Industry Acquisitions Suggest Healthy Market for Private Labels, Despite Challenges
Despite the emergence of serious supply chain issues, 2021 has been a strong year for home commerce. Demand skyrocketed, sales surged – and even though there was a long wait to get a sofa delivered, the interest and intent to buy was clearly there.
This rosy forecast may have faded somewhat – look no further than the now overstocked retailers. Growth has slowed this year, triggered by rising prices, ongoing supply chain issues and the spread of hesitation among many buyers anxious to conserve cash while waiting for a volatile economy to stabilize. But a new report, released yesterday by investment banking firm Capstone Partners, offers a half-full assessment of the health of the domestic industry, at least as far as acquisitions are concerned. The verdict? Strategic buyers – companies that acquire another company in the same industry in order to expand their capabilities or grow – are fueling an increase in M&A activity and contributing to market resilience.
According to the report, there has been a 15% increase in M&A activity over the past year compared to the same period a year earlier, with 53 deals announced or closed so far. These figures come after a drop in market transactions from 2018 to 2020, followed by a relative frenzy of activity – 117 transactions in 2021 compared to 66 in 2020.
That the report focuses on strategic buyers should come as no surprise, as their activity accounts for 75.5% of all deals so far this year. Nearly two-thirds of these deals are led by private strategic buyers looking for strong product diversification and synergies, such as a CFO or an existing sales force.
Some of the deals struck will be familiar to industry professionals, such as Maitland-Smith’s purchase of luxury goods maker Scarborough House, which expanded the former brand’s offerings into a new category; Hooker Furniture’s expansion into outdoor offerings through the acquisition of Sunset West; and online design platform Havenly’s decision to snap up fast-fashion direct-to-consumer furniture brand The Inside. Others are more obscure, like The Container Store’s takeover of Closet Works, which makes wood-based organization systems.
For Ken Wasik, head of consumer investment banking at Capstone Partners, all of this activity is a sign of a healthy market. “When strategic buyers are the predominant buyers, it means big companies have an incentive to buy something rather than build something,” he says, citing the behavior as a sign that CEOs think there’s something wrong. room for future growth. Acquisition is a way to get certain capabilities that they don’t already have or that can help a business scale quickly, to meet the demands of a changing market.
According Randy Eller, president and director of Eller Enterprises, a Tennessee-based consulting firm that specializes in the gift and homeware industry: to increase product variation or to buy out a competitor. In an environment where manufacturers and retailers are facing declining demand, he says, the industry is about to enter a period where the weak are getting weaker and the strong are getting stronger.
“No matter how badly things go, someone always has money,” Eller says. “Some people are going to have to sell, and some people just want to sell. This is a great time to pick product categories you plan to get into. It may be cheaper at this point to gain a new product category through an acquisition than trying to do it organically, especially with lead. time involved and the supply chain as it is.
This activity is also favorable to sellers. “Typically, strategic buyers pay more than financial buyers,” Wasik explains. “The reason is quite simple: a strategic buyer has a lot of things called synergies…[for example,] they sell nationally, when something they acquire might sell regionally, so they can get instant gains. A financial buyer simply buys out the existing business without any synergy. Typically, a strategic buyer provides higher value to sellers compared to financial buyers, regardless of ownership, due to the synergies they provide.
Regardless of what motivates industry players to move in an uncertain economy, Wasik points out that the trend towards strategic acquisitions is a boon for the domestic market as a whole: “It tells me that CEOs are optimistic about the future,” he said. “If you think bad times are ahead, either for your business or for the underlying industry, the last thing you’re going to do is go out and buy other businesses.”
Homepage photo: ©Prostock-studio/Adobe Stock