Retail Industry Outlook: Expect Continued Consolidation

It’s hard not to notice the consolidation that has been taking place in the retail industry. The retail industry has been under pressure ever since the economy started heading south when the Great Recession hit. As if that wasn’t bad enough for retail, Amazon and a slew of online retailers have been experiencing extraordinary growth and have continued to ratchet up the pressure on traditional bricks and mortar retailers. Beyond these macro influences, what is really driving consolidation among retailers and will consolidation continue? Here’s our retail industry outlook.

There are 4 major underlying forces at work driving consolidation in the retail industry. First, like many industries that have been around for a long time, the retail industry is mature. Well past the rapid growth phase, the industry is exhibiting all of the classic signs of a mature industry. Competitive intensity increases as industry players struggle to capture customers, and price discounting becomes a popular strategy as competitors pursue elusive growth opportunities. When industry participants find it difficult to achieve organic growth, the level of merger and acquisition activity heats up and consolidation ensues.

Forces_at_Work_Chart-RETAIL-PROJECTIONS

Second, in the U.S. over the last several decades, per capital retail space growth has far exceeded population growth, thereby creating significant overcapacity in the industry. Despite retail store closings in the past few years, the industry is still overstored. Based on 2007 Economic Census data, there were 1,122,703 retail establishments in the U.S. and a total of 14.2 billion square feet of retail space. That translates to approximately 46.6 square feet of retail space per capita in the U.S., compared to 2 square feet per capita in India, 1.5 square feet per capita in Mexico, 23 square feet per capita in the UK, 13 square feet per capita in Canada, and 6.5 square feet per capita in Australia. Industry consolidation has helped to facilitate capacity rationalization as companies merge and get acquired and the combined entities shed the worst performing stores.

Third, there has been a decline in consumer spending brought about largely by the Great Recession in the U.S. Real income growth in the U.S. has suffered which has translated into lower spending. Consumers have also been deleveraging in recent years after a running up historic per capita indebtedness. The combination of these two economic realities has put a squeeze on retail consumer spending. This, in turn, has made it difficult for retailers to achieve growth in same store sales, which has driven acquisitions as a way to secure continued growth.

Finally, consolidation within the retail industry has been driven by cheap capital. In the U.S. we have experienced a long period of historically low interest rates. When risk-free returns are low, investors turn to higher risk activities like mergers and acquisitions to achieve attractive returns. We expect interest rates to increase which may slow the rate of mergers and acquisitions over the next several years, but the other forces at work are likely to continue to drive industry consolidation during the foreseeable future.

The chart below shows just a few highlights of retail merger and acquisition activity across four retail categories. Two of these examples, the Ascena Retail Group acquisition of the parent company of Ann Taylor for $2.1 billion and the likely merger of Delhaize Group and Ahold which would form the 5th largest grocery chain in the U.S., were announced just this week.

Forces_at_Work_Chart-RETAIL-PROJECTIONS

We believe the fundamentals are in place for continued industry consolidation which will have significant ramifications for retailers as well as the retail industry’s supply chain.

Leave a Reply

Your email address will not be published. Required fields are marked *