Consumer Retail M&A: Building Durable Competitive Advantage

Chris Moynihan (00:02):

Welcome to Solomon Connects. I’m Chris Moynihan, a director in the M&A group, and today I’m joined by Jeff Derman, co-head of our Consumer Retail group. Jeff, welcome to the podcast.

Jeff Derman (00:11):

Thanks, Chris. It’s great to be here. First time on Solomon Connects — hopefully not my last. Looking forward to the conversation today.

Chris Moynihan (00:19):

Yeah, we’ve been doing a lot of these, and we’ve gone to speak with all of our newer industry groups. Consumer retail is obviously a little bit different. You’re the first group that we had at the firm — the heritage of Solomon. So, why don’t you talk a little bit about…since you joined…and how the group’s evolved since you joining?

Jeff Derman (00:37):

Yeah, happy to. I joined in the summer of 2009. It was the height of the great recession at that point, and people were wondering: Is the American consumer ever going to fully recover? It was a bit of an existential moment for the sector and for the industry overall. Certain subsectors that I covered were just decimated. I saw deals in process die. I had signed transactions terminate. But when things did come back, the disruptions weren’t over. In fact, retail has been defined by continuous disruption, and that’s… post-recession austerity…then the rise of e-commerce… Amazon’s dominance — and then, after some seeming quiet, of course, COVID, supply-chain chaos…most recently, tariffs, and so on. But notably, the sector’s adapted every time. Resilience is the defining characteristic of this industry, and it’s gratifying to see great management teams help it evolve. We are rooted in the retail sector, as you know.

(01:41):

When I joined, we were really more of a corporate-oriented firm. We did a lot of strategic buy-side work with a number of industry leaders and that gave us terrific insights. What was winning and why and what was losing and why. And our sector expertise made us the go-to trusted partner for boards and owners to figure out how to navigate everything as markets and trends shifted. As we’ve scaled, we’ve become a little more tilted toward sell-side work, and leading retailers continue to seek us out for getting the best outcome possible for that final monetization event. It’s also included more public company work. You know that from your perch in the M&A group, where we often collaborate, and that’s a lot of reliance on our senior team’s longstanding experience. I will say one thing that hasn’t changed over my 17 years, it’s our device being rooted in deep industry expertise.

(02:39):

It’s our insights on where the consumer is going, not just where they’ve been recently. It’s the vision into understanding where M&A can provide a superior outcome to our clients and equally where it cannot. We try to be very candid and clear with our boards and owners in answering those questions. And look, if there’s a deal to do, one thing that hasn’t changed is the environment remains incredibly complicated — more complicated today than it ever was. And we need to be as tenacious as we’ve always been to get deals done. 

Chris Moynihan (03:15):

And maybe picking up on that last theme — even within the last five years, there’s been a lot of changes in your sector. So, you had COVID in 2020 and the shutdown of many retailers, and they had to contend with that. Then, subsequently all the supply-chain issues — and inflation, tariffs, recently. So, as you talk to those different constituencies — the large public clients, the brands — how are they navigating that sustained unpredictability, where it seems like every year there’s something else that’s influencing or changing their business from a macroeconomic perspective?

Jeff Derman (03:49):

Looking back at that most recent existential threat, tariffs, skilled operators have found a way — and that’s really management’s battle testing, working their way through all the different threats that you talked about. They’ve learned the skills to cope and adapt. And, so, in the most recent one with tariffs, they counter sourced from new geographies. They figured out how to put through tactical price increases. Of course, those increases have been largely borne by consumers, and we see that with, as the Fed pointed out, 2025 tariffs impacting core goods’ PCE prices by +3.1% — but ultimately that’s a way that they’ve been able to cope. From the consumer’s perspective. Because I think it is all about the consumer at the end of the day — how have they navigated the uncertainty? We’ve all heard about the K-shaped economy. The high-end consumer remains active in spending. The lower-end consumer is really bearing the brunt of inflation and prioritizing non-discretionary spending, but everybody at every level is being more deliberate about how and where they spend.

