2010 witnesses contractionin retail M&A activityThere were 1,409 transactions valued at $17.1 billion USD in thelast twelve months (ended September 2010) for the retail sector,representing a downside of 33.6 percent in terms of transactionvalue ($25.7 billion USD during the previous 12-month periodwith 1,473 deals). Dollar volume in this period included two majortransactions (Kohlberg Kravis Roberts/Pets at Home and LotteShopping Co/GS Square and GS Mart), which represented $2.7billion USD or nearly 15.8 percent of total dollar volume. Duringthe previous period, the largest transaction was the acquisitionof Next Rx LLC by Express Scripts for $3.5 billion USD.In terms of business segments, specialty and distributorsaccounted for the highest in terms of value at nearly 56 percentof total dollar volume for the period.In terms of geography, the United Kingdom had the highesttransaction value of $3.9 billion USD with a total of 161transactions over the last 12 months. The United States came insecond with a value of $3.4 billion USD through 370 transactions.Among other regions, Europe was the clear leader at $7.3 billionUSD with 688 transactions.Going forward, large grocers and mass merchants will startlooking to invest in emerging markets, especially in the BRIC 1region, where valuations are low. Also, the retail sector is highlyfragmented; hence, consolidation through inorganic growth byforeign players will drive the M&A segment. Albeit, consideringthe dim retail <strong>industry</strong> outlook, retail companies will continue tofind it hard to raise the funds to finance transactions.1 Brazil, Russia, India and China countriesM&A Activities at a Glance2010 V. 2009LTM ended3Q 2009LTM ended3Q 2010Transaction value (USD billion) 25.7 17.1Top 5 transactions 32.4% 27.3%Segment AnalysisSegment No. of transactions Value (USD bn)Specialty Stores 299 5.1Distributors 692 4.5Department Stores 50 2.4General Merchandise Stores 28 1.6Home Furnishing <strong>Retail</strong> 38 1.1Internet <strong>Retail</strong> 124 0.8Top 5 regions No. of transactions Value (USD bn)Europe 688 7.3North America 412 4.1Asia Pacific 245 4.1Latin America 36 1.4Middle East 13 0.2Top 5 countries No. of transactions Value (USD mn)United Kingdom 161 3.9United States 370 3.4South Korea 3 1.2France 87 1.1China 66 0.9Source: Capital IQ Database, <strong>IMAP</strong><strong>IMAP</strong>’s <strong>Retail</strong> Industry Global Report — 2010: Page 2
Global recession hit retail hardThe recessionary period has been a chaotic period for the<strong>global</strong> retail <strong>industry</strong>. Factors which affect retail sales such aspeople’s purchasing ability (disposable income) and willingnessto spend (consumer confidence) were at rock bottom duringthis period. Eventually, <strong>global</strong> retail sales declined 3.7 percentin 2009 to $13.9 trillion USD 1 . While sales for 2009 were low,it is worth noting that sales of the <strong>global</strong> retail <strong>industry</strong> havedoubled since 2003. Along with sales decline, profitability formost retailers shrunk due to heavy promotional expensesincurred in 2009. Profitability of the 200 largest retailers in theworld fell to 2.4–4.1 percent during fiscal ended 2009, whereinmore than 30 retailers <strong>report</strong>ed operating losses 2 . This trendaffected almost every retail category and geographical areaexcept Africa and the Middle East where retailers <strong>report</strong>ed anincrease in profitability.With the worst behind, 2010 began with guarded optimismfollowing signs of a recovery in the <strong>global</strong> retail sector duringthe second half of 2009. It is certain that a recovery is onthe way; however, the worst-ever recession has changed the<strong>industry</strong>’s dynamics with the changing nature of consumers andtheir shopping habits.1 Economist Intelligence Unit (EIU)2 BloombergChange in consumer preference fuels online retailEven as sales through traditional channels declined, onlineretail formats provided some respite for retailers as <strong>global</strong>online retail sales grew by 14.5 percent in 2009 to reach $348.6billion USD 1 . Electronics was the largest segment in <strong>global</strong>online retail sales, contributing around 22.6 percent. Whilethe online retail sales sector continues to outperform, itsmagnitude remains small with 2.5 percent of total <strong>global</strong> retailsales. On an average basis, <strong>global</strong>ly, online sales account for 6.6percent of total sales for the top 100 retailers in 2009 2 .The US remains the biggest market for online retail with 37.2percent market share. Total spending reached $129.8 billionUSD in 2009 3 , marginally lower than $130.1 billion USD in 2008.A high level of product differentiation together with low fixedcosts and dynamic market revenue growth is seen in the USmarket. However, it also creates competition in the marketwith a large number of active players and the absence ofconsumer switching costs.The online channel is outperforming wider retail as it has anumber of counter-recessionary characteristics. The onlinechannel offers considerable benefits to retailers. Relativelylow operating costs (compared to an equivalent store network)1 Data monitor, July 2010. The online retail market consists of the total revenues generatedthrough the sale of retail goods via online channels, valued at retail selling price.2 Forrester Research, January 20103 The US Department of CommerceBusinesses such as Dwell <strong>Retail</strong> in the UK haveexperienced dramatic growth in the largelytraditional home furnishing sector, as a result oftheir multi-channel offer to consumers attractedby the ability to ‘try in store – buy online’ largeitem furniture with next day and timed delivery.Marc Gillespie, Head of <strong>IMAP</strong>’s <strong>Retail</strong> Industry Group,<strong>IMAP</strong> UK (Clearwater Corporate Finance)Traditional vs. Online <strong>Retail</strong> Industry Growth25%20%15%10%5%0%-5%22.7% 22.1%7.2%10.9%9.4%12.4%14.5%2006 2007 2008 2009allows them to pass benefits to customers in terms of low cost,and can be operated 24x7. The rise in Internet penetration anda change in view of consumer mindsets is happening as moreconsumers feel more comfortable purchasing and using theircredit cards online.In summary, the Internet has evolved into an important retailchannel. An increase in tech-savvy consumers, an increase inInternet access and growing confidence in payment securityand privacy have advanced this retail channel.Convenience, value and selection —major catalyst for online channel uptakeThe online retail channel has consistently outperformedbecause most consumers are valuing low and transparentprices, convenience, and comprehensive assortment of goodsand services. As per the survey 4 conducted in North Americawhich is the largest market for online retail, 67 percent ofonline buyers find the products online that they cannot findin stores easily; 65 percent of US-based Web buyers buy theproducts online as they save time by shopping online; and 63percent of Web buyers find better deals online.4 North American Technographics <strong>Retail</strong> Online Survey, Q3 2009-3.7%Traditional<strong>Retail</strong> GrowthOnline <strong>Retail</strong>GrowthSource: EIU, Datamonitor, <strong>IMAP</strong><strong>IMAP</strong>’s <strong>Retail</strong> Industry Global Report 2010: Page 3
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