Ever since Covid hit in 2020, retailers have been struggling and pivoting to not only keep up with changing consumer preferences, but also to keep their brand relevant. This time has brought some of the worst financial strain to retailers.
“The whole sector has faced headwinds from shifts in consumer spending and increased operating costs, specifically labor, inventory and across their supply chains,” says George N. Koutsonicolis, Managing Director, SOLIC Capital Advisors. “The degree of these operational challenges varied across retail sub sectors. Specifically, specialty and luxury retailers have struggled more than the rest of the sector due to consumers limiting discretionary personal expenditures.”
Koutsonicolis explains that there were over 80 consumer discretionary retail bankruptcy filings during 2023, the most of any industry or sector. Meanwhile, food retailers have been able to pass most of the costs through to consumers.
Koutsonicolis spoke with Specialty Retailer and gave us exclusive insight on the financial state of the retail market. Here is what he had to say.
Merger and Acquisition Activity is Robust
Because of this economic activity, mergers and acquisitions (M&A) have been increasing in activity. A Skadden article cited that there was a 27% increase in M&A activity in the retail sector in Q4 2023.
“A majority of retail M&A were focused on capturing efficiencies,” Koutsonicolis states. “Many retailers felt that acquisitions and mergers were the best way to recapture and enhance profitability in the recent economic environment. Efficiencies captured through retail acquisitions include supply chain consolidation and efficiencies, new business units, new markets and overhead synergies.”
Koutsonicolis speculates that this will continue, with companies focusing on fortifying supply chains, targeting expansion into new markets (geographic and consumer markets) and online presence.
“M&A trends in recent months suggest that retailers are slowly shifting away from capital preservation initiatives and towards investment in operations and acquisition as evidenced by the recent increase in M&A activity from large public and private retailers after over a year of minimal activity from this acquirer group.”
Retailers Focus on Supply Chain Efficiencies
While the economic forecast suggests easing rates and more consumer spending, Koutsonicolis says retail executive teams remain focused on inventory management and supply chain efficiency. Addressing supply chain disruptions is something retailers have struggled to address, seeing as causal factors are largely out of their control.
To help improve supply chain efficiency, Koutsonicolis has some suggestions for retailers:
- Modernizing inventory management. Recent developments in digital supply chain and data analytics technologies have made it easier for operators to establish and maintain effective inventory management systems.
- Escalate private label offerings. Private label products allow retailers to control more of the supply chain and expand product margins.
The Future of Retail
Absent any sharper-than-expected economic turnarounds, Koutsonicolis predicts the retail industry will likely continue to face stress in 2024.
“Many retailers were able to implement short term cost reduction initiatives to get them through 2023, but will face challenges in 2024,” he says. “Initial signs of stability may form across the industry, but any recovery will rely on changes to consumer spending habits, which will likely be slower to recover.”
Koutsonicolis also predicts that consumers will continue to be as cost-conscious as they were last year. “While there are many indications of potential rate cuts in the second half of 2024, they have yet to take place and consumers will likely be cautious over increasing their spending before significant recovery.”