(04:55):

Given this backdrop — what sets the best companies apart? Well, one thing we’ve been writing about: Scale is a strategic weapon and a powerful buffer against that next dislocation, whatever it might be. And why does that matter? Well, certainly it’s leveraged with suppliers. It’s centrality, if that’s a word, with your customers. It’s a lower cost of capital. It’s the scale to make capital-intensive bets, and be OK if they don’t go as planned. The market also interestingly has taken notice of what scale provides — and I’m going to give you a few interesting stats: Ten years ago, the top three public retailers accounted for 37% of all the sales across those top hundred and 37% coincidentally of the market cap.

(05:58):

Today, or at the end of last year, the top three have moved up from 37% of sales to just under 50% of sales, but their market cap is nearly two-thirds of the top hundred. So, what does that mean? Investible dollars are chasing the winners because they recognize investors recognize all those structural benefits that scale brings. But beyond scale, there’s also value, and some of the winning businesses really have figured out how to tap into everyone’s desire for value at all levels — and that’s giving people what they need or feel emotionally connected to for a price they deem fair. It’s not always about the lowest price. It can be about a feature or material. It can be about love for a particular brand that drives you to pick that product from that brand because it connects to you. Now, clearly, affordability pressures have mounted, and so, across the board, options at lower prices have drawn more people at all levels, and value-seeking does feel like it’s becoming structural, not just a temporary phenomenon.

(07:06):

Both Walmart and Dollar Tree in the last year have been calling out all the share gains they’ve been making with households making over $100,000. And you think Dollar Tree, the deepest discount of the discount markets, is drawing people who have options to spend at different levels. So, that’s another area. How do you tap into the consumer-wide view of value as an important driver? The final thing I point out about who’s winning is: Who are those parties who have operational agility? After six years of supply-chain uncertainty, companies need to have backup plans to their backup plans; and inevitably, there’s going to be that next surprise. I don’t know what it is. If you do, I’m happy to hear about it, and I’m happy to tell my clients. But having operational degrees of freedom when your competitors don’t is a strategic weapon, whatever that looks like.

Chris Moynihan (08:00):

I like the way that you framed out the winners and who’s doing well in this environment and able to handle all the uncertainty that you’re seeing in the market. As we look into the second half of the year, and look forward, where do you think the M&A activity will be from those winners? Are they looking to acquire and continue to gain scale so they can continue to attract investible dollars? Are some of the ones that you mentioned that are more agile and have refocused their supply chain — are they now switching into an offensive mode, where they can do acquisitions? How are the CEOs thinking about the M&A opportunity?

Jeff Derman (08:35):

Yeah, well, certainly scale continues to be a driver — and if you have it, you want more of it. And we’ve seen that across the board — and particularly with the larger enterprises, they also have the flexibility to acquire scale and some of the peripheral capabilities that will allow them to continue to separate themselves from the competition. Years ago, we used to talk about — back when e-commerce was really was on the rise — should our clients buy some technology infrastructure company? Ultimately, the vast majority of them decided it’s much better to rent rather than buy. You can allow that company to then amortize its development cost across a number of different companies — and you’re always just getting the best technology out there versus putting all your chips down on one particular party. What we have seen now is that when it comes to AI and the investment cycle — and I think we’re going to get to some deeper questions associated with it — the bigger parties will have the flexibility to build scale around technological differentiation, whereas mid-scale companies won’t have that ability to do so.

