With the recent slowdown of retail M&A activity, we took a look at key factors leading the trend – namely Brexit, employment market matters and technological disruption. Brexit Napoleon recognised retail’s importance to the UK in the context of his own European unification project: as the UK approaches Brexit, its impact on this “nation of shopkeepers” has been most immediately felt in the post-referendum decline in value of Sterling and the pressures this has placed on retailers’ margins. The UK retail market is a competitive one, where the ability to pass on price increases to the consumer has generally been a rarely exercised option (although a UK listed retailer has publicly announced that it will have to do just that in the face of prolonged Sterling weakness). For some predominantly UK-based companies with an international focus, the dip in the pound provided a post-Brexit boom and it reported bumper summer sales. Similarly, for UK-headquartered retailers with a significant non-UK presence (whether physical or online), the increase in the relative value of non-UK earnings will increase retail M&A activity, making those firms more attractive to buyers when especially combined with internationally famous brands. For M&A retail deals that were in execution mode prior to the EU referendum, the Brexit vote and the accompanying sudden decline in Sterling’s value created a buying opportunity or at least facilitated investment decisions in what was a particularly uncertain time. It is not clear whether this will have a lasting effect. As the government’s approach to Brexit has become clearer it is possible to pick out a few persistent challenges for the sector that will be weighed in the balance, when considering possible transactions. 1). The effect of possible tariffs on pricing and/or margins; 2) The friction-cost of importing goods across custom barriers and its effects on cross border distribution hubs and on supply-chains generally; 3) The effect of Brexit on the labour market and supply of retail workers; 4) The impact of weaker Sterling on the retail sector; 5) The effect of lessening inward migration on retail demand; and 6) Brexit’s effect on UK property prices and rents (and the follow-on effect this will have on leverage opportunities). Putting aside more general questions on the cumulative impact of Brexit on UK retail demand – the above provides plenty of headwinds for transactional activity in the sector. Employment matters The retail sector is the UK’s largest private sector employer, and its sheer size makes the potential changes it is exposed to all the more interesting. As well as the broader trends of automation and the massive sea change brought about by the UK’s embrace of online shopping, HM government’s introduction of the National Living Wage – due to come into force this April and the apprenticeship levy will increase the pace of that change. Add to this the, as of yet, unquantified effect of the assumed labour shortages in the retail sector that may follow Brexit and we have a range of factors that could weigh on the UK retail M&A market. Technological disruption The retail sector was one of the first to be exposed to online disruption and the resilience of the sector and the UK’s traditional “bricks and mortar” High Street names speaks volumes to its adaptability. It is perhaps not surprising that in a sector of the UK economy that has always prided itself on being aligned to UK consumer trends, there have been few examples of market participant failures due entirely to online disruption. However the change of pace is only accelerating. The effect on margins and the increase in competition caused by online-only retail competitors has however been seismic. This has caused the retail M&A market sector to become more sophisticated where “bankable” deals are perhaps less easy to find. It has made undertaking due diligence of market participant’s online strategies, and their ability to implement, a top priority for potential buyers. While the cost of non-participation in the online market weighs heavily on retailers, the cost of implementing an online strategy is also very high and the ability to implement is important. Mark Crofskey is partner and solicitor in the PwC corporate team.Image:Shutterstock
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