M&A is usually a lagging indicator. That’s not always the case in the lower middle market, however, where sell- and buy-side activity can reveal emerging trends that haven’t yet hit the radars of more observers. The lower middle market activity fueling increased deal flow across the consumer goods sector, for instance, provides a window into the evolving appetites now shaping retail today.
In 2021, the consumer goods sector saw the biggest year-over-year increase in sell-side activity across the Axial platform, as new sale processes in the lower middle market grew by 35% from 2020 levels. In unpacking the data, it wasn’t the retail or consumer goods manufacturing subsectors that drove the increase, but rather the wholesale & distribution segment, which is emerging as the engine that drives omnichannel. And within this specific niche, 2021 deal flow jumped by 44% over the previous 12 months and accounted for 40% of all sell-side activity in the consumer goods space last year.
To be sure, the current supply-chain challenges represent one variable driving interest in these assets. But to focus on only one factor – that may or may not be temporary – would be to overlook the punctuated equilibrium that has dramatically altered consumer behaviors amid the pandemic and now, more permanently, is shaping how consumer-oriented companies go to market.
It’s not that merchandising is any less important to success in retail, but actually getting goods to consumers is becoming as critical as brand names or price points to establish a differentiated value proposition. Moreover, new retail models are emerging that not only account for the Amazon threat, but have instead turned its massive presence and infrastructure into an opportunity. The data is beginning to bear this out.
As a result, retail M&A barely resembles the consolidation activity that took place in previous eras. And rather than tying two rocks together to see if they can float, the brick and mortar holdovers are instead seeking different types of assets that will reinforce their omnichannel offering – think fulfillment centers, shipper-aggregation companies and even investments to build dedicated container ships. These are the types of deals the likes of Amazon and Wal-Mart were making 10 years ago, while others retailers were pursuing acquisitions of flash-sale sites to paper over their infrastructure shortcomings that otherwise obviated their omnichannel ambitions.
On the other hand, among the most in-demand companies fetching interest in the lower middle market – at least based on pursuit rates that extend well above the industry averages – are operators that have adopted a more symbiotic relationship with Amazon and Wal-Mart. Affiliate marketing brands, FBA vendors and a growing population of DTC manufacturers are increasingly attracting investors keen to roll-up and scale these businesses while leveraging a shared operating structure. It’s a thesis, actually, that is increasingly seeing many of the largest and most successful investors in retail – including Advent International, Oaktree Capital Management, and Silver Lake – fund platforms that give them a reach into the lower middle market to acquire and optimize these types of assets.
These trends are indeed surfacing in the activity and pursuit rate data. But in Axial’s latest report, “Green Shoots Emerge out of the Retail Apocalypse,” specialists on the ground add further color. Bo Stump, a Partner at Stump & Company, and Jason Somerville, the Founder and Managing Partner at Global Wired Advisors, help put these trends into context.