IPOs in retail and consumer goods, slowing M&A activity amid inflation: KPMG


People shop at a grocery store in Monterey Park, California on April 12, 2022.

Frederic J. Brown | AFP | Getty Images

Supply chain headaches, soaring interest rates and the war in Ukraine have combined to stifle IPOs and deals in the consumer and retail sectors until present this year.

The total number of consumer and retail transactions in the first quarter fell 31.9% from the previous period, global consultancy KPMG said in a report released Wednesday. Trading volume decreased by 39.8%.

This marks something of a stark reversal from recent trends, when the number of deals involving US-based consumer and retail companies nearly matched pre-pandemic levels.

Last year’s boom was fueled, in large part, by the growth of e-commerce in retail and a focus on health and wellness trends, KPMG said. In 2021, Levi Strauss & Co. bought Beyond Yoga, Wolverine World Wide acquired Sweaty Betty, and Crocs bought Hey Dude. Retailers such as Allbirds, Warby Parker, On Running, Lulu’s, Brilliant Earth, ThredUp, Rent the Runway and AKA Brands – to name a few – have all started trading on public exchanges.

At the start of the year, the consumer and retail sectors were poised to see a rapid and continued expansion of deals and IPOs, said Kevin Martin, who leads the US Consumer and Retail division. from KPMG. But a volatile stock market and uncertainty about near-term consumer spending gave executives and investors pause, as did a period of so-called darling direct-to-consumer stocks underperforming the broader market, including including those of Warby Parker and All the Birds.

While Martin doesn’t foresee deal activity picking up quickly this year, he sees more consumer brands, retailers and private equity firms looking to 2023 instead. He expects the pet category, including pet food manufacturers, to be a focal point, along with the consumer alcohol sector.

Meanwhile, some retailers could come under pressure to sell parts of their business. A few highly watched offers could arrive sooner rather than later. For example, home goods retailer Bed Bath & Beyond is reportedly considering deals for its BuyBuy Baby business, including one from private equity firm Cerberus Capital Management. There are also growing calls for Gap to separate its faster-growing Athletica division from its other brands.

“Companies are continuing to move forward as is — pedaling to the metal in some cases — with the idea that by 2023 some of the concerns that we’re now seeing around the world will be put aside,” Martin said. “There will be pent-up demand.”

Retail and consumer companies reportedly suing for an IPO include online sneaker exchange StockX, Rihanna’s Savage X Fenty lingerie line, Chobani yogurt maker, Zazzle e-commerce marketplace and furniture brand Serena & Lily. Private equity giant L Catterton is also would have consider an IPO.

Representatives for those companies did not immediately respond to CNBC’s request for comment.

Inflation and supply chains are top concerns

Given rapidly rising prices, Martin thinks one of the most realistic opportunities for deals, at least for the rest of this year, could be private label food brands.

“It is unclear how much of consumers’ disposable income or savings will be absorbed by rising prices in the future,” he said. “So there are a lot of large consumer food and beverage companies that will be looking to either sell off their private labels or acquire private labels,” to give shoppers a cheaper option at grocery stores, a- he declared.

A second opportunity for deal growth relates to the supply chain issue, he said, as many companies are still grappling with delayed shipments of finished goods or materials from overseas, associated at exorbitant transport costs.

“Are you building something or buying something in order to have a more local supply chain for your customer base? That’s going to be a driver of M&A activity and something that will accelerate over the course of the rest of 2022,” he said.

In this vein, the clothing retailer Last year, American Eagle Outfitters acquired two companies — one focused on fulfillment centers, the other on trucking — to help it grow a vertically integrated supply chain business it is now opening to other retailers.

A third trend could come from an amplified focus on ESG, or environmental social governance, Martin said, citing Win Brands Grouprecently acquired Love Your Melon, an outdoor lifestyle brand that donates 50% of its net income to nonprofits that fight childhood cancer.

Notably, private equity deals were weakest in the first quarter, KPMG found, falling 51% from the fourth quarter of 2021. The Federal Reserve’s more aggressive approach to interest rates s proved to be one of the biggest deterrents, Martin said.

“The higher cost of capital has a huge impact on strategies or businesses,” he said. “And that feeds into their decision matrix about what kinds of returns they’re going to get for an asset. And likewise, that impacts private equity…sometimes even more significantly.”

Granted, Martin said there’s still a lot of “dry powder” in the hands of consumer-focused private equity firms; they just take the time to research the best assets in a post-pandemic landscape. In addition to L Catterton, some companies playing in this space include Sycamore Partners, Bain Capital, Ares Management and Leonard Green & Partners.


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