(09:42):

So, the drive for scale isn’t going anywhere. We’re going to continue to see that whether it’s about consolidation among the leading parties in any given subsector — or it’s about bringing in more capabilities if you’re a bigger, well-capitalized company. One of the things we also see as a big trend, though, is the counterpart to scale is complexity and sometimes lack of focus. We’ve also seen portfolio optimization as an increasingly important tool for management teams and boards. In an ever more complex world, you have to pick your spots — and where are you unable to achieve your ROI goals? Where might assets find better value with a different owner? Do you have a business that’s just flat-out underperforming non-core or slow growth — and do you really have a reason to believe that that business is going to be better tomorrow than it is today? So, that’s been a core driver — and given broad market stresses, boards and owners have been more inclined to act around monetizing or optimizing their portfolio.

(10:47)

Examples we’ve seen recently: LVMH announced its divesting Marc Jacobs. When Wolverine was pruning its portfolio, we helped a client of ours, DBI (Designer Brands Inc.), buy Keds. There’s examples that go on and on, associated with making sure that you have the right complex of products, services, capabilities, banners, et cetera, to optimize the dollar and time capital that you’re able to deploy.

Chris Moynihan (11:14):

Jeff, you recently co-hosted the 14th annual Consumer Retail Dinner. I got to be there and listen to you moderate, and it was great to hear you talk with some legendary brand-builders. What struck me as interesting from that conversation was the topic around AI. They really emphasized the human component in building their brands. And I know AI is a big conversation topic — people are talking about in every industry — and I’m curious what you’re seeing in your industry. Where has AI been a useful tool for all the different retail companies? Where is the human component still important for these businesses?

Jeff Derman (11:48):

Yeah, it’s a really interesting question — and that was a fun event. A little nerve-racking to be in your shoes — moderating, not my day job. I have a greater appreciation for you sitting on the other side of the table here. Just for people’s background, at that event we had Mickey Drexler who, of course, ran Gap and J. Crew, and is now running Alex Mill with his son, and Stephen Silverstein who runs Spencer Spirit, the parent of Spencer and Spirit Halloween. And so, it was a great honor to be able to spend that time with them. Human intuition was a core theme for them in our discussions, as you point out, and they spoke passionately about the, quote, “merchant instinct,” unquote. And that’s about product passion, that’s about obsession, that’s taste and judgment, right? Mickey, in particular, has bemoaned the fact that the financial guys have become too prominent in product decisions.

(12:42):

He’s argued the industry should not relegate merchants to the second or third place in decision-making. I agree with him. Zeros and ones can’t replace gut instinct. And when it comes to creativity and taste, AI tools are not anywhere close to what experienced humans are able to do. A human creator knows what it means to feel passion for something, and skilled creators know how to bring that out in other people. However much AI tools are evolving, I just don’t see that coming anytime soon. But that being said, there are many places where AI is making an impact or will very soon. Our clients are looking to use AI both to drive revenue and to manage down costs. And on the revenue side, some early examples I can point to — they’re looking to sharpen their merchandising decisions. So, they’re incorporating hundreds of signals, things like weather, social trends, competitor moves — just onslaught of information they can take, absorb, and put into some algorithm that allows for greater localized assortment planning as well.

(13:48):

Beyond that, what’s really interesting is, you’re familiar with SEO. Now you have to worry about GEO — generative engine optimization — and it’s a really important effort that customers or clients have to undertake. That ensures that product collateral — that their imagery, that ratings — are all packaged in a way that it’s easy for chatbots to discover and display. So, overall, it’s becoming less about just putting a bunch of stuff out there in your store and knowing a customer’s going to buy something from you. It’s really making sure you’re discovered in the right place at the right time, given how people are changing the act of discovery. On the cost side, there’s a lot of fertile territory — that’s inventory optimization, supply-chain routing, back-office efficiencies. It’s a little bit simpler because at the end of the day, you just need to make sure your operations continue seamlessly and that you save money.

