Retail M&A: Strategic acquisitions taking centre stage as market shifts

Despite an incredibly challenging trading environment and a difficult summer that has featured some high-profile casualties, there are green shoots of recovery in the retail sector. Amid all this, M&A activity in the industry appears to be strong – and not just as a result of high levels of distress.

According to recent figures from law firm RPC, dealmaking in the UK retail sector hit a five year high in the year to March 2023. What was most remarkable about these figures, however, was that very little of this activity was driven by distressed acquisitions – despite the issues facing many retailers and the high level of insolvencies.

While distress is, of course, a major theme in retail M&A and will continue to be for some time, new trends are beginning to emerge that demonstrate that, buyers in the sector are starting to look more towards the long term and how they can really solidify and develop their own operations, rather than just pouncing on the business, assets and brands of their distressed competitors.

So, as we move towards the final quarter of the year, what’s in store for the UK retail sector? And what are the factors that could drive dealmaking moving forward?

M&A activity strong in tough environment

Since early 2022, economic disruption and geopolitical turmoil has largely pushed M&A down across the majority of sectors, with buyers remaining cautious and funding conditions tighter for those seeking capital to make acquisitions.

However, retail has been a prominent outlier to this, with industry incumbents looking to acquisitions to help them navigate a changing marketplace and expand their services or, alternatively, offsetting some assets or parts of their business in order to strengthen balance sheets or refocus their operations.

In the UK, this has led to retail M&A reaching heights that it hasn’t seen in several years – even during the busy dealmaking period immediately following the pandemic.

RPC’s report on retail M&A found that, in the year to March 2023, there were a total of 38 acquisitions in the UK retail sector, a 23 per cent increase from the 31 deals seen during the year ending March 2022. This is somewhat remarkable, considering that – in many other sectors – 2021 was a year of record breaking dealmaking activity as pent up demand was released following the pandemic.

Of course, one of the main contributors to this has been rising levels of financial distress within the sector, with economic conditions, rising debt and the end of COVID-19 protection measures pushing insolvencies up. According to RPC, retail insolvencies in 2022/23 stood at 1,942, a 56 per cent increase from 1,243 during 2021/22, while distressed acquisitions accounted for nearly a quarter of transactions.

These challenging trading conditions are showing little sign of improving significantly any time soon. However, several recent trends suggest factors other than rising levels of distress may emerge as major drivers of dealmaking in the retail sector, with retailers increasingly looking beyond the short-term when they plan acquisitions.

Unexpected resilience of brick & mortar

In the wake of the COVID-19 pandemic, many forecast that retail had changed forever and that the physical in-store experience was on the way to being usurped by online and hybrid shopping models.

While it is true that e-commerce and multi-channel shopping have grown in popularity since the pandemic, the shift away from physical retail has been less dramatic than many anticipated According to ONS statistics, online retail sales have plateaued over the past year, leading to suggestions that – rather than seeing continuous growth – online retail has instead reached maturity and that any future growth will not be as dramatic as the kind experienced following COVID-19.

In fact, according to a report from UK Ecommerce Association the IMRG, the total market for UK online retail could be set to see a year-on-year decline of 3 per cent during 2023, with declines expected across all major online categories except clothing, which the IMRG expects will see zero per cent growth.

A crucial factor in the renewed resilience of physical shops in the face of online retail has been the combined effects of supply chain disruption and public sector strikes impacting delivery routes (particularly Royal Mail strikes).

According to the IMRG, this was well demonstrated during Christmas 2022, when these disruptions meant that customers could no longer rely on online retailers to deliver their orders in time for Christmas, leading to strong high street performance during that period.

Even more recently, an iconic shopping destination has illustrated the renewed strength of brick and mortar retail, after what has been a rough period for physical shopping. According to recent figures from property consultancy CBRE, there are at least 10 stores on London’s Oxford Street that are under offer.

