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Have we reached a ‘peak’ in e-commerce M&A?

Sam Fuller, managing director, head of consumer Europe at GCA Altium, tells Retail Sector that despite the record levels of e-commerce M&A led by the IPO market, the only way from here is down

It has been mentioned time and again, the e-commerce boom has been led by Covid-19. The past 18 months have undoubtedly seen a myriad of digital retailers expand exponentially. M&A interest within the sector has also swelled to unseen levels. Yet, is this spike sustainable? Will e-commerce firms continue to gather pace and attraction? Sam Fuller, managing director, head of consumer Europe at global investment bank GCA Altium, thinks not; “we are definitely through peak e-com land,” he says.

In a report released in August 2021, GCA claimed that it expects 2021 to be a record breaking year for e-commerce M&A activity. This followed some 177 transactions in the year to date across the European market. For Fuller, “retail has obviously been turned on its head by e-commerce and Covid-19 has turned e-commerce on its head”.

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“Mainly led by the IPO market,” these e-commerce firms have seen “unprecedented growth rates”, in turn leaving investors without a choice but to “have a piece” of the success. Fuller highlights the expansion capacity of these online retailers, such as Boohoo, who have been offering “valuation utopia”. Clearly, in any market of exponential returns interest whether in the form of venture capital or wholesale acquisition is going to be high.

Yet, an area of particular interest for Fuller has been the number of key digital retailer takeovers of established brands, as seen in the Topshop and Debenhams sagas. Fuller sees this “picking over the carcasses” by consumer sector brands as facilitated by the complete lack of private equity interest in traditional retailers over the past 18 months. “You’re not going to find much private equity interest in a predominantly offline retailer,” he notes. 

This in turn weakens competition and allows these booming e-commerce firms to pick up big brands for “peanuts”, but why do they want to? Fuller says that it provides them with “a channel to market.” He adds: “It’s a very cheap way to get access to a [35 to 60-year-old] customer base, which to otherwise market to would take years of trial and error. So, some of these acquisitions of high street brands hasn’t been remotely about the footprint, it has been about buying that channel to market, and therefore gaining a customer base you might otherwise have had to really spray the marketing cannon around to get.”

This gap between e-commerce firms and the “old guard” of traditional retailers may, then, seem unassailable. However, Fuller argues that we have reached “peak e-commerce”. He says that in reality, “it’s been a busy year in e-commerce M&A, but only IPO”, adding that there have been “very few ‘.com’ businesses bought or invested in by private equity”. In turn, Fuller states that a downturn in e-commerce IPO will impact e-commerce M&A activity as a whole.

He says: “I think the e-commerce activity is going to slow down materially from here, because the IPO window is going to shift focus. The biggest challenge in e-commerce is working out what the new normal is, because we’ve been through that Covid spike, you are definitely going to find trading softer than it was last year as this time last year everyone was locked down and had nowhere else to spend their money.”

While the sector as a whole continues to sit in a prettier position than would have been estimated prior to the pandemic, Fuller singles out the continued uncertainty as damaging to future M&A activity. “If your feet are on shifting sands with regard to forecasting your numbers,” he says. “It is just a hard time to do M&A.”

Fuller also predicts a “resuscitation” of consumer recovery plays in the post-pandemic period. Restaurants, leisure, and travel will, for Fuller, represent the next “spike” in activity. This, alongside the tech industry, which represents a “very crowded M&A marketplace”, could take the spotlight away from these booming e-commerce businesses. 

Moreover, Fuller argues that the e-commerce M&A situation is “more a reflection of the balance of retail as opposed to any sudden uptick in e-commerce M&A”. Over the past 18 months, “there’s only been e-commerce that is investable” within the industry, therefore leading investors to “go for it”. 

He adds: “What you’re now going to see over the next 18 months is a lot more optionality with those recovery plays I talked about. Suddenly there’s more opportunities to invest in consumer more broadly, and that might be retail, so e-commerce isn’t going to have it all to its own and isn’t going to look quite so starlet.

“We’re definitely through peak e-com land. There are a lot of e-commerce IPOs coming to market in the next six months or so and I’d be fascinated to see how many of them get done. It won’t be as many as got done in the first half of this year.”

It’s no secret that e-commerce has seen lift off over the last 18 months. In some ways, this can give further strength to Fuller’s predictions of an M&A slowdown. With many digital retailers having to forecast a year-on-year fall in revenues and profitability, it is no surprise that buyers may wish not to jump the gun. By holding fire, these investors could avoid falling for inflated trajectories, contributing to a short-term deflation in the e-commerce M&A market as a whole.

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