It’s now well-documented that stay-at-home orders during the COVID-19 pandemic accelerated an existing shift in retail from physical to online. Regular or occasional online shoppers increased their online shopping, of course, and began buying things online that they previously hadn’t, but there was also a huge, sudden growth in first-time online shoppers.
Many older people, for instance, who were perhaps most vulnerable to the virus, turned to online grocery shopping for the first time, rather than risk a trip to the supermarket. This huge growth has naturally prompted a wave of e-commerce-related M&A over the past 18 months and one of the key questions facing the market as the pandemic eases is whether this dealmaking will continue and in what form.
As restrictions lift and the vaccine rollout makes people feel safer and more confident, the issue for e-commerce is how much the growth experienced during the pandemic will stall. After all, it is of course natural that many people will resume shopping with physical retailers now that it is possible and safer to do so.
However, there are also indications that the increased popularity of e-commerce will sustain post-COVID. According to a recent study by e-commerce M&A consultancy HahnBeck, for instance, 32 per cent of those polled said that they would continue to shop more online after the pandemic. This, along with other factors, looks likely to drive continued dealmaking in the e-commerce space through the remainder of the pandemic and perhaps beyond.
What kind of e-commerce dealmaking did the pandemic drive?
At the outset of the pandemic, many big companies were caught totally flat-footed by COVID-19 and the instant shift it caused to a near-total e-commerce marketplace. Many of these companies had previously paid little or no attention to their e-commerce operation, perhaps considering it irrelevant to their core business, or even a trend that would simply never replace physical retail.
Many UK high street retailers were amongst this group, having a long-standing disregard (verging on contempt according to some reports) for e-commerce. Even prior to COVID-19, many of these retailers were in a distressed state, having seen high street footfall and their own revenues eaten away by e-commerce, while struggling with the costs of their bloated physical store estates.
With such pre-existing issues, the onset of the pandemic meant that many of these retailers quickly fell into administration. As icons of the British high-street, however, with massive brand recognition and a nostalgic attraction for many shoppers, a significant number represented irresistible distressed acquisitions.
Often the firms acquiring these collapsed giants were the very e-commerce operators who had paved the way for their downfall. As in the case of ASOS and Boohoo (e-commerce fashion retailers that picked the bones of the Arcadia group), these firms often moved to acquire the brand and intellectual property of high street retailers, adding them to their extensive online portfolios while leaving their massive estates of brick and mortar stores behind.
Even for companies that weren’t quickly pushed into a distressed state by the impact of the pandemic, COVID-19 still meant that many big companies had to rapidly adjust in order to not be left behind in the new, online-only world.
Big companies that had perhaps managed to sustain years of success without ever really entering the e-commerce space realised that, in order to weather the present crisis and prepare themselves for future ones, they would have to bolster their online offering or diversify to gain some share of the e-commerce market. This lead to many cases of big companies moving to acquire e-commerce brands or startups.
In February, food and beverage giant Nestle diversified its huge portfolio of brands with the acquisition of UK meal and recipe kit delivery company SimplyCook. The acquisition of the firm formed part of a concerted push by Nestle into the e-commerce space, following its acquisitions of other meal delivery firms Mindful Chef and Freshly.
According to Nestle UK & Ireland CEO Stefano Agostini, the acquisition underlines the company’s “focus on investing in businesses with attractive growth prospects and acting on current trends.”
SimplyCook is a digital-first business that specialises in letterbox-sized meal kits featuring pre-portioned ingredients and simple instructions. Since its launch in 2014, the company says it has helped customers cook more than 20 million meals.
Post-acquisition, the company will continue to operate with its existing structure, while receiving operational support and expertise from Nestle.
Stefano Agostini added: “I am delighted to welcome the SimplyCook team to Nestlé. We share an ambition to make cooking more accessible by offering delicious, nutritious and convenient solutions. This is an ideal partnership for both parties as Nestlé continues to transform its portfolio and SimplyCook accelerates its growth.”
Even essential retailers that were able to remain open during COVID-19 lockdowns moved to tap into the trend for e-commerce. Supermarkets, of course, had existing online and delivery operations, but as the pandemic began and demand for online shopping skyrocketed, these had to be ramped up.
This lead to a number of deals between supermarkets and delivery platforms, as stores looked to give shoppers more options for getting their food delivered. One particularly early example of this was the deal between Morrisons and Deliveroo in April 2020, which saw the supermarket offer 30-minute delivery of up to 70 items via the online delivery app.
Small e-commerce firms have been trading via Amazon for years, leading to the development of the Fulfillment by Amazon (FBA) sector. In the early days of the pandemic, many of these small firms saw a downturn in trade (despite rising demand for e-commerce) as Amazon prioritised the storage and delivery of essential or high-demand items.
However, as the global supply chain gradually resumed normal service, FBA businesses were able to capitalise on the new reliance on e-commerce to record the best year in the sector’s relatively short history.
With these rapidly growing revenues and the sheer amount of small FBA companies, it is unsurprising that the sector has been ripe for large-scale consolidation over the course of the pandemic.
This lead to an influx of capital to companies operating as specialist consolidators of FBA firms. According to figures from Hahn Beck, more than $4 billion (£2.9 billion) entered the FBA marketplace in the form of funding for well-capitalised consolidator businesses.
Massachusetts-based Thrasio is one of the world’s biggest consolidators of FBA businesses. Last year, BSR took a look at Thrasio and their acquisition model in a dedicated insight piece.
At that time, the company had made 43 acquisitions. In its short but busy history, Thrasio had become well-known for the speed and efficiency of its all-cash takeovers, often completed in the space of a couple of months.
