Expect more retail technology M&A as the sector arms race accelerates

By Paul Vanstone, Director, Catalyst Corporate Finance.

Retailers face a daunting technology challenge as digital innovation transforms their business models. Whilst 90% of sales are still made in physical stores, half of all sales are influenced in some way by customers' use of the internet and shoppers who buy across multiple channels also spend more.

A retailer must effectively serve customers across multiple platforms in order to attract retail customers and generate shareholder return. Retail customers increasingly expect an omni-channel experience – that is, the option of shopping in different ways in-store and online, including via mobile and tablets where the customer's experience is consistent for a given geography (unless intentionally varied by the retailer).

A customer may, for example, use a price comparison site to locate the best price for an item, check with the store online to ensure they have the item in stock and to reserve it, and then visit the store to see the item first hand (for example, to try clothing on) before buying (in store or online) for immediate or future collection or home delivery.

Many different combinations are possible – and retailers that cannot deliver across multiple channels will miss out. Nor is the challenge only in customer-facing functions; retailers must also integrate processes in areas such as fulfilment, returns, stock control and logistics in order to provide the service customers expect.

The landscape has also been further complicated by the plethora of consumer and adjacent sector technology innovation including payment (chip & pin, mobile and contactless), bring your own devices/self-scan, customer tracking and location based advertising.

No wonder retailers' IT spending is soaring. The sector already accounts for 6 per cent of the $2.7 trillion spent on IT each year and sector technology spend is growing faster than any other industry. John Lewis, one retailer praised for its innovation, says its technology spending as a proportion of all its capital expenditure has increased from 15 per cent to 37 per cent over the past five years.

However, despite this phenomenal investment, many retailers are struggling to implement their omni-channel strategies. Having spent decades building IT systems for their store networks and then, more recently, focused on developing separate IT infrastructure for online business, they are now saddled with expensive and complicated legacy platforms that do not communicate with one another. Nor can they quickly respond to a rapidly evolving marketplace.

This presents an enormous opportunity for agile technology providers with solutions that solve retailers' problems. All the more so since significant consolidation in the retail technology provider industry over the past 15 years means retailers now have relatively little choice – a handful of global players, such as Oracle and NCR, have acquired more than 50 brands since 2000.

For these reasons, we expect this industry to generate considerable M&A activity in the months and years ahead. Strategic buyers keen to acquire new capabilities and increase their reach will compete with private equity, which has the appetite and capital to back strong opportunities.

We've seen a number of these deals in recent months. In the UK, Apax-backed Aptos paid an undisclosed sum for BT Expedite in October, while Germany's Wincor Nixdorf was acquired in August by Diebold of the US for £1.5bn. Also in the US, Oracle paid almost £7bn for Netsuite in July, while Mincron was taken out by the UK's Accel KKR-backed Kerridge Commercial Systems.

There will be more such transactions as the arms race in retail technology continues. Those businesses with the weapons to help retailers win that war are going to be very highly valued by strategic buyers and financial investors alike.

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