Europe’s consumer industry has suffered as a result of the COVID-19 pandemic and has had to adjust quickly to survive. Lockdowns froze physical players and e-commerce provided a lifeline for survival for some. But the easing of restrictions did not necessarily help: consumer behaviours have clearly changed and retail footfall has not recovered to pre-pandemic levels.
This year has been defined by more challenges: the war in Ukraine, ongoing supply-chain issues, inflationary pressures, and rising energy prices. And it seems increasingly likely that many consumer businesses will struggle to stay afloat this year and in 2023.
Distress and dealmaking
The prospect of high levels of distressed dealmaking in Europe’s consumer space is real. According to professional services firm RPC, in the UK only two distressed M&A deals came to fruition in H2 2021 and Q1 2022. Then, in Q2 2022, conditions began to change noticeably, with four acquisitions of distressed retailers announced.
And per our latest Deal Drivers: EMEA HY 2022 report, the consumer sector saw the most material weakness in activity YOY: deal volume fell to 382, a 35% decline, and value saw a 12.6% dip to €29.2bn versus €33.4bn last year. The sector is also expected to see the third-highest volume of deals for the remainder of the year, after TMT and industrials and chemicals.
The European Distress Index, published by law firm Weil, Gotshal & Manges, affirms this outlook. According to the June update to the index, corporate distress across major European markets rose to its highest level since August 2020, with German and UK businesses feeling the most stress.
And the retail and consumer goods sector was identified as the largest driver of distress, reflecting poor investment levels, volatility in equity markets, and the overall decline in household discretionary spending.
Private equity’s role
One deal recently saw UK convenience-store chain McColl’s bought out of administration by supermarket group Morrisons, which is owned by PE giant Clayton Dubilier & Rice. Similar transactions in which larger and well-capitalized players gobble up small and medium-sized outfits are likely to become the order of the day. In this consolidation boom, PE firms in particular, with their mountains of dry powder, can be expected to eye up these distressed assets.