Investors are on Cloud Nine for retail solutions

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Private equity investment in the ecommerce technology market is surging. Last year saw another record for European software mergers and acquisitions (M&A), with 460 transactions completed, a 10 per cent increase from 2016 – and up from just 210 deals at the start of the decade, according to figures from Mergermarket. The total value of deals disclosed rose to $11.2bn, another record, and up from $4.7bn the year before.

There are signs that this momentum will continue through the rest of the year, with appetites undiminished and over $1.8trn of dry powder held by PE funds at the end of Q2 2018, up 11.6 per cent year to date, according to Preqin.

A significant part of that activity is in the ecommerce space. In 451 Research’s recent Corporate Mobility and Digital Transformation survey, 26 per cent of respondents had plans to deploy or upgrade digital commerce software over the next 12 months, putting it among the highest customer engagement applications surveyed.

Examples of this activity include: Insight Venture Partners recently announcing its $1.25bn acquisition of Episerver; Adobe’s $1.68 billion acquisition of Magento’s digital commerce platform announced in May; Salesforce’s purchase of Demandware for $2.8bn; and, biggest of them all, Oracle’s purchase – for $8.7bn – of NetSuite. In fact, there has been an unprecedented level of M&A activity in this space since 2010 with IBM, Oracle, SAP and Salesforce alone having spent in aggregate well over $20bn

Two things are striking about the deals we have seen. The first is that many, if not most, of the targets for acquisition are cloud-based solutions, whether it’s Demandware’s cloud ecommerce platform or NetSuite’s ERP and omnichannel commerce software. The second is the increasing activity from private equity buyers in the space.

In 2017 alone, we saw GTCR and Sycamore’s $1.06bn purchase of retail supply chain management software and hosted integration firm CommerceHub; Vista Equity Partners’ purchase of Marketo’s marketing automation software as a service (SaaS) for $1.7bn (just recently acquired by Adobe for $4.75bn); and EQT Partners $1bn purchase of experience and content management firm Sitecore Corporation. There were many smaller deals too, such as GB Group’s $97mn acquisition of real-time customer data SaaS business PCA Predict, on which Pagemill Partners advised.

Overall, private equity buyers accounted for almost one in three deals in 2017 and 45 per cent of the disclosed deal value over the year. With prices up to 11 times revenue (Magento and Demandware) and over 30 times EBITDA (CommerceHub), retail software companies, particularly the SaaS businesses and the cloud computing infrastructure underpinning it, are in demand from both strategic as well as financial buyers.

Solutions for every business

In part, this is simply down to the phenomenal rise in ecommerce. Its value is expected to increase by almost two-and-a-half times from $1.85tn recorded in 2016 to $4.5tn by 2021, according to Statista. And a rising tide lifts all boats.

The focus on cloud services and solutions, however, is not so easily explained. Rather, it reflects the power of the cloud model for retail. First, cloud computing provides essential scalability for ecommerce platforms to cater to the changing demand and scenarios of the market. It enables the rapid upscale or downscale of the services according to the demand, traffic and seasonal spikes. Cloud also provides the ideal solution for the scalable architecture needed by modern retail businesses. As the market continues to expand, it’s vital that businesses have the capability to adapt to customer needs, fluctuating demands in peak seasons and higher volumes of sales.

At the same time, cloud services offer flexibility and relieve retailers of many of the technical challenges involved in providing a seamless multi-channel retail experience for customers. Mobile devices now account for 60 per cent of global ecommerce sales, according to eMarketer, and, according to Gartner, more than half of ecommerce sites will integrate technologies from over 15 vendors to deliver a digital customer experience this year.

Outsourcing that task to cloud service providers makes this far simpler and allows retailers to focus on their strategy and customer experience. They also make it easier for retailers to deliver a true multi-channel shopping experience where consumers can interact and receive a consistent service from brands across social media, their smart phone, tablets and in store.

The benefits are most obviously felt by small businesses: startups can employ the cloud to get to market quickly and cost-effectively, without the investments required to build, maintain and update their own systems in-house. But cloud solutions are proving equally attractive to established retailers, many of whom are struggling to adapt legacy systems to new channels and consumers’ growing expectations of multi-channel integration.

A key area of investment and focus for online merchants is into better understanding and influencing shopper behaviour through digital analytics and loyalty solutions. Customer insight and intelligence is more critical than ever in the online world, where pricing transparency means customer loyalty is often in short supply. Digital analytics platforms which track and provide insights into customer journeys across social, mobile, web as well as physical channels (mail, stores) enable merchants to better understand the customer experience and to tailor individual customer journeys. Customer engagement and loyalty solutions focus on drawing customers back into the online store through any combination of targeted offers, customer reviews, surveys, digitally re-targeted ads and loyalty awards, amongst other increasingly ingenious technology-enabled means.

Cloud technologies are being used in all these scenarios to add increased flexibility to solve some of the integration challenges or being used separately to expand into new markets or launch new brands, without further complicating the legacy architecture.

Global online sales are expected to expand 20 per cent CAGR through 2022, making up 17 per cent of the value of all global transactions, according to analysis by 451 Research. As online retail grows, consumer expectations will be shaped by the digital leaders, making it hard to predict the precise solutions that retailers will need to address these demands. We can say with some certainty, however, for online retail, the cloud is here to stay.

Rory O’Sullivan, Managing Director, Pagemill Partners, a Division of Duff & Phelps
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