U.S. ecommerce sales grew 16.1% in 2011 – twice the rate of total retail sales, according to the U.S. Department of Commerce. Ecommerce sales now represent 4.6% of total retail sales. As consumers become more comfortable purchasing products online – taking share from catalogs and brick and mortar channels – so has mergers and acquisitions activity gravitated toward Internet retail.
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Ecommerce transactions now dominate the multichannel retail mergers and acquisitions market, comprising 92% of all deals in 2011 – up from 59% in 2006.
Most ecommerce deals consist of Internet retailers acquiring other operators of Internet storefronts, which sell similar or complementary product lines. Recent examples include: Fanatics’ acquisition of Dreams in April 2012 (both sell licensed sports gear); Shoebuy.com’s acquisition of Cozy Boots (both sell footwear) in October 2011; and Shockoe Commerce Group’s acquisition of Red Rock Products (both sell yoga gear).
Perhaps more interesting, however, has been the recent trend of brick and mortar retailers and product manufacturers/wholesalers acquiring pure play Internet retailers in their niche categories to bolster their online presence and expertise.
In the early days of ecommerce, the field was dominated by web-only players focused on narrow product niches owned and operated by entrepreneurs. Seeing the explosive growth rates in ecommerce, many brick and mortar retailers and product manufacturers invested heavily in Internet retail and came to build large online channel businesses. Examples include: Staples, Apple, Office Depot, Wal-Mart, and Sears.
Recently, brick and mortar retailers and product manufacturers have been acquiring web-only Internet retailers to acquire their expertise and high growth rates. Notable examples include: Walgreens – the nation’s largest brick and mortar drug store chain with more than 7,800 stores – acquiring Drugstore.com, an Internet retailer of over-the-counter products; National Vision – a brick and mortar retailer of eyeglasses – acquiring Arlington Contact Lens Service in March 2012; and Motorsports Aftermarket Group’s – a manufacturer of motorcycle parts – acquisition of Motorcycle Superstore, a motorcycle part Internet retailer, in March 2012.
Shifting to the more traditional catalog and direct channels, deal activity has been relatively thin since the recession, with most activity driven by bankruptcies and corporate divestitures. More recently, however, large catalog companies have begun getting back into the M&A market. Recent examples include: Bertelsmann’s acquisition of Sky Mall, the well-known home goods catalog in April 2012; QVC’s acquisition of Send the Trend in February 2012; and HSN’s (Cornerstone Brands) acquisition of Chasing Fireflies (an upscale children’s branded catalog selling direct to consumer) in April 2012. While these large players have been acquiring titles, we expect other catalog behemoths to divest underperforming non-core titles in 2012.
For the most part, private equity firms have steered clear of multichannel retail recently, with one exception – business-to-business merchants. Recent examples include: Levine Leichtman Capital Partners’ acquisition of MacKenzie Sports Supply, a b-to-b supplier of taxidermy supplies, in March 2012; Capital Resource Partners’ acquisition of Catalog Marketplace, a supplier of ceremonial uniform accessories to the military, in January 2012; Galls’ (owned by CI Capital Partners) acquisition of Quartermaster (a supplier of uniform accessories to military, security and police personnel); and Water Street Healthcare Partners’ acquisition of MarketLab, a direct marketer of laboratory products.
Most private equity investors avoid multichannel retail buy outs for two reasons. First, many financial buyers fear the rapid transition from the catalog model to the Internet model. Second, while many buyout groups have an interest in ecommerce, most Internet retailers do not have sufficient size and scale to be feasible as buyout transactions.
Whether Internet retail, catalog or direct, the buyers in recent transactions have been predominantly strategic. Strategic buyers acquiring companies, titles and storefronts in similar product categories are able to leverage fulfillment, merchandising, management and house lists to meet target return on capital rates.
Chris Kampe is a managing director at investment firm Tully & Holland.