These 10 deals in advanced negotiations, added to the 15 deals that have already been signed for properties on Oxford Street so far in 2023, herald the street’s most active period of letting since the beginning of 2020, before the COVID-19 pandemic prompted the start of a tough period for brick and mortar.

Deals already completed so far this year include retailers HMV and Footasylum, while CBRE report that properties under offer are set to be leased to firms from sectors including food and beverage, fashion and tech. This broader variety of prospective tenants marks a positive development for Oxford Street, which has been flooded with an influx of American candy stores over recent years.

CBRE continues to see strong competition for the very best stores, demonstrating that contrary to popular belief, there is clear appetite from retailers to showcase their brands on Oxford Street, benefiting from lower rates and rebased rents.

How has retail fared over the summer?

While there are signs of promise, the retail sector is still under tremendous pressure. Even the most optimistic predictions for the industry are sounding a note of caution over how the next few months will play out.

After insolvency levels soared last year, retailers may have been hoping that the signs of renewed interest in brick & mortar retail, combined with the continued strength of online retail, would lead to a summer of further recovery and growth.

However, a dogged range of headwinds meant that these flickers of optimism were rapidly extinguished, with retailers registering one of their toughest summers on record, increasing fears that distress and insolvency levels within the sector could continue to rise.

The summer started with some hope, with ONS data showing that UK retail sales volumes increased by 0.6 per cent in June, outperforming expectations as hot weather helped food and furniture sales increase. From March to May 2023, there was a 7.3 per cent growth in regular pay, leading to optimism that the cost-of-living crisis was beginning to abate and that, if wage growth caught up with inflation, consumer sentiment could recover.

At the time, Shore Capital stated that “non-discretionary retail, affordable treats, and big-ticket consumer services (especially travel) are likely to outperform in the short-to-medium term with now stronger discretionary goods retail headwinds. We still feel UK living standards will rise around the turn of the year”.

However, the UK then experienced its sixth-wettest July on record, with 170 per cent of average overall rainfall for the month making it the wettest July since 2009, taking a massive toll on UK high street footfall during what is typically one of the most important months of the year for retailers. At the same time, consumers continued to struggle with the cost-of-living crisis as inflation continued to outstrip wage growth.

Against this backdrop, the ONS reported that the volume of goods fell 1.2 per cent month-on-month, significantly outstripping average forecasts of a 0.5 per cent fall in sales volumes. While the results most likely reflected a one-off blip, they nonetheless highlighted the fragility of the retail sector, with the decline in sales being felt across the industry.

Non-food retail sales were down 1.7 per cent, with supermarket sales falling 2.6 per cent, as sales of food and clothes both plummeted. Amid soaring food prices, sales volumes at food stores were down 5.1 per cent, compared to pre-pandemic figures.

Helen Dickinson, CEO of the British Retail Consortium, commented: “July’s poor weather dampened retail sales, with spend stalling in areas such as clothing and footwear and household goods. Weakening consumer confidence also impacted purchases of big-ticket items as customers continued to spend more cautiously, especially for computing and furniture. Meanwhile, sales for books and stationery performed better.”

Despite saying that there were signs of optimism for the retail sector, Dickinson cautioned that “the economic backdrop will remain difficult” and highlighted the need for the government “to create an environment that fosters economic growth”.

Distress remains prominent, but is the focus moving to strategic M&A?

Since COVID-19, distressed M&A has been a key theme in the retail sector, as buyers pounce on the assets of fallen counterparts – many of these deals have involved big names that were, potentially, too set in their ways or complacent to respond to a changing market, or to absorb the economic shocks caused by events like Brexit and the pandemic.

With economic conditions seemingly getting even tougher and dealmaking appetite in the retail sector appearing to be high, it only seems natural that there would continue to be a significant degree of distressed dealmaking going on. And this was demonstrated by the fact that nearly a quarter of retail M&A deals during 2022/23 involved insolvent acquisitions.

