Home Improvement Retail M&A Outlook

In Review

The Home Improvement Retail (HIR) sector continues to experience significant changes due to consolidation. From the beginning of the pandemic through today’s new housing and remodeling activity uncertainty, HIR shows no signs of slowing down on the merger & acquisition (M&A) front with nearly 70 transactions announced in 2022. Will this level of M&A activity continue or was it a short-term blip spurred by pandemic-induced demand?

At Anchor Peabody, we believe the HIR sector is in the early innings of consolidation. The sector is highly fragmented with over 30,000 home centers and hardware stores in the United States and an aging ownership base. The competitive landscape gets more complicated every year with large independents, big-box retailers, and Amazon all competing for their share. Perhaps, most importantly, the capital requirements needed to solve issues such as the sector’s technology gaps and supply chain and labor constraints, continue to disrupt the retailer’s ability to maintain market share in an ever-changing retail environment. Fortunately for potential sellers, there has never been a larger group of active HIR investors (financial and strategic) with the capital, platform, team, and appetite for inorganic growth. Heightened interest and a competitive process with multiple buyers at the table does more than help you receive maximum valuation and optimal structure and terms. It provides sellers with an opportunity to figure out who the ‘right buyer’ is for the business and the employees, while not sacrificing issues which are important to the seller in this once in a lifetime (usually) event. We continue to encourage potential sellers to canvass and test the market and to hire a reputable industry-specific financial advisor to navigate through the arduous transaction process.

As we highlighted in our prior article, HIR Industry Update (click here), HIR is expected to fare better during this cyclical downturn before returning to a long-term growth trajectory through 2030. We expect M&A activity to continue its upward trend during the slowdown and beyond as investors are attracted to the sector’s resiliency and long-term growth fundamentals compared to other sectors. Since the cyclical slowdown is forecasted to be relatively short compared to prior cycles, expect investors to continue to utilize inorganic growth to better position themselves to capture the growth upswing after this period.

Seller Motivations

The primary driver of Sellers today is age and the desire to retire. The sector’s average ownership age is approaching 60 years old, and many of these owners have no succession plan in place or a next generation unwilling to take over the business. Some of the recent increase in M&A activity was driven by sellers who took an early retirement (Great Resignation). However, HIR owners continue to be confronted with competitive constraints and business reasons which encourage some to sell, including:

  • The outsized magnitude of investable capital at big-box retailers and Amazon. Massive capital budgets provide for risk-taking on new ideas designed to disrupt the market and take market share. For example, Home Depot spends over $500 million annually on e-commerce just to keep up with Amazon – a dynamic some independent HIR businesses find untenable.
  • Technology gaps inhibit the ability to offer a seamless omni-channel customer experience. HIR independents have historically lagged other retail segments in technology and are currently playing catch-up. Selling allows owners to gain access and/or pool technology resources to prevail this evolving consumer trend.
  • Pandemic supply chain disruption highlighted the customer’s willingness to shop elsewhere. It is essential to have the ‘right’ products stocked with multiple brands and price point options, as well as e-commerce and in-store transparency to retain and acquiror customers. To offer competitive pricing and expand product selection, owners will partner with larger players to gain purchasing power and enhance vendor relationships.
  • Labor constraints will continue to put pressure on the bottom-line and in-store experience. Labor has always been, and will continue, to be an issue for the sector as it is for the entire U.S. economy. Selling to a larger buyer can offer a seller’s employee base better wage & benefit packages, training and development, and career opportunities which will attract quality employee talent and ultimately improve the customer experience.

The Buyers

For the same reasons owners are deciding to sell, HIR buyers/investors are utilizing inorganic growth to solve the sector headwinds. These buyers/investors seek synergies such as purchasing power, geographic diversification, product and service expansion, and larger enterprises to rollout technology solutions. Below are the active HIR investor groups and what to expect when selling your business.

  • Cooperatives and wholesalers preserving membership/customer base. This group is the most active in the space and its inorganic scope extends across the nation where it doesn’t overlap with fellow independent acquirors. These investors do not shy away from converting stores and some are open to different store formats (lumberyard, farm & ranch, lawn & garden, and more). We typically expect one (1) or more of these investors to be at the table for every HIR seller.
  • Independents strengthening and expanding market positions. No matter the region a potential seller is located, there is an independent with an inorganic growth mandate. The independent M&A participation is what makes this sector exciting to us, and this trend is only increasing. It is not uncommon to find independents outside of your market interested in acquiring your business.
  • Financial investors are attracted to the sectors long-term growth fundamentals. The HIR sector offers everything financial investors crave: a fragmented sector, cyclical inflection point to enter, and long-term, sustainable growth outlook. There are currently a few active financial investors and we expect this trend to increase as the sector consolidates.
  • LBM consolidators diversifying product portfolio and end market reach. Housing cyclicality and commodity volatility have forced this group to utilize tuck-in acquisitions with greater exposure to the less cyclical HIR sector.
  • Big-box retailers seeking new avenues to increase shareholder value. The ability for big-box retailers to expand the geographic footprint has plateaued due to the box size. This group continues to invest in the professional contractor and commercial end markets with aspirations to serve the builder. We continue to believe a big-box retailer will eventually utilize an acquisition to solve the viability of their brand in smaller, rural areas and accelerate end market growth strategies.
  • The Amazon-threat continues to stalk the HIR sector. HIR has historically claimed to be, ‘Amazon-proof.’ As e-commerce continues to gain share, the threat of Amazon deciding to disrupt the sector and utilize an acquisition similar to Whole Foods can’t be disregarded.

M&A Financing

The era of ‘free money’ is behind us and the access to capital has become more challenging. Financial institutions tend to lump the HIR sector with the housing industry, and many HIR businesses do have some new home construction exposure. The current housing correction and overall recession fears has sidelined available capital to the sector in the near-term. As we move further into 2023 and there is a clearer view of the magnitude of the economic correction, capital markets should un-freeze and M&A financing will become more available. If you are interested in obtaining capital, it would be advantageous to hire a reputable financial advisor who has deep relationships with the financing community and understands how to properly position and separate the HIR sector fundamentals from the housing market.

Anchor Peabody has a dedicated Home Improvement M&A advisory practice where we seek to know who is doing what to who and why more so than anyone else. We consider ourselves part of the fabric of this community, and welcome conversations on any front from owners and executives interested in discussing the strategic and financial alternatives and/or the impact of M&A on their business. Please consider us a resource as you navigate 2023.