E-Commerce Sector Update – July 2024

E-Commerce Sector Grows with Post-Pandemic Consumer Preferences, Private Equity Looks to Expand Portfolio Holdings

The adaptability and convenience of e-commerce and online purchasing has enabled consistent sales growth and penetration in the Retail market, both of which have supported strong E-Commerce sector merger and acquisition (M&A) activity. Despite macroeconomic headwinds, including delayed interest rate cuts and mounting financial pressures, consumers have continued to use e-commerce channels for staple and discretionary spending. Sticky remote shopping preferences and tailwinds for consumer spending, such as easing inflation and rent growth deceleration, are projected to support sustainable growth in e-commerce sales through the remainder of 2024 and into 2025. Additionally, consumers have shown more optimism about the economy compared to prior months, as the Consumer Confidence Index grew 5.4% in May following three consecutive months of decline, according to The Conference Board.¹ E-commerce sales have continued to take market share from other retail sales channels, growing 8.6% YOY to reach 15.9% ($289.2 billion) of total retail sales in Q1 2024, according to the U.S. Census Bureau.²

E-Commerce Sector Demonstrates Lasting Impact Post Pandemic

The COVID-19 pandemic sparked an acceleration of e-commerce penetration which, at its peak, reached 16.4% of total retail sales. After a period of unsustainable growth in Q2 2020 and a reversion to the mean, e-commerce sales have still continued to increase month-over-month (MoM) since September 2020, exemplifying the channel’s adaptability to shifting consumer shopping habits and challenging macroeconomic backdrops.

Post pandemic sustained hybrid work environments, the convenience of e-commerce, and increased use of smartphones and mobile apps have altered how consumers purchase goods. Stay-at-home mandates in 2020 accelerated consumer reliance on and integration with smartphones as mobile devices supported relationships with friends and family, work productivity, news coverage and entertainment. The lockdown aftermath has resulted in U.S. smartphone penetration reaching 90% with the strongest adoption (97%) seen in Gen Z and Millennial cohorts, according to the Pew Research Center.³ Moreover, 50% of consumers have more than four shopping apps on their smartphone, exemplifying the growing incorporation of technology into all facets of consumer life, according to Capita One Shopping Research.⁴ Sticky remote shopping preferences and consistent Retail market share growth have renewed private equity interest in the E-Commerce sector, driving M&A volume up 3.8% YOY.

E-Commerce Players Increasingly Diversify Revenue Streams

Strategics and financials sponsors continue to have interest in pure play direct-to-consumer (DTC) brands but with much more scrutiny compared to a few years ago, driven in part to privacy changes, the evolving social media landscape and increased customer acquisition costs. Of note, Apple’s (Nasdaq:AAPL) 2021 iOS 14.5 update instituted a Tracking Transparency Prompt (TTP), enabling users to opt-out of activity tracking used for personalized ads. In light of these privacy changes that have hindered digital marketing strategies, many DTC companies are seeking channel diversification and opening retail locations to become more omni-channel. For example, Wayfair (NYSE:W) opened its first brick-and-mortar store in Chicago in May to bolster and strengthen its brand by allowing consumers to have a physical experience with the company. “There’s a very big opportunity to get that larger share of wallet and drive profitability by having the ability for consumers to flex in either direction [online or brick-and-mortar],” noted Niraj Shah, Wayfair CEO and Co-Founder, at the Bernstein Strategic Decisions Conference.⁵ In contrast, Wayfair competitor Beyond (NYSE:BYON), whose subsidiaries include Overstock and Bed Bath & Beyond, saw sales and marketing expenses as a percentage of revenue rise from 12.3% to 17.8% YOY, while Wayfair’s advertising expenses fell almost 1% YOY to $324 million (11.9% of revenue), according to their respective Q1 2024 earnings releases.^6,7 Beyond has made efforts to shield itself from inefficient marketing spend by increasing expenditures on performance marketing—where the brand only pays marketing agencies after specified ad campaign milestones are achieved. Wayfair has reiterated that the decrease reflects its response to changing market conditions. “As part of this brand refresh, we’ve taken an expanded lens of our advertising channel portfolio, leaning in with renewed strength across many of the biggest channels on which our customers spend significant time,” said Niraj Shah in the Q1 2024 earnings call.⁸ In a post-TTP landscape, brick-and-mortar locations provide an alternative marketing strategy for digitally-native brands, as physical retailing can accelerate online sales growth, particularly for emerging DTC brands. Notably, opening a brick-and-mortar store boosts online sales by 6.9% on average in the weeks following that store’s opening, according to a 2023 ICSC study.⁹ Furthermore, store openings correlate to a 13.9% bump in online sales for emerging DTC brands. Moving through year end, financial and strategic buyers are expected to show increased interest in companies with diversity in sales channels and end market mix—such as Wholesale and Retail—to avoid dependence on ad spend to drive revenue.