However, despite distress mounting (which would, assumedly, mean a greater number of distressed opportunities coming to market) it seems that the desire to secure long-term profitability and resilience through acquisitions is increasingly leading buyers to target deals for profitable companies that can immediately be accretive to their earnings, without threatening their bottom line, rather than turning to acquisitions of insolvent businesses.

According to Karen Hendy, RPC retail group partner and co-head, a wider range of assets are being brought to market as other operators disposed of non-core assets amid the tough economic conditions. As a result, Hendy says, buyers were increasingly able “to break into some very specific consumer demographics and new areas of the market”.

Hendy continued: “Retailers with strong balance sheets are looking past the peak in interest rates and making strategic acquisitions for the long term. Accessing the wider pool of assets that is up for sale is enabling acquirers to break into some very specific consumer demographics and new areas of the market.”

“One of the drivers for M&A is weakening demand as consumers cut back on discretionary spending. Some retailers misjudged how demand was going to be impacted by the turn in the interest rate cycle. Carve-outs and disposing of non-core assets enables retailers to raise capital and strengthen their balance sheets as well as focussing on efficiencies and tighter inventory management.”

RPC’s report found that 33 per cent of acquisitions made in the UK retail sector during the first quarter of 2023 were of distressed companies or assets – a significant decrease from the fourth quarter of 2022, when distressed deals accounted for 50 per cent of acquisitions.

While this is still a significant portion of activity, it also hints that maybe M&A trends within the retail sector are moving away from the opportunism offered by distressed takeovers and towards using dealmaking as a means to build resilience in the face of mounting headwinds and a changing consumer market.

A major insolvency demonstrates ongoing vulnerability

As a bargain retailer with a strong presence both online as well as on the high street, extremely strong brand recognition (so strong, in fact, that it was able to rebrand to its colloquial nickname several years ago), and a huge product range spanning numerous segments, Wilko seems like a retailer that should be well placed to withstand economic shocks.

However, earlier this year, the company became perhaps the biggest retail casualty since the COVID-19 pandemic when it was announced that the business would be placed into administration and that a race was underway to find a buyer for the firm’s 400 stores and 12,500-strong workforce.

Discussing the issues that the company had faced, joint administrator Edward Williams of PwC touched on many of the issues that had impacted, not only Wilko, but the UK retail sector more broadly: “High street retailers are facing a number of well-documented challenges and Wilko has been significantly impacted by the headwinds facing the industry including inflationary pressure and rising interest rates.”

Since then, there have been numerous assessments that should serve as a warning to other UK retailers. Namely, that Wilko had been complacent in comparison to its competitors, failing to invest in things such as technology, despite being in a position to capitalise on its prominent position within the bargain retail market.

Crucially, the firm had also failed to adequately respond to the shift in retail since the COVID-19 pandemic. Despite having a relatively strong online offering compared to other prominent retailers that collapsed during COVID-19 lockdowns, Wilko’s brick and mortar estate was largely focused around UK high streets.

Even before the pandemic, the UK high street had been experiencing a considerable decline in footfall, a trend that dramatically accelerated as online retail dominated during the pandemic. Since then, retail park and multi-channel retail have emerged as the leading trend in retail, while Wilko gradually began to be overtaken by more nimble rivals, such as B&M, Savers, Poundland and Home Bargains.

This left the company exposed and its cashflow suffered accordingly. In the year to January 29 2022, its total sales fell £42 million during the year to £1.2 billion, while EBITDA fell from £48 million to £15.6 million. Amid this sharp decline in sales, the company fell from a pre-tax profit of £5.5 million to a £38.7 million pre-tax loss.

By the end of August, a deal had been agreed for Canadian businessman Doug Putman - owner of music retailer HMV - to acquire 300 of Wilko’s 400 stores, securing around 8,000 - 9,000 of the firm’s total staff of 12,500.

The deal - which, at the time of writing, is yet to be finalised - was perhaps the best outcome that could have been secured for the firm and its huge network of underperforming stores, with administrators admitting the difficulty they had encountered in their attempts to secure a deal for the whole business.