Speaking in October 2019, John Hefter, Thrasio’s Director of Brand Strategy commented: “We’re the world’s largest acquirer of Amazon FBA businesses. We acquire about two to three businesses every single month. We scaled from zero to 25 brands in less than fifteen months.”
David Mussafer, a Managing Partner at Advent International, which has helped lead equity funding rounds for Thrasio, described the business’ approach: “Thrasio is a leader in a $200 billion, fast-growing and highly fragmented market.”
“They’re not just enhancing and accelerating e-commerce, they’re helping to revolutionise it. We look forward to supporting Thrasio’s continued growth through M&A and expansion into new channels and services.”
That was all before the COVID-19 pandemic and, since then, the company has only accelerated its acquisitive activity and is approaching 100 FBA acquisitions. Earlier this year, Thrasio completed a $750 million fundraise to fuel its ongoing growth.
Thrasio’s co-founder Joshua Silberstein said: “Thrasio continues its exceptional growth. Over the past two months, we’ve been acquiring $1.5 million in revenue per day. Thrasio is now closing two or three deals every week.”
In a year of enormous growth for e-commerce, FBA businesses are thought to have experienced the biggest surge in demand. This, coupled with strong earnings and the increased acquisitive interest in the sector has helped push the valuations of these brands up significantly.
For the owners of FBA businesses, then, this may seem like the best possible time to capitalise and reap the rewards. As a result, consolidation of FBA companies should continue to remain strong for the time being. However, the same issues facing the wider e-commerce sector as the pandemic begins to fade are also facing FBA firms.
As time moves on from the initial months of the pandemic, in which online commerce was virtually the only option for many people, valuations will increasingly be based on sales from slower-growth months, reflecting the return of physical retail. While this may not reduce the interest that consolidators have in the FBA sector, lower valuations may make owners less willing to sell.
However, given the capital that has been ploughed into the sector and still needs to be deployed, a strong level of FBA dealmaking should remain evident over the next few months. This, alongside the wealth of acquisition targets and the fact that valuations will still remain relatively high compared to pre-COVID, should continue to fuel ongoing M&A activity in the sector.
The end of lockdown – what next for e-commerce M&A?
While the COVID-19 pandemic has taught us never to assume the best too quickly, it seems unlikely at this point that the UK will re-enter a full lockdown in which physical retail outlets are shut (barring the emergence of vaccine-resistant strains of the virus or the NHS being pushed to capacity over the winter.)
However, although physical retail looks likely to remain largely open, the experience of COVID-19 could still leave many wary of shopping in public and more likely to turn to e-commerce for their retail needs. Also, as we mentioned at the outset, polls have shown that a significant number of people will shop online more even when the pandemic has passed.
Given this mindset among many consumers, combined with the fact that the pandemic is very far from over, it seems certain that e-commerce’s increased prominence is here to stay, even if its rapid growth rate from the past 18 months does decline. As we’ve seen during the pandemic, this will continue to drive e-commerce acquisitions.
There are numerous other factors that could also feed into continued e-commerce M&A post-COVID. A key feature of the pandemic has been the struggles of retailers who neglected their online offering. With the myth that e-commerce can be ignored or delayed now well and truly debunked, retailers who survived the pandemic will no doubt be looking to boost their online presence and could turn to M&A to achieve this.
Meanwhile, operators of all sizes with under-developed online offerings will continue to be targets for seekers of distressed acquisitions. These businesses will likely be struggling with cash flow issues and often, for buyers, they will represent a great value opportunity to acquire the intellectual property of well-known brands.
On the other hand, the e-commerce-focused businesses that performed well during the pandemic may now look at the changing retail landscape and decide the time is right to enter the M&A market. As increasing numbers of shoppers return to high streets and shopping centres, online operators may look to acquisitions to help sustain their growth going forward.
These e-commerce success stories will of course continue to make attractive acquisition targets for buyers such as bigger retailers and private equity firms. And, if their revenues decline significantly on the back of restrictions lifting, they may become attainable at lower valuations.
Finding e-commerce acquisitions with BSR
If you’re looking to acquire an e-commerce business, finding the right target can be difficult. For starters, the term “e-commerce” is extremely broad and incorporates a wide variety of companies registered under a range of different SIC codes.
At Business Sale Report, we’ve compiled a list of off-market businesses running on some of the biggest e-commerce platforms, such as Shopify and Magneto. Ths manually researched database - the only one of its kind in the UK, will certainly help you find potential acquisitions in this sector. Here are its main features:
1. We list e-commerce businesses that are operated by companies registered in the UK.
2. We enable you to search through these companies by industry sector or using keywords. With BSR’s unique keyword system, you can sort through companies using keywords that accurately describe a business’ activities, meaning you no longer have to rely solely on searching using generic SIC codes.
3. All businesses are listed alongside estimated sales figures based on the number of checkouts the company has completed.
4. Where this information is available, we provide turnover and net asset figures covering the last three years, allowing you to pinpoint businesses that have grown or declined since 2019,
Download your tailored e-com list here.
While e-commerce companies may struggle to ever again replicate the explosion of growth they saw amidst COVID-19, it seems clear that the pandemic’s impact has delivered a permanent boost to the popularity and ubiquity of e-commerce.
This change has naturally filtered through to dealmaking, with some looking to capitalise by diversifying their offering, consolidating e-commerce firms en masse or opportunistically swoop for distressed physical retailer. Others, meanwhile, are looking to merely catch-up and ensure they aren’t once again found wanting in the online marketplace.
Given this state of affairs, e-commerce dealmaking looks set to remain strong as buyers and sellers continue to react to and learn from the colossal impact of COVID-19.
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