Fragile confidence leading to subdued retail M&A

Fragile confidence among both dealmakers and consumers is contributing to subdued M&A activity in the UK’s retail sector so far this year. While activity among strategic buyers has remained relatively resilient, private equity firms have been reluctant to enter the retail market.

This is according to Grant Thornton’s Retail M&A review - Summer 2025, which found that deal volume in the UK retail sector stood at just 25 transactions during the first half of the year, putting 2025 on course to lag behind 2024, when there were 60 retail deals across the year.

Grant Thornton largely attribute sluggish activity to the fact that the retail sector sits “at the sharp end of economic cycles”, meaning that confidence among both buyers and consumers has been acutely impacted by factors such as the cost-of-living crisis and the impact of potential US tariffs.

Despite the reduced levels of activity seen so far this year, Grant Thornton report that there have been “pockets of strategic value” in niche retail sectors, such as health and wellness, pet and beauty, as well as “some strategic deals across the wider European market.”

A key finding of the study is the reluctance of private equity firms to enter the retail market, with Grant Thornton reporting that trade acquisitions continue to outstrip private equity deals. As the report states, private equity firms value “predictability and defensibility” in their investments, something that the retail sector largely lacks due to its heavy exposure to trends such as interest rates, the cost-of-living crisis, inflation and tariff uncertainty.

As a result, there is a high bar for private equity investment in retail, with even strong areas of the sector such as online commerce, which saw a surge in sales during the COVID-19 pandemic, having been impacted by geopolitical uncertainty and recent measures like the increase in National Insurance contributions.

According to Grant Thornton, the lack of PE investments in the sector has led to private equity firms struggling to find a profitable exit route for their existing investments, particularly amid limited IPO appetite and a challenging environment for trade buyers. This also feeds into a reluctance to invest in the sector, given the risk that exit options may remain limited 3-5 years down the line.

However, Grant Thornton partner and Head of Consumer Industries Nicola Sartori suggests that private equity activity could recover, saying: “Private equity may be taking a cautious stance for now, but we believe this is a temporary pause rather than a permanent retreat. As inflationary pressures ease and valuation gaps narrow, we expect investor confidence to return, particularly in businesses with strong digital capabilities and scalable models."

While private equity appetite may currently be lacking, Grant Thornton report that M&A remains “an important growth lever” for strategic retail buyers “looking for acquisitions that accelerate their strategic plans and provide them with competitive advantage”.

This includes retailers seeking to enter new categories or reach niche areas, with Grant Thornton citing recent acquisitions such as the takeover of outdoor equipment brand Karrimor by Japanese business ITOCHU and fashion retailer Adastria and homeware retailer Dunelm’s acquisition of the Designers Guild Brand and design archive.

Nicola Sartori comments: “While the retail M&A landscape continues to face headwinds, we’re seeing clear signs of strategic resilience and in lots of areas now active growth.”

“Trade buyers continue to identify long-term value in niche segments like pet care where consumer demand remains robust and brand differentiation is strong. These deals allow investors to future proof portfolios in a landscape of changing customer expectations.”

Despite resilient trade activity and a slight uplift in volume during the second quarter (which saw 14 deals compared to 11 in Q1), Grant Thornton say that they do not expect “any great shift in the landscape” during the second half of 2025, but that reduced concerns over US tariffs and a “generally settled economic outlook” could provide more security for would-be buyers.

The report adds that valuation gaps are a crucial barrier to getting deal flow moving again, with a reduced buyer pool and significant gaps between buyer and seller valuations meaning that even owners selling strong businesses are struggling to attract the valuations they are seeking.

The report concludes that it is likely there will be an increase in strategic buys from trade buyers across Europe, which could potentially provide private equity firms with increased confidence to invest in the retail sector.

While M&A activity in the sector may be subdued, distressed retail assets could offer opportunistic buyers significant growth opportunities

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