E-Commerce M&A Driven By Old Economy Acquirors
After transforming the global consumer sector landscape over the last decade, e-commerce looks set to continue to define the sector’s future. 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 are able to 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 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 and are increasingly driving M&A and investment into the sector.
Below Jonathan Buxton, partner and head of consumer at Cavendish Corporate Finance, offers his thoughts on M&A trends in e-commerce and a broad outlook on the future of the sector.
Worldwide e-commerce market set to quadruple
Market research firm Euromonitor recently forecast that e-commerce will become the world’s single largest retail channel in 2021, accounting for 14% of global sales. In some countries – notably China, and the UK – it already has that status, with the US and Canada not far behind. Market data and analytics firm Statistica projects that the size of the worldwide market will almost quadruple from £1.1 trillion in 2014 to an estimated £4.9 trillion in 2021.
Europe fertile ground for e-commerce M&A
Europe has emerged as fertile ground for e-commerce growth, thanks in part to the EU’s digital single market – which 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 buyers, compared to a fifth picked up by North American investors.
Worldwide, one third of all e-commerce targets were based in Europe – not far behind North America, and almost twice that of Asia Pacific. And, in spite of Brexit uncertainty, the value of UK M&A deals involving e-retail businesses surged fourteen-fold in 2017/18 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 we advised on its sale to Chanel last year. Orlebar Brown originally launched online and now sells online to over 100 countries worldwide.
Rise of the DNVB model
At the core of the DNVB model is a digitally-born brand, which is able to adapt quickly to rapidly evolving and changing consumer demands. The pace of such change in itself 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 more nimble rivals, oftentimes following expensive attempts to create their own versions in-house. Unilever’s $1bn acquisition of Dollar Shave Club and Wilkinson Sword’s $1.4bn purchase of Harry’s being high profile examples. Cross-border deals have also been key feature of this development. A good example is Walmart’s acquisition of India’s largest online retailer, Flipkart, for $16bn last year. 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.
Subscription model being rapidly adopted
The subscription model is synonymous with the rise of e-commerce, with brands such as Blue Apron and Mindful Chef enjoying success – the latter we recently completed a fundraising for to help underpin its growth. The subscription model capitalises on customer convenience as the businesses that adopt this approach convey their products and services straight customers’ doors. Bigger players have naturally moved quickly to acquire these companies. A key example of this being Nestle Purina PetCare’s acquisition of a majority stake in Tails.com, a direct to consumer, tailor-made dog nutrition business.
Rising customer acquisition costs
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 is has come at a time where customer loyalty is low while at the same time customer choice is ever growing. So DNVB businesses have increasingly been reviewing more creative cost-effective ways of acquiring customers, 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 and the continued growth of Amazon, which 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.