Comment: A decade of change and more to come

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Our firm’s recent 10th anniversary has caused us to reflect on what has happened in the retail sector over the past decade – an extraordinary period of change and corporate activity – and to wonder what might happen in the next 10 years.

There has been consolidation in the grocery sector with the demise of Netto UK, Safeway, Somerfield and T&S Stores. Although the four major players have a huge aggregate market share, others, such as Booker, Iceland and Waitrose, have achieved great success too.

What is more significant, in our view, is that the majors are now converging strategically (multi-format, multichannel, extending non-food and service offers) and that Tesco still has a commanding leadership position.

Elsewhere there was huge activity (particularly in fashion and brands) in the first half of the decade when the trading environment was more conducive and led by the Icelandics and the mid-sized private equity houses, and fuelled by the willingness of the banks to lend large amounts to acquirers. Since then there have been flurries of action and strong businesses have continued to trade at very attractive multiples (Alliance Boots, Kiddicare and Wiggle, for example).

The retail sector has always been a place where it has been possible for new businesses with the right characteristics to thrive. In the past decade we have seen the emergence of some extraordinary large retail success stories such as Asos, Pets at Home, Poundland, Primark and, of course, the greatest of them all, Amazon, where sales have grown from $4bn (£2.55bn) to $48bn (£30.56bn) over the period.

Private equity has played a strong supporting role enabling small entrepreneurial businesses to become professionally managed activities and, for the more developed businesses, providing strategic guidance and the means to achieve significant profitable growth.

Of course, there have also been some notable failures, usually where business models have been challenged by the multiple grocers as they have extended their activities into non-food or by other traditional or online competitors.

So what of the future? It is difficult to see the retail sector providing any meaningful growth in the foreseeable future and, indeed, it is likely to remain a tough operating environment for several years. The large multiples will continue to seek growth outside the grocery sector and this, and Amazon’s ambitions, will pose very real strategic threats to those unable to create or maintain a differentiated and compelling offer.

The shift to online and multichannel models is already having a very significant impact on the use and ownership of retail property and this trend will accelerate.

Although merger and acquisition activity is currently muted, we expect there to be considerable activity over the next five years as private equity owners recycle their investments.

The structure of the retail sector will change significantly over the next 10 years – probably more so than in the past decade – making it an even tougher place in which to operate. But there will still be opportunities for entrepreneurs and for tomorrow’s managers to prove their worth.