Private Equity and Retail: An Ideal Match?
Private equity’s growing impact on the retail industry epitomizes this statement. With private equity (PE) investments continuing to impact, innovate, and reinvigorate troubled industries, the retail sector has made it to the top of their shopping list. The approach, on the surface, looks quite straightforward: huge investments are made to buy retail companies, which are then turned private, and the business is overhauled to finally sell these companies later at a profit. UK’s retail industry is more than attractive, as far as business growth is concerned. If executed right, retail and PE firms’ combinations can create new opportunities for more significant gains when the market rises. This implies that in a bullish market, a retail investor is expected to beat the market by a significant margin based on the investments made in each retail segment – distributors, building supply, grocery and food, online, general, and special line or specialty retailers.
The cash flow in retail businesses is yet another compelling reason that attracts acquisitions for investment firms. These reliable cashflows can be leveraged for debt obligations (for three years) until the time comes to sell. Unlike passive investors, the primary goal of PE firms with such investments goes beyond just a buy-to-sell approach as they focus more on revamping and improving the management and competitive position of a specific retailer. That said, the success of such PE investments stem from rapid performance improvement that necessitate technology-driven transformations in a short span of time.
Technology Transformation: A Flywheel for Value Creation
Keeping cost reduction, talent upgrades, and financial engineering at the core of all transformation efforts, PE firms in the UK have mastered the art of value creation for their portfolio companies. They draw on their business experience and financial connections to set up strong, highly motivated executive teams to drive the transformation. While PE firms orient themselves on driving performance related KPIs such as revenue acceleration, operating margin improvement, and cash flow optimization, retailers seek technology partnerships to improve sales and customer experience, engage employees, optimize operations, and reimagine their products and services. From a horizontal technology charter, the retail industry is accelerating digitalization for improved customer experience, sustainable operational efficiencies, and strengthened cybersecurity across the value chain. To win in the digital era, retailers need to up their game with the leading digital transformation enablers:
- Robotic Process Automation (RPA): Retailers can turn even small process improvements into huge savings with automated functions for store planning, inventory management, product categorization, business and sales analytics, and customer support management. RPA has also been instrumental in supply chain digitization for better visibility and the agility required to meet the ever-changing demands.
- Cloud Computing: The de facto operating model for businesses today, cloud computing is deployed to achieve scalability, resiliency, agility, and cost management. While developing their multi-cloud strategy, retailers can choose hyperscalers for specific use cases.
- Blockchain: Consumer trust is of utmost importance in the retail business. That said, blockchain technologies have emerged as a savior to circumvent issues related to transparency and auditability, building trust, and fostering customer loyalty. With blockchain applications, retailers can streamline their supply chain; reduce counterfeits; handle, secure, and decentralize customer loyalty program data; eliminate financial inefficiencies and reduce transaction costs.
- Augmented Reality/Virtual Reality (AR/VR): These technologies can help retailers deliver interactive and immersive experiences in the metaverse for customers. AR and wearable computing solutions are a great way to ensure business continuity and keep the frontline workforce safe, connected, and secure in remote setups.
- Digital Twin: Retailers can improve productivity, visibility, and efficiency across the enterprise through digital simulation. The technology also focuses on ensuring reduced waste and carbon footprint.
Technology in Action
Putting theory to practice, food-to-go retailer, Pret A Manger, is rewriting its success with a strategic digital transformation initiative. With Tech Mahindra as its technology and digital transformation partner, Pret A Manger is enabling service transformation to a truly global operating model. As part of the ongoing transformation program, the retailer will focus on technology transformation for streamlining and optimizing its IT infrastructure through cloudification, systems re-engineering, consumerization of IT systems, and data engineering.
Profitability with the Private Equity and Retail Combination
PE firms have been a ray of hope for retailers struggling to survive and thrive in a highly competitive climate. However, successful investments boil down to how efficient a retailer is, how smooth its operations are, how much technology it has implemented, revenue, margins, P/E ratios, and more. With an eye on maximizing potential market profits, choosing the right partnership is just as important as choosing the technology itself. To set enterprises up for future growth and success, Tech Mahindra is committed to enabling end-to-end digital transformation for global customers by delivering innovative and customer-centric digital experiences.
