New retail development and middle-class growth are driving M&A activity - M&A in China’s Retail and Consumer sector: 2018 review and 2019 mid-year outlook released.

Retailers are pursuing growth through mergers and acquisitions both into and out of China, where deal opportunities are set to continue to grow in the coming years. According to PwC’s M&A in China’s Retail and Consumer sector 2018 review and 2019 mid-year outlook released today, 2019 got off to a flying start in the first quarter, as the number of retail and consumer M&A transactions increased by 31% year-on-year.

After rapid growth in 2016 and a brief downturn in 2017, M&A in China’s retail and consumer sector rebounded in 2018. The value of M&A transactions reached US$59 billion – an increase of 48% on 2017. The volume of deals climbed 32% to 1,031 transactions.

Increased consumption brings about new business opportunities

Chinese retailers and brand owners (especially private enterprises) are acquiring high-quality overseas brands. They will channel their resources into mergers and acquisitions that help them satisfy the rapidly growing demand from China’s middle class. Such M&As allow local players to acquire upstream assets overseas and then introduce quality brands and products to China’s middle classes. In recent years, e-commerce in Southeast Asia has grown at more than 20% a year. There is still plenty of room for further development.

Foreign investors remain upbeat about the huge potential and growth prospects among Chinese consumers. They are particularly keen on high-quality consumer goods that are aimed at China’s growing middle class, combining the strengths of established overseas brands and products with local partners’ distribution network, local market insight and agile operations. This is typified by large-scale inbound M&A deals and partnerships in the food and beverage industry, which pushed up volumes in this segment in the second half of 2018.

“China’s market offers abundant opportunities, given its huge middle class pursuing higher living standards,” says Ken Zhang, Deals partner with PwC China. “Mounting uncertainties in the global economy and trade environment mean that China will be increasingly dependent on consumer-led growth. On a medium to long-term view, this will continue to drive M&A activity in this sector. We expect activity to steadily increase in 2019.”

Convergence of new and traditional business models triggers further momentum

Digital and bricks-and-mortar business models are converging. Online players use their edge in big data analytics to work with off-line retailers and to leverage their stores as consumer touch-points, for store-based delivery and to expand off-line use cases. This convergence will continue to drive M&A activity in on- and off-line retail areas.

Online/off-line integration within China’s retail sector is still relatively low. Traditional bricks-and-mortar retailers will continue to deepen cooperation with their leading online counterparts to enhance their product offer, fulfilment and overall customer experience. Given this market context, traditional retail, food and beverage, and the hotels, restaurants and leisure segments are all expected to remain attractive for strategic investors in 2019.

Private Equity leads the charge

Financial investors (private equity funds) have been increasingly active in M&A transactions in major segments such as online retail; food and beverage; and hotel, dining and leisure.

These will continue to be active in 2019. In addition to inbound investment, PE funds will increasingly participate in overseas M&A transactions. This will include cooperation with strategic investors as a financial investor with US dollars. PE funds will continue to focus on high-growth online and new retail industries.

“Our view is that M&A in China’s retail and consumer sector will be buoyant over the medium to long term,” concludes Mr Zhang. “The China-US trade friction is likely to impact investment into the US market, prompting outbound investors to look elsewhere overseas.”

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Vivian Huang, Deputy Manager, PwC China

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