Although pure play DTC companies remain attractive M&A targets, buyers today are willing to pay higher valuations for omni-channel brands as they offer more channel diversification and are less reliant on digital and social media platforms.

Lisa TolliverManaging Director, Capstone Partners

E-Commerce Sector M&A Volume Records Slight Uptick Year-to-Date

M&A activity in the E-Commerce sector has picked up slightly through year-to-date (YTD) with 55 transactions announced or closed, compared to 53 in the prior year period. While transactions in the Home Goods, Fashion Apparel, and Beauty segments have remained in line with 2023 volumes, the Food & Beverage segment has been a bright spot for E-Commerce sector M&A to date. Notably, YTD deal activity in the Food & Beverage segment increased 66.7% YOY with 20 transactions announced or closed, compared to 12 in YTD 2023. Acquirer appetite has been centered around brands with a health and wellness component. Of the transactions in the Food & Beverage space to-date, more than half have featured diverse, better-for-you (BFY)-related product lines. These products include gluten-free and organic spirits, vitamins and supplements, and organic, whole food produce.

Evidenced by accelerated deal activity in the Food & Beverage segment YOY, sector acquirors have focused M&A around top-performing, high-growth segments in the E-Commerce space. The Fashion Apparel and Beauty segments have seen relatively flat transaction volumes—correlating with static sales growth—while the Home Goods segment posted a 24% decline in transaction activity YTD, reflective of its 10% decline in e-commerce sales YOY.

Food segment spending has increased 123.4% since Q1 2020, followed by an 81.3% increase in Health & Personal Care segment spending and 46.3% growth in Clothing & Clothing Accessories segment, on a non-adjusted basis, according to the U.S. Census Bureau.¹⁰ More recently, Food has been the strongest segment, posting 7.5% growth YOY while Clothing & Clothing Accessories, and Health & Personal Care posted small, 0.4% growth and a 2.8% decline YOY, respectively, further exemplifying the resiliency of online Food segment shopping. In-line with segment sales, the Food & Beverage segment has garnered robust buyer interest YTD. The growing use of e-commerce as a household productivity tool for remote workers and steady Food e-commerce sales growth has already sparked consolidation in the segment, particularly in the fragmented Sustainable Groceries sub-segment. Of note, Market Wagon, an Indiana-based e-commerce platform operator, and delivery service provider connecting farm producers and consumers, acquired Find Your Farmer in January for an undisclosed amount. New York-based Find Your Farmer offers a complementary farm produce e-commerce platform and expands Market Wagon’s geographical footprint, furthering both firms’ missions to make locally sourced food a convenient option for consumers. Additionally, U.K.-based Modern Milkman acquired a U.S.-based company of the same name for an undisclosed amount in March. Both firms offer milk, soft drink, and grocery delivery in sustainable bottles and bags, conveniently proving locally sourced farm produce to consumers.

Private Equity Re-Enters the M&A Market in the E-Commerce Sector

Strategics and financial sponsors have split the M&A market through YTD, accounting for 58.2% and 41.8% of total transactions, respectively. Private strategics have maintained a dominant presence among total strategic activity while private equity add-on transactions have experienced a dramatic uptick to-date. Add-on transactions have increased 111.1% YOY to 19 deals in YTD 2024 from just nine in the prior year period. Early-stage companies—particularly those who have developed a strong brand using e-commerce channels but lack a clear, short-term path to profitability—have increasingly felt pressures from a challenging fundraising environment, supply chain volatility, and moderating growth of e-commerce sales post-COVID, creating a target rich environment for both private equity firms and strategics alike.