(14:40):

It’s less about how  it looks to the consumer. I’ll give you a few stats just to point out how this is coming on fast and furiously: Amazon is saying their CapEx budget this year is $200 billion, 200 B, billion, with a lot of that going to agentic AI, and you can contrast that $200 billion with the market cap of the vast majority of retailers and it dwarfs just about everybody but for a few. McKinsey says agentic commerce may drive up to $1 trillion of retail sales in the US just by 2030. So, if that’s anywhere close to correct, there’s a lot to chase there. But it’s not all roses in the early days, we know that. S&P last year reported that 42% of companies abandoned most AI projects in 2025 because they just didn’t deliver the ROI. And McKinsey said that while 88% of organizations use AI in at least one function, only 6% of those deployments are, quote, “high performers,” unquote.

(15:46):

What does that mean? Make a difference from an EBIT perspective. There’s a lot of promise. There’s a lot of FOMO. There’s a lot of chasing. There’s going to be a lot of winners. There’s going to be a lot of losers. It is a huge initiative. So, just to bring it back to the dinner topic and what we heard from Mickey and Steven — look, building a brand that resonates emotionally, one that engenders loyalty deserves a premium — is still fundamentally a human endeavor: that merchant instinct, that curating and trusting your gut. But AI is here to stay. Execution discipline around those AI tools is going to be critical, not just the technology itself. You can’t just plug it in and hope it’s going to be OK. You have to have a vision for where it can make a difference and know where to stay away when it can create problems.

(16:36): [Can we cut this and the first line in response to Chris? Or does it sound off?]But, one way or another, it’s evolving incredibly rapidly. Hopefully, I can be on your 2027 post-dinner podcast debrief — and ask me about it then, because it’s going to be probably entirely different than anything I say it might look like today.

Chris Moynihan (16:52):

Well, on that same podcast, I’ll probably ask you about this next question as well. So, we’ve talked a lot about companies and management teams and what they’re dealing with — but the other side of the equation, which your group talks about a lot is: What is the consumer doing? For example, Gen Z and its embrace of brick and mortar, which is very much a reversal of a trend that we had seen going back five, 10 years ago. What are the other trends that you’re seeing in the market with the consumer today and how is that impacting the retail sector more broadly?

Jeff Derman (17:20):

Yeah, well, let’s start with your question around the counterintuitive trend of Gen Z going back into stores. And it makes that constant drumbeat I’ve heard over my career — of the death of physical retails right around the corner — look a bit silly, as it always does. But with two Gen Zers in my own household, I can, in fact, see it for myself. But look, there’s some interesting stats — and by now, you know I like my stats. There’s some interesting stats that probably go beyond my non-statistically significant household example. YouGov has reported that Gen Zers are about twice as likely to shop in stores as the overall population; and over half of Gen Zers say they like to browse in stores versus 42% for all adults. So, it’s not an overwhelming shift, but it is a steady drift back to the physical store. People like the opportunity to touch the goods, try them on, hang out, enjoy the experience, and many retailers are increasingly seeing stores being integral to their overall brand building efforts — sometimes even more important than being able to convert the sale.

(18:29):

So, the dollars are following. Folks like Uniqlo, Coach, Ralph Lauren, they’re adding cafes to give an even stronger incentive to people to walk in the door and experience that brand. Spirit Halloween thrives on a carnivalesque atmosphere that just can’t be replicated online. The overwhelming experience of going in the door and seeing all this together, and the animatronics — an online experience just will never get there. I’ll throw one more interesting thought in the conversation. We’re used to those of us who have covered the consumer retail space; the concept of overstoring in this country. What does that mean? Too many stores for the demand, and we’re going to have to continue to see the shutdown of stores. There’s still pressure in that way — particularly as malls continue to struggle — but there’s actually been sluggish strip-mall construction, and some are predicting there could be a retail real estate shortage by the end of this decade.

(19:29):

That seemed inconceivable to us a few years back, and that would be quite the twist. So, look, put it all in a bow. Once again, the death of physical retail has been incorrectly foretold, and it’s good to see our clients finding ways to make the most of that inaccurate assessment to their benefit for the long term.

