There is light at the end of the tunnel, as demonstrated by the market’s response and rapid recovery following the recent COVID-19 vaccine announcement. The pandemic has stayed longer than many expected, but we expect the markets to come to a new normal in 2021.
2020 saw several trends accelerate steeply during the pandemic. The move to online shopping increased dramatically with online retailers seeing five years’ worth of growth in just three months. Companies were able to resist the temptation to offer product-price promotion despite shrinking consumer wallets and increased price sensitivity, and thereby protecting falling margins. By the end of September, only 26 percent of US grocery items featured a price promotion,1 compared with the average of 31-percent.
The Consumer & Retail M&A market also felt the pandemic’s disruption, as deal volume fell five percent year-over-year (YoY). The impact was particularly acute in Q2 where deal volume contracted 21 percent compared with 2019. However, the deals market started to turnaround in Q3 as deal volume was up 26 percent (vs Q2) and only off three percent YoY2 and Q4 was increased 6% YoY. Another bright spot was total deal value in 2020: up 17 percent to USD 287 billion. The second half of 2020 also accounted for eight out of the 10 largest deals of the year.
Interestingly, the mega deals primarily took place in the grocery or food retail sector, mostly led by financial buyers looking to increase exposure in the sector. The top three deals of 2020 were all in this category: Seven Eleven’s acquisition of Speedway (USD 21 billion), Inspire Group’s acquisition of Dunkin Donuts (USD 11 billion) and Tesco’s sale of its Thailand business (USD 9.9 billion). Retail also accounted for about 40 percent of the total C&R deal volume in 2020. The most prominent deal drivers in the overall C&R sector were consolidation, non-core asset disposal, direct to consumer (DTC)-led acquisitions, and health & wellness portfolio expansion.
Capability expansion will likely be a continued focus in 2021 as companies enhance logistics, fintech and DTC capabilities through M&A, and expand product offerings and geographical reach. Accelerated by the pandemic, players are expected to align M&A ambitions with their sustainability goals while keeping an eye on the long-term vision. Consumer and retail majors have announced product sustainability as part of their business strategy, moving ESG from the fringes to the core. Additionally, we expect deal activity in 2021 to spike as deals delayed by government-led COVID restrictions have also restarted.
With Private Equity (PE) holding dry powder worth trillions of dollars, we expect to see a major play by PE seeking value-creation opportunities in carve-outs. They are well-positioned to acquire increased exposure to the sector. It may also be well-timed, as several companies are undergoing portfolio reviews and looking to exit assets that are non-core or underperforming.
As the sector shows resilience in the market, we expect 2021 M&A activity to recover from the COVID-led slowdown and players to keep investing, with a vision to emerge stronger, not only from the economic uncertainty of 2020 but also over the longer term.
We look forward to sharing further insights into M&A sector trends in the upcoming weeks.
How KPMG can help?
How you grow matters. KPMG is with you, shoulder-to-shoulder, all the way to strong performance, lasting value and responsible growth. We think like an investor, looking at how opportunities to buy, sell, partner, fund or fix a company can add and preserve value. Our teams of specialists combine a global mindset and local experience with deep sector knowledge and superior analytic tools to help you navigate a complex, fragmented process. Together, we can help make your business fit for tomorrow — a future that is sustainable and secure.
Anticipate tomorrow. Deliver today.
1. One-year average March 1, 2019 to February 29, 2020. Source: Nielsen.
2. 2019 Q1: 1,485 vs 2020 Q3: 1,378 deals. Source: Thomson One Banker, accessed on 5 Jan 2021