Retail and consumer IPOs, M&A activity slows amid inflation: KPMG

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

Frederick J. Brown | AFP | fake images

Supply chain headaches, rising interest rates and the war in Ukraine have combined to stifle IPOs and deals in the retail and consumer sectors so far this year.

The total number of retail and consumer deals in the first quarter fell 31.9% from the previous period, global consultancy KPMG said in a report published on Wednesday. Trading volume was down 39.8%.

That marks something of a sea change from recent trends, when the number of deals involving US-based retail and consumer companies roughly 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, just to name a few, began trading on public exchanges.

Earlier in the year, the retail and consumer industries were poised to see continued rapid expansion in deals and initial public offerings, said Kevin Martin, who heads KPMG’s US Retail and Consumer division. But a volatile stock market and uncertainty over short-term consumer spending have given executives and investors pause, as has a period of underperformance by so-called shares of direct-to-consumer favorites relative to the broader market, including Warby Parker and All the Birds.

While Martin doesn’t predict deal activity will rebound quickly this year, he does see more consumer brands, retailers and private equity firms setting their sights on 2023. He expects the pet category, including pet food manufacturers pets, be a focal point, along with the alcohol consumption sector.

Meanwhile, some retailers could be under pressure to sell parts of their businesses. Some much-watched deals could come sooner rather than later. For example, home goods retailer Bed Bath & Beyond is reportedly considering offers for its BuyBuy Baby business, including one from private equity firm Cerberus Capital Management. Calls are also mounting for Gap to separate its fastest-growing Athleta division from its other brands.

“Companies are still going ahead as they are, pedaling to the max in some cases, with the idea that by the time 2023 rolls around, some of the concerns that we’re seeing now globally will be gone,” Martin said. “There will be pent up demand.”

Retail and consumer companies reported to be seeking an IPO include online sneaker exchange StockX, Rihanna’s Savage X Fenty lingerie line, yogurt maker Chobani, e-commerce marketplace Zazzle and brand of Serena & Lily furniture. Consumer private equity giant L Catterton is also reportedly considering an initial public offering.

Representatives for these businesses did not immediately respond to CNBC’s request for comment.

Inflation and supply chains matter most

Given the rapid rise in prices, Martin believes one of the most realistic opportunities for deals, at least for the rest of this year, could be tied to private label food brands.

“It’s not clear how much of consumers’ disposable income or savings will be absorbed by higher prices in the future,” he said. “So there are a lot of large consumer food and beverage companies that will be looking to sell their private labels or acquire private labels” to offer shoppers a less expensive option in grocery stores, she said.

A second chance for deal growth surrounds the supply chain issue, he said, as many companies are still dealing with delayed shipments of finished goods or materials from abroad, along with skyrocketing transportation costs.

“Do you build something or buy something 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’s accelerating through the rest of 2022,” he said.

In this vein, clothing retailer American Eagle Outfitters last year acquired two companies, one focused on distribution centers and the other on trucks, to help it build a vertically integrated supply chain business that it is now opening up to other retailers.

A third trend could come from an amplified focus on ESG, or environmental social governance, Martin said, citing Win Brands Group’s recent acquisition of Love Your Melon, an outdoor lifestyle brand that grants 50% of his net proceeds to non-profit organizations fighting pediatric cancer.

In particular, private equity deals fell the most in the first quarter, KPMG found, falling 51% from the fourth quarter of 2021. The Fed’s more aggressive approach to interest rates has proven to be a key deterrent, Martin said.

“The higher cost of capital greatly impacts strategic or corporate companies,” he said. “And that feeds into their decision matrix around what kinds of returns they’re going to get on an asset. And similarly, it affects private equity…sometimes even in a bigger way.”

To be sure, Martin said there is still plenty of “dry powder” in the hands of consumer-focused private equity firms; they are simply taking the time to search for the best assets in a post-pandemic landscape. In addition to L Catterton, some firms playing in this space include Sycamore Partners, Bain Capital, Ares Management, and Leonard Green & Partners.

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