Chris Moynihan (19:48):

To wrap up, what are the key conversations you’re having with your strategic clients, and how are you advising them and thinking about the back half of the year?

Jeff Derman (19:57):

Look, I’d frame it in two buckets, and it depends on whether or not we’re talking about selling or buying for our clients. Sometimes, by the way, those are one and the same. As you know, clients often think about the broad range of strategic and financial alternatives, and we’re always happy to help them think about the right path forward based on their situation. But whatever our advice is, it’s always grounded in our decades of experience and our view that honesty is always the best policy in that advice we’re giving. It’s not about what people want to hear, but what do we believe is the most accurate assessment of the reality of the external and internal situation that they’re facing. But specifically on the buy-side, we’re really pushing teams to be disciplined about what they need to get out of an acquisition, and to think about it in a very deliberate way, and specifically, around the following attributes, in the following order: strategic, operational, financial, and then cultural attributes.

(20:55):

And too often that order gets flipped or people start with the financial side — certainly, when cash was effectively cost-free because interest rates were low, everything looked accretive and you could merge two businesses that had no strategic rationale together, and say, “Yeah, but it’s accretive, but does it make any strategic sense?” So, we really want to focus with our clients on the buy-side about: Does this make strategic sense? OK, can you operationally manage it? OK. Then, financially, does it make sense, and then, culturally, is it going to be a good fit for you and your management team and the people you’re acquiring? If it checks all those boxes, great. On the sell-side, the conversations are a bit different. We’re helping boards contextualize this complex external environment, and just as importantly, how does that external environment then manifest itself in value, right? (21:57):

Sometimes people get grounded in what used to be the case, and, it’s really about where we are going tomorrow. We do try to identify, particularly on the sell-side, drivers that can help our clients enhance value, and equally, the red flags that can detract from it. And when we’re asked about timing or exit prospects, we try to be very clear-eyed about this. If it’s a scarce, high-quality asset that we know will create competitive tension, we’ll say so. If there are structural issues and more limited prospects, we’ll say that directly too. We believe over-promising and under-delivering is a bad long-term business strategy for our practice, and we’ve really built our practice on that high-integrity advice. How we’re advising them for the back half of the year, one of the key aspects is preparedness, and that’s just become increasingly more important over the course of the post-COVID era. As we said in our annual outlook, the one certainty that we can promise is that there will be another period of uncertainty to show up and since you couldn’t tell me several questions ago exactly what that’s going to look like, it remains uncertain.

Chris Moynihan (23:11):

Still thinking.

Jeff Derman (23:12):

OK, we still have time. And if there are strategic actions that you can take to create buffers to that uncertainty, whatever it is, now more than ever, those actions are worthy of consideration. Stepping back, we view M&A as a critical tool for building durable competitive advantage.  Uncertainty creates opportunity, but only for companies that are willing to move. Our job is to make sure they’re moving with full information and the benefit of expert, honest advice so that they can achieve that durable competitive advantage for the long term.

Chris Moynihan (23:55):

Jeff, thank you very much for your insights. This was really great. I will hold you to one thing. I think we’ll have to make this an annual tradition after the retail dinner every year, that you come on and give your insights.

Jeff Derman (24:05):

Well, I appreciate it, Chris. I now better understand what it’s like to be on the other side of the mic, and so it would be a pleasure to be back with you a year from now and talk about what’s transpired in the course of 12 months. I still do want to hear from you, maybe offline, what’s that next uncertainty, and we can make a side bet on what that’s going to be.

Chris Moynihan (24:27):

I’ll let you know next year.

Jeff Derman (24:28):

OK. Yeah, that’s fair. Very good. Thank you, Chris.

Chris Moynihan (24:31):

Of course. And to our listeners, thank you for tuning in. Be sure to check out solomonpartners.com for our consumer and retail trends and M&A insights..com for more insights, and we’ll be back next month with another M&A update.