Fund managers are expected to continue to expand portfolio company product offerings and distribution channels via horizontal acquisitions. Notably, GroundForce Capital-backed Systm Foods acquired Humm Kombucha in January 2024 (undisclosed), which marked the final of three add-on transactions for the portfolio company since 2022. “After COVID, we anticipated that strategics would focus on their core businesses and capital for emerging brands would dry up….We saw an opportunity to create a platform where a few great brands could profitably grow together,” explained Mark Rampolla, Co-Founder and Co-Managing Partner of GroundForce Capital, in a press release.¹¹ The firm made two transactions in 2022, went dormant in 2023, and has re-entered the market in 2024, demonstrating financial buyers’ emerging comfortability with transaction financing costs and consumer strength. Select recent transactions are outlined below.

• 1-800 FLOWERS.COM Acquires Card Isle (May 2024, $3.5 Million) – 1-800-FLOWERS.COM (Nasdaq:FLWS), an Ohio-based e-commerce platform operator providing gifts across a portfolio of brands, acquired Card Isle for $3.5 million in May. Card Isle is a venture-backed, Virginia-based personalized greeting card provider operating through automated kiosks and e-commerce channels. The transaction is expected to expand 1-800-FLOWERS.COM’s gift offerings and bolster its print-on-demand and personalized greeting card offerings. Card Isle’s portfolio is complementary to the 1-800-FLOWERS.COM’s existing brands and products; consumers can customize cards with gift baskets already offered by the firm. The firm emphasized the acquisition’s role in its broader strategy to address all end markets and increase frequency of repeat purchases by expanding offerings at lower price points. “With Card Isle, it does give us an offering that are at the low price points that consumers can interact and visit us more frequently,” said William Shea, 1-800-FLOWERS.COM’s Senior Vice President, Treasurer, and CFO, in its fiscal year Q3 2024 earnings call.¹²
• Razor Group Acquires Perch (March 2024, Undisclosed) – Razor Group, a German-based leader in Amazon (Nasdaq:AMZN) aggregators, acquired Perch, the top U.S. aggregator, for an undisclosed amount in March. The merger has further positioned the Razor Group as a top aggregator worldwide with more than 40,000 products selling across key brands in various DTC channels, according to a press release.¹³ The announcement comes shortly after Thrasio—previously the premier Amazon aggregator in the space with $3.4 billion raised from creditors and investors—filed for Chapter 11 Bankruptcy in February, moving Razor to the top spot with $2.1 billion raised, according to Marketplace Pulse.¹⁴ The deal highlights Razor’s focus on competition with Chinese consumer-to-manufacturer (C2M) models. “In contrast to our peers, our focus has been to build the Western response to Chinese vertical C2M models like Temu and Shein, rather than an internet version of P&G [NYSE:PG],” explained Tushar Ahluwalia, Razor Group’s Co-Founder and CEO, in the press release.
• BRITA Acquires LARQ (February 2024, Undisclosed) – In February, BRITA acquired LARQ, a digitally native San Fransisco-based brand of self-cleaning water bottles and water purification systems. Terms of the transaction were not disclosed. Based in Germany, BRITA produces and retails drinking water filters with products spanning drinking bottles, kitchen faucets, water dispensers, and filter parts. Its end markets include individual consumers as well as businesses such as cafes, bakeries, and fine dining establishments. BRITA marks the acquisition and expansion in the North American market as a key step in its global Shaping Sustainable Solution strategy that aims to grow its e-commerce presence and footprint.

To discuss the lasting impacts of COVID-19 on e-commerce growth strategies, provide an update on your business, or learn about Capstone's wide range of advisory services and E-Commerce sector knowledge, please contact us.

Andrew Woolston, Associate, was the lead Market Intelligence contributor to this article.