In a statement, PwC had said: "While discussions continue with those interested in buying parts of the business, it is now clear that no viable offer structure put forward includes the group in its entirety.”

Despite this, the company’s high-profile brand, assets and intellectual property were always bound to attract significant interest from opportunistic buyers - even if none were going to be forthcoming that would be interested in acquiring the whole business.

This has been a notable trend in distressed retail M&A during the past few years (especially since COVID-19), with buyers targeting certain assets (particularly brand names and online operations) from high-profile collapsed retailers and adding this name recognition to their own offering while leaving underperforming networks of high street stores behind.

As Wilko’s collapse shows, even big names that have survived the pandemic are not immune from the struggles facing retailers. However, while these companies may have made significant errors in how they operated, or failed to respond to the changing face of retail, they are still likely to attract significant interest given their prominence and status among UK consumers.

Retail insolvencies are unlikely to slow significantly given the sector’s difficult summer and the continuing economic challenges. Distressed M&A will therefore continue to play a key role in the sector, enabling struggling retailers to secure rescue deals, while allowing buyers to acquire valuable assets at a low price.

RPC’s analysis of the recent drop in distressed deals hints at other trends emerging in retail M&A and there is further evidence that buyers are increasingly looking at solvent targets and utilising M&A as a way to expand their business into emerging markets and to adapt to new conditions.

Could the shift to “beyond-trading” be the next big M&A trend?

RPC has suggested that, with the face of retail changing so dramatically since the COVID-19 pandemic, retailers will begin using M&A more as a means of strategically repositioning their business and locking in cashflow, rather than relying on distressed acquisitions in order to pick up cheap assets.

In a dissection of emerging retail M&A trends, Bain & Company summed up the state of the retail industry thus: “In many ways, the retail industry’s rapid evolution feels like a blur. Traditional retailers are more aggressively upping their digital game while digital natives (think Warby Parker, Gopuff, and Deliveroo) are racing to hone the classic retail capabilities patiently built up over decades by incumbent rivals. This is happening at a time when profit pools are on the verge of massive changes that will make them virtually unrecognisable as more and more retailers see a future in non-trading activity."

As this shift develops, acquisitive retailers are expected to target acquisitions that help them to move beyond their traditional operations into new adjacent areas – for example, logistics, customer data monetisation and new sales channels such as business-to-business (B2B) or marketplaces linking third-party sellers with consumers.

Bain forecast that non-trading activities such as these will account for 40 per cent of retail revenues and over half the industry’s profits by 2030. The firm cites several recent deals by large retailers as indicative of this developing trend, including Best Buy’s acquisition of healthcare firm Current Health, eBay’s acquisition of NFT marketplace KnownOrigin, as well as a host of retailers that are moving into “retail media”.

Retail has changed at such a rapid pace over recent years that acquisitions seem to be the best available means for companies to quickly move into new areas, unlock new revenue streams and achieve their strategic objectives. As Bain notes: “Even the biggest retailers are finding that building can be too slow, capital intensive, and, when they lack in-house talent, especially risky. That’s why more are opting for partnerships or outright acquisitions.”

While the difficult conditions facing so many UK retailers of all sizes will mean that distress (and distressed M&A) continue to be prominent for the foreseeable future, it does seem that other buyers are moving away from such opportunistic M&A and instead focusing on deals that can enable them to solidify their profits by moving into new, profitable areas.


By making strategic acquisitions of companies in adjacent fields that can immediately enhance both their product or service offering, as well as their cashflow, retailers can adapt to new trends and develop a resilient offering that helps keep them ahead of rivals and could potentially better insulate them against possible future shocks.

As long as some retailers continue to struggle, there will still be a market for their best assets and for the biggest brands. But with the sector undergoing such rapid change, retail M&A may come to be defined more by businesses using acquisitions to tactically build for the future.

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