Consumer Markets deals insights

Q4 2018

While 2018 started with uncertainty around North American Free Trade Agreement negotiations, momentum in Consumer Markets picked up as the year progressed. With 247 transactions in Consumer Markets in 2018, deal volume declined by 13.9% over the 287 deals in 2017. Deal value was up by 57.8%, rising to CA$25.4 billion in 2018 from CA$16.1 billion in 2017.

The surge in deal value was largely due to blockbuster deals like the Stars Group Inc.’s acquisition of United Kingdom-based Sky Betting & Gaming for CA$6 billion, Canadian Tire Corp. Ltd.’s purchase of Norway-based Helly Hansen for CA$1.3 billion and Empire Co. Ltd.’s CA$800-million deal to buy Farm Boy Co. Inc.

Deal activity did slow in the fourth quarter of 2018, with both deal value and volume down significantly in comparison to Q4 2017. With 52 deals announced in Q4 2018, deal volume fell by 34.2% from 79 transactions in Q4 2017. Similarly, deal value (CA$2.5 billion in Q4 2018) was down by 32.3% from the CA$3.6 billion recorded in Q4 2017. Comparing the numbers to Q3 2018 (68 transactions valued at CA$10.8 billion), deal volume and deal value fell by 23.5% and 76.9%, respectively, in Q4 2018. With those trends in deal activity in mind, what were Consumer Markets companies up to last year?

Major trends for 2018

Consumer Markets companies shifted toward a strong focus on convenience and orienting their businesses around customer attraction and retention in 2018.

Early in the year, for example, Sobeys Inc. announced plans to partner with Ocado to boost its e-commerce offerings. With Ocado’s warehouse expected to be up and running by 2020, Sobeys will soon be able to deliver groceries to customers’ front doors.

In Q3 2018, Walmart Canada Corp. moved to collaborate with Instacart on offering same-day delivery in Winnipeg and Toronto. The partnership with Walmart Canada followed a similar move by Loblaw Cos. Ltd. in 2018 to work with Instacart. Costco Wholesale Canada Ltd. also kicked off home delivery in 2018 by partnering with Instacart.

Similar to Amazon.com Inc.’s Prime offering, companies like Loblaw, Lululemon Athletica Canada Inc. and Wayfair Inc. have introduced paid loyalty programs in recent months. Benefits include free shipping, two-way delivery and other discounts.

While paid subscriptions can buy loyalty to some extent, the true game changer will be customer experience given that, in the long run, commoditized purchases will be a big driver of e-commerce. Many companies are making significant moves on the experience issue as well, as seen in decisions by retailers like Walmart Canada and Canadian Tire to introduce self-serve robotic pickup towers in their stores for online purchases. Walmart Canada is also making other changes to enhance the digital store experience, including personalized shopping suggestions, discounts for in-store pickup and easy returns.

Other companies focusing on experience include Casper Sleep Inc., which has launched stores that let customers schedule naps and test out mattresses before making a purchase.

The focus on experience and delivery has trickled down to the cannabis sector as well. In Q4 2018, cannabis retailer Namaste Technologies Inc. signed a deal with Pineapple Express Delivery Inc., which offers a same-day delivery service platform for medical and recreational cannabis to licensed producers across Canada. Pineapple Express has launched services in Manitoba and Ontario and has plans to expand to other provinces.

While investing in experience is a big focus, labour shortages are a growing concern for Consumer Markets players. Technology can be a partial solution to that problem, but the need to offer quality experiences and earn customer loyalty will require a human touch.

Consolidation was another significant theme in 2018. The year kicked off with Cara Operations Ltd. (now known as Recipe Unlimited Corp.) acquiring Keg Restaurants Ltd. for CA$326 million and MTY Food Group Inc. closing its CA$273-million Imvescor Restaurant Group Inc. acquisition. Overall deal value in the restaurant category was down significantly in 2018 over 2017, which included RBI Inc.’s CA$2.3 billion acquisition of Popeyes. There was still significant deal volume in 2018, with MYT Food Group continuing to lead the way on the number of acquisitions in the restaurant category.

