Consumer Markets – Retail

Outlook for the U.S. Retail industry is positive, though the uncertainty that persisted prior to COVID-19 has increased due to the pandemic. In the retail landscape, “essential” stores such as grocers, home improvement suppliers, and mass merchants benefited the most from the economic challenges brought about by COVID-19. Apparel and department stores who were already struggling pre-pandemic saw revenues fall as government-imposed lockdowns forced stores to close theirdoors. Uncertainty in the industry in addition to greater financial challenges is expected to drive M&A activity throughout the projection period.

Overall revenue is projected to increase by 2.8% annually from 2021 to 2026 and reach a total of $5.8 trillion by 2026, up from $4.9 trillion in 2020. Sector growth is expected to be driven by an increase in per capita disposable income. This is contingent on post-COVID-19 economic recovery and consumer confidence returning to the marketplace. Consumer spending is expected to grow at 2.5% annually throughout the projection period. Exhibit 1 shows the performance of the Retail sector since 2016 relative to the overall economy, comparing sector revenue change to GDP growth from 2016-3Q2020.

Preceding 2020, retail stores were coping with increasing SG&A, compressed margins, sluggish asset turnover, and increasing e-commerce competition. These challenges were exacerbated by the COVID-19 pandemic, placing even more pressure on the retail industry. 2020 saw established retail players like J.C. Penny, Neiman Marcus, Lord & Taylor, and more file for bankruptcy. In addition, consumer desire to shop in stores has been diminished due to COVID-19, with concerns of entering crowded places still prevalent throughout society. This disinclination is expected to persist throughout the projection period, forcing retailers to rethink their store layout and cleaning standards.

Although retailers struggled throughout the pandemic, there was some encouragement in 3Q2020, when personal consumer expenditures (PCE) climbed 8.9% from 2Q2020. There was still a significant reduction in retail spending throughout that time, but it foreshadows the anticipated growth that will occur in 3Q2021 when vaccinations will be readily available to the U.S. population.

Retail investment in the digital sector is expected to be the main priority going forward. Retail companies will also look to develop subscription-based models and form strategic partnerships with digital-centric brands. This is highlighted by Walmart’s partnership with Dollar Shave Club (DSC) in 3Q2020 to sell DSC products in stores and feature their products on Walmart.com. E-commerce continues to be the main driver for the industry, with online sales representing 21.3% of total retail sales in 2020. Consumers spent $861.12 billion on online goods in 2020, a 44% increase from $598 billion in 2019.

M&A activity increased in 3Q2020, which is expected to continue throughout the projection period. Activity is anticipated to be driven by companies looking to restructure through a sale or acquisition of additional lines of business (LOB). Private equity firms may also seek to take a strategic position amongst the turmoil. This activity was highlighted by Newtimes Group’s acquisition of Coldwater Creek for $12.2 million, Authentic Brands Group LLC and SPARC Group LLC’s acquisition of Brooks Brothers for $325 million, and Saadia Group’s acquisition of RTW Retailwinds, Inc. for $40 million. Exhibit 2 shows the trends in investing activity from 2015-2020.

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