by Alison A. Nieder
The M&A activity for the apparel sector will continue to remain strong. Because macro-economic data—including per-capita disposable income, confidence levels and unemployment rate—are improving, the emphasis will most likely stay on high-end contemporary and luxury categories. Brands that offer great value and have strong brand recognition will survive purely based on their strong, willing buyers. Others won’t.
In addition, there is plenty of capital to support other M&A. However, the players will change. We will see strategic buyers who are well-informed and knowledgeable build smarter and more agile enterprises. These strategic players with strong cash reserves will take advantage of great M&A opportunities, which will allow them to acquire new products and gain additional market share. Although the Fed has announced that the interest rate will increase, it hasn’t happened yet. Therefore, I don’t believe that the Fed increasing rates will have a material impact on M&A activity because these smart buyers still have ample time to adjust accordingly.
I do foresee a consolidation in our industry by the end of this year among those larger retail players that are working on small margins with high debt and losing market share. These large players and manufacturers with high sales concentrations could either self-liquidate or file for bankruptcy because they have been merely surviving on a prayer. They were hoping that the interest rates do not rise and this unprecedented period of easy monetary policy did not end because it gave them the ability to borrow and meet their cash needs, but fundamentally they did not borrow to create a stronger brand. That was their mistake. The leadership within these enterprises is driven by short-term goals versus building a brand with a strong financial base. Hence, as the era of easy money comes to an end, these enterprises will also follow.
This turmoil will create tremendous opportunities for growing companies that have carved out a niche for themselves with new merchandise and new channels of distribution such as the foreign markets. Those who target the larger players and seize the opportunities of market penetration will continue to create a further consolidation in our sector.