In Q4 2018, Empire, the parent of Sobeys, completed its acquisition of Farm Boy. Farm Boy not only offers local fresh food, meat and a robust private-label selection, but it also has a ready-to-eat meal selection that will help Empire compete with the likes of Loblaw, Metro and Longo’s, which have opened sit-down eating areas and cooking stations aimed at adapting to changing consumer consumption patterns. While many consumers want to eat out, they also want to control how much they spend, which is a desire grocery stores can help fulfill with their lower meal costs in comparison to sit-down restaurants.

Other examples of consolidation in 2018 include Sleep Country Canada Inc. acquiring Endy (CA$88.7 million) and Canada Goose Holdings Inc. moving into footwear with its acquisition of Baffin Inc. (CA$32.5 million). Q4 2018 also saw the merger of Sporting Life Inc. and Golf Town Ltd., primarily to drive joint investments and efficiencies in staffing and technology.

The year also featured moves by Canadian companies to extend their global reach, so much so that the value of outbound deals (CA$9.7 billion in 2018) was up by 70.2% in 2018 over the CA$5.7 billion recorded in 2017. Outbound deals represented 38.2% of deal value in 2018, versus 35.4% in 2017.

During the year, Saputo moved forward with its expansion in Australia, while Lululemon increased its presence in Europe. Other moves included Canadian Tire’s acquisition of Helly Hansen and Canada Goose’s decision to open a flagship store in China.

The recent move by Canada Goose came amid strained political relations between Canada and China at the end of 2018. The political situation has created challenges for some Canadian companies in China recently, which may lead some to take another look at expansion plans there for the time being. But in the long run, it will likely be difficult for brands to ignore the Chinese market. Companies forging ahead in China include Hershel Supply Co., which in late 2018 entered into a partnership with Starbucks Corp. to offer products such as carryalls and mugs.

Q4 2018 also saw Shopify Inc. acquire Swedish e-commerce platform Tictail and Saputo’s purchase of United States-based F&A Dairy Products Inc. for CA$111 million.

Impacts on real estate

The changing environment in Consumer Markets is having a rising impact on the real estate sector. The challenges in the real estate sector accelerated in 2018 with the closure of anchor locations operated by Sears Canada Inc., and stores operated by specialty retailers such as  Nine West, Bombay, Bowrings, Rockport, Town Shoes and Crabtree and Evelyn, although Canada has seen a resurgence of independent stores.

In 2018, RioCan Real Estate Investment Trust disposed of 19 assets as it also moved to pre-empt the growing e-commerce threat by converting malls to hybrid spaces that bring together residential units, retailers and co-working areas.

RioCan is aiming to generate 10% of its income, over the next decade, from residential complexes, which is a big change for a company that is synonymous with shopping centres. RioCan has pointed to 43 properties that it will transform into residential buildings in six major cities across Canada.

Changing demographics, particularly due to rising urbanization, are also helping to spark a move to locating retail stores closer to increasingly dense residential areas. That, in turn, is leading to different retail setups from what has been common in the past. Some retailers, for example, are moving into second-storey spaces and reducing store sizes, at least in Canada’s major cities. Retailers making such moves include well-known companies like Loblaw, Longo’s and Sobeys, as well as newcomers like Organic Garage Ltd., which has been opening stores in downtown Toronto.

How we can help

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This range of experience gives us a strong understanding of the issues retail and consumer companies are facing across the entire supply chain, from manufacturer to final consumer purchase.

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Consumer Markets quarterly deals insights

Contact us

Michelle Pickett

Deals Lead Partner, TMT & Consumer Markets, PwC Canada

Tel: +1 416 815 5002

Brooke Valentine

Partner, PwC Canada

Tel: +1 416 687 8141

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