Endnotes

1. The Conference Board, ”US Consumer Confidence Rose in May,” https://www.conference-board.org/topics/consumer-confidence, accessed May 31, 2024.

2. United States Census Bureau, “Estimated Quarterly U.S. Retail Sales (Adjusted): Total and E-Commerce,” https://view.officeapps.live.com/op/view.aspx?src=https%3A%2F%2Fwww.census.gov%2Fretail%2Fmrts%2Fwww%2Fdata%2Fexcel%2Ftsadjustedsales.xlsx&wdOrigin=BROWSELINK, accessed May 31, 2024.

3. Pew Research Center, “Americans’ Use of Mobile Technology and Home Broadband,” https://www.pewresearch.org/internet/2024/01/31/americans-use-of-mobile-technology-and-home-broadband/, accessed June 26, 2024.

4. Capital One Shopping, “Mobile eCommerce Statistics,” https://capitaloneshopping.com/research/mobile-ecommerce-statistics/, accessed June 26, 2024.

5. Wayfair, “Event Details - Bernstein Strategic Decisions Conference,” https://investor.wayfair.com/events-and-presentations/event-details/2024/Bernstein-Strategic-Decisions-Conference-2024-1XA11osaQU/default.aspx, accessed June 10, 2024.

6. Wayfair, “Wayfair Announces First Quarter 2024 Results,” https://s24.q4cdn.com/589059658/files/doc_earnings/2024/q1/earnings-result/2024-05-02-EX-99-1.pdf, accessed June 5, 2024.

7. Beyond, Inc., “Beyond, Inc. Reports First Quarter 2024 Financial Results,” https://investors.beyond.com/files/doc_news/2024/05/EX-99-1-Q1-24-Press-Release-EDGAR-FINAL.pdf, accessed June 5, 2024.

8. Beyond, Inc., “Q1 2024 Beyond, Inc Earnings Conference Call,” https://investors.beyond.com/news-events/events-and-presentations/events/event-details/2024/Q1-2024-Beyond-Inc-Earnings-Conference-Call/default.aspx, accessed June 5, 2024.

9. Internation Council of Shopping Centers (ICSC), “New ICSC Study, “The Halo Effect III: Where the Halo Shines,” Quantifies How Physical Stores Drive Online Sales,” https://www.icsc.com/news-and-views/icsc-exchange/new-icsc-study-the-halo-effect-iii-where-the-halo-shines-quantifies-how-physical-stores-drive-online-sales, accessed June 1, 2024.

10. United States Census Bureau, “Supplemental Estimated Quarterly U.S. Retail Trade Sales (Not Adjusted, Millions of Dollars) – Total and E-Commerce,” https://view.officeapps.live.com/op/view.aspx?src=https%3A%2F%2Fwww.census.gov%2Fretail%2Fmrts%2Fwww%2Fdata%2Fexcel%2Fsupptsnotadjustedsales.xlsx&wdOrigin=BROWSELINK, accessed May 31, 2024

11. Business Wire, “GroundForce Capital Completes Beverage Roll-Up Strategy with SYSTM Foods’ Acquisition of Humm Kombucha,” https://www.businesswire.com/news/home/20240111286058/en/GroundForce-Capital-Completes-Beverage-Roll-Up-Strategy-with-SYSTM-Foods%E2%80%99-Acquisition-of-Humm-Kombucha, accessed June 1, 2024.

12. 1-800-FLOWERS.COM, Inc., “2024 Third Quarter Results Conference Call,” https://event.choruscall.com/mediaframe/webcast.html?webcastid=jYnS8MCW, accessed June 1, 2024.

13. PR Newswire, “Razor Group Acquires US Amazon Aggregator Perch and Announces Series D Financing Round,” https://www.prnewswire.com/news-releases/razor-group-acquires-us-amazon-aggregator-perch-and-announces-series-d-financing-round-302080402.html, accessed June 10, 2024.

14. Marketplace Pulse, “Amazon Aggregators,” https://www.marketplacepulse.com/aggregators, accessed June 5, 2024.