeit at a much more specific and sometimes granular level. These exercises have been undertaken jointly between tax and finance teams and businesses supply chain and procurement teams.
Difficulties seem to arise where, for example:
Preparing for a lower-carbon economy
Non-recyclable plastic are not the only commodity viewed as creating negative externalities of course. COP26 again brought carbon reduction and net zero policies back to the forefront of society’s consciousness.
There are now more than 50 carbon tax or carbon pricing regimes in the world, and we expect these to proliferate further as well. As retailers are only too well aware, fuel and transport costs are already rising due to supply constraints. If and when additional carbon taxes and pricing mechanisms come, retailers may see significant cost increases as part of the transition to lower-carbon activities.
An example of such a proposal is the EU’s Carbon Border Adjustment Mechanism (CBAM), which would seek to level the playing field between the EU and third countries with differing policies on carbon tax and pricing. In effect, this mechanism would add costs much like additional import duties to products coming into the EU from some third countries.
Know your supply chain
The retail groups we see who are most on the front foot with all of these issues are those who have an in-depth understanding of their own supply chains, and those of their suppliers themselves.
Monitoring tax policy developments in territories key to both your sales and supplies is just as important, and will help you forecast where future cost increases might come without behavioural change.
If you would like more information on any of these topics, get in touch with Dan Dickinson.