After transforming the global consumer sector landscape over the last decade, e-commerce looks set to continue to define the sector’s future. Jonathan Buxton, partner and head of Consumer outlines M&A trends in e-commerce, and the outlook for the retail sector
In August 2018, market research firm Euromonitor predicted that e-commerce would become the single largest retail channel in 2021 – accounting for 14% of total retail sales. In some countries (particularly China and the UK) it already has that status, with the US and Canada not far behind. According to projections from Statista, the size of the worldwide market will have almost quadrupled from £1.1trn in 2014 to an estimated £4.9trn in 2021.
Digital Single Market
Europe has emerged as fertile ground for e-commerce growth, thanks in part to the EU’s digital single market, which has harmonised online and offline business environments to encourage cross-border activity. Some analysts predict that the Western European e-commerce market will expand at an annual rate of 10% over the next few years. In the first half of this year, three quarters of European e-commerce targets were acquired by European investors. This compares favourably to a fifth being picked up by North American buyers.
Worldwide, one third of all e-commerce targets were based in Europe, which is not far behind North America, and almost twice that of Asia-Pacific. Despite the ongoing uncertainty around Brexit, the value of UK M&A deals involving e-retail businesses surged fourteen-fold in 2018, from the previous year.
According to research by law firm Reynolds Porter Chamberlain this is partly because luxury brands are now increasingly embracing online avenues, or deciding to start their business online. A good example is luxury swim and resort-wear brand Orlebar Brown, which Cavendish Corporate Finance advised on its sale to Chanel last year. Orlebar Brown originally launched and now sells online to over 100 countries worldwide through its online offering.
One of the most widely documented trends is the growth of the awkwardly named Digitally Native Vertical Brand (DNVB) businesses. DNVBs such as Allbirds, Caspar and Bonobos can use their direct, digital dialogue with consumers and close links with suppliers to respond quickly and create new products, which precisely match consumer trends.
Unsurprisingly, the global fast-moving consumer goods (FMCG) groups and retailers, with their complex supply chains and old economy distribution, can only look on jealously at this level of reactivity and consumer engagement. This is increasingly driving M&A and investment in the sector.
At the core of the DNVB model is a digitally borne brand, which can adapt quickly to rapidly evolving and changing consumer demands. The pace of such change is being driven by peers and opinion leaders via social media. A common response of the big FMCG groups and retailers to the erosion of their market share has been to acquire their nimbler rivals. Pretty often this follows expensive attempts to create their own versions in-house.
10 DNVB brands to watch in the US in 2019
Away – three-year-old travel brand that has received $81m of VC funding. Casper – mattress e-tailer that has had $240m of VC funding. Universal Standard – women’s clothing business that last year teamed up with J Crew. M.Gemi – Italian luxury footwear brand that has received $50m in VC funding and was founded by serial entrepreneur Ben Fischman and e-commerce veteran Cheryl Kapla. Allbirds – footwear brand ever-present on Instagram that has had $77m in VC funding. Glossier – beauty e-tailer whose model hinges on fostering social media interaction. Everlane – clothing e-tailer that last year opened two physical shops and has received $33m of VC funding. Outdoor Voices – health and fitness leisure brand that has received $57m of VC funding. Adore Me – underwear e-tailer, has had $53m of VC funding. AYR – women’s clothing e-tailer has grown dramatically since its incubation days with Bonobos founder Andy Dunn. (Source: Retail Dive).
Unilever’s $1bn acquisition of Dollar Shave Club and Wilkinson Sword’s $1.4bn purchase of Harry’s are high-profile examples of DNVB acquisitions by old-world businesses. Cross-border deals have also been a key feature of this development. A great example is Walmart’s successful $16bn bid to become majority owner of India’s largest online retailer, Flipkart.
And at the same time, many global groups are scrambling to develop their own venture arms, with the aim of netting exciting growth prospects early on. An example of this is L’Oreal’s BOLD initiative, which invested in Sillages Paris, an online fragrance start-up using machine learning to optimise scent personalisation.
The subscription model is synonymous with the rise of e-commerce, with brands such as Blue Apron and Mindful Chef enjoying success. We advised on specialist consumer brand investor Piper’s £6m investment in Mindful Chef completed in January 2019. The investment will be used for growth.
The subscription model capitalises on customer convenience, as the businesses that adopt this approach convey their products and services straight to customers’ doors. Bigger players have naturally moved quickly to acquire these companies. A key example of this is Nestlé Purina PetCare’s acquisition of a majority stake in Tails.com, a direct-to-consumer, tailor-made dog nutrition business.
Probably the biggest hurdle to the sustained growth of DNVB businesses is the increasing cost of customer ‘acquisition’. A key factor in this is the rise in digital advertising costs, which have risen by 12% on average over the past two years. This has come at a time where customer loyalty is low, while customer choice is growing. So DNVB businesses have increasingly been reviewing more creative cost-effective ways of gaining customer share, with an emphasis on experiential initiatives and launches on social media. For example, Dollar Shave Club launched a highly successful YouTube video in 2012 that went viral, resulting in 12,000 new subscribers in a matter of days.
Overall, M&A in e-commerce is likely to continue at a brisk pace over the rest of this year. It will continue to be driven by the rapid growth of DNVB businesses, global FMCG and retail firms’ insatiable desire to buy them. The continued growth of Amazon is prompting smaller players to consolidate to stay relevant and remain competitive. While it’s still not clear who the eventual winners will be, what’s certain is that the retail and e-commerce landscapes that emerge over the next decade will look very different. And M&A will continue to play a huge part in changing the lie of the land.
This article first appeared in Corporate Financier.