Retail 2021: Digital Transformation Drives Deals

E-commerce got a serious shot in the arm from the pandemic, but even as consumers have returned to doing more activities in person, retail is continuing to evolve, with technology and consumer behavior working in tandem to fuel change. Far from over, the e-commerce era may have only just begun.

Earlier in November, American Eagle Outfitters (NYSE: AEO) said it is buying Quiet Logistics Inc. for $350 million as part of its supply transformation strategy. Quiet Logistics offers automated and technology fulfillment services for consumer brands.

“Different technologies are slowly influencing changes in our lives,” says Swander Pace Capital principal Robert Vassel. “From a consumer investor perspective, the role of technology is a key consideration of how changes in consumer behavior will affect the future growth outlooks of potential investments and how those businesses can continue to grow and thrive in an ever-changing environment.”

One recent deal that exemplified many of the trends came in October, when online grocery delivery pioneer Instacart acquired smart grocery cart startup Caper AI for $350 million. It marked Instagram’s fifth acquisition since the company’s founding in 2012. Caper AI allows customers to place items in their carts, which carry weight sensors to detect items automatically. The carts also have payment systems that let shoppers check out without having to wait in line.

The day the deal was announced, Instacart CEO Fidji Simo spoke at the WSJ Tech Live conference. “We’re in the business of helping our grocers’ business,” Simo said. “We want to have all of the technologies that can help them compete in the marketplace.” She also mentioned with a company like Caper, which also makes personalized suggestions on grocery items and recipes, grocery stores can add an innovative customer experience.

PE Firms Shop for Home Décor
Another trend that began at the height of the panic but shows no signs of slowing down is the increased interest in home décor. People are still spending more time in their homes and more money decorating them. The space is attracting private equity buyers. For example, Francisco Partners is acquiring a majority stake in RugsUSA from Comvest Partners. RugsUSA is an e-commerce provider of area rugs and other home décor products. “RugsUSA is dislocating the traditional retail experience,” FP principal Christine Wang said about the deal.

“Nesting was a big theme during the pandemic, which involved cooking, decorating, and making your living space more enjoyable for your household,” adds Vassel.

The sector even resulted in a leveraged buyout. In April, Apollo Global Management completed its $5 billion acquisition of crafts and décor retailer the Michaels Cos. As a private company, Michaels will be able to expand its digital and e-commerce platforms.

“The mechanics of selling online have never been easier with an increasingly flexible suite of solutions to power everything from front-end design to reverse logistics,” says Cathy Leonhardt, co-head of global consumer retail at investment bank Solomon Partners. “The democratized digital retailing ecosystem has inspired a new wave of DTC entrants and consumers to be able to pick up or deliver goods anywhere and at any time.”

“The pandemic resulted in a significant reduction of brick-and-mortar locations in many retail categories, as e-commerce penetration further accelerated,” adds Josh Benn, head of Americas M&A Advisory and global head of consumer corporate finance at Duff & Phelps, a Kroll business. “We are noticing a shift to smaller retail store operating space, increased showrooming to support omni-channel go-to-market strategies and the rationalization of in-store inventory levels to tightly manage working capital.”

Filling in the Gap
There is more software and technology available now to help retailers improve their websites and e-commerce services. Strategic buyers are buying up those technologies.

Gap Inc. (NYSE: GPS) is one good example. In October, the Banana Republic and Old Navy owner, acquired tech startup Context-Based 4 Casting Ltd. The latter uses artificial intelligence and machine learning that helps retailers improve operations, increase sales and improve customer experience through predictive analytics.

“We believe artificial intelligence and machine learning will shape the future of our industry,” said Sally Gilligan, Gap’s chief growth transformation officer, when the deal was announced. “Gap Inc. has experience working with CB4’s world-class data scientists, so we understand the impact and the wide applications their science can have across sales, inventory and consumer insights, as well as its potential to unlock value and enhance the customer experience.”

CB4 is not the only tech acquisition that Gap had made in 2021. In August, Gap purchased Drapr, an e-commerce startup that allows customers to create 3D avatars and virtually try on clothing. Drapr is designed to help customers find the best clothing size and fit for their personal style and body type, while helping retailers reduce unnecessary returns.

“Fit is the number one point of friction for customers and through their advanced 3D technology, Drapr has shown it can help shoppers efficiently find the size and fit they need,” Gilligan said at the time.

What’s Next?
Businesses will continue to invest in technology to ramp up their digital transformation. “Innovation of new products and services, and digital transformation emerge as top focus areas for retailers as they emerge from the pandemic,” states an August EY retail report. “Rapidly changing industry dynamics mandate they continue to differentially invest in these areas. Data and technology will play a more critical role in predicting which current trends will persist.”

But it won’t be just about data. One investment banker points out that businesses need to figure out how to take things to the next level. “Convenience and an experience that gives the consumer what they want easily and seamlessly will be what defines the most successful retailers,” says Warren Feder, a partner at investment bank Carl Marks Advisors.

Retailers have a grasp now, but they need to be prepared when things will quickly change again. “One thing is for sure, nothing will stay still,” says Vassel.