Future Direction Of Retail M&A Predicted In Lululemon’s Acquisition Of Mirror

Lululemon, the lifestyle athletic apparel retailer, just announced it has inked a deal to acquire the in-home fitness company Mirror company for $500 million. While it’s not such a big deal in scale, it’s huge in scope and vision for the retailer.

In a statement, Lululemon CEO Calvin McDonald said, “In 2019, we detailed our vision to be the experiential brand that ignites a community of people living the sweatlife through sweat, grow and connect. The acquisition of MIRROR is an exciting opportunity to build upon that vision, enhance our digital and interactive capabilities, and deepen our roots in the sweatlife.”

The all-cash deal is expected to close in the next one-to-two weeks, after which Mirror founder Brynn Putnam will continue to lead her company as a standalone business.

With the pandemic closing gyms, Mirror became a much sought-after alternative for fitness enthusiasts, giving in-home market leader Peloton a run for its money. The wall-mounted Mirror technology, which broadcasts live classes, on-demand workouts and personal training sessions, retails for $1,495 and subscribers pay $39 per month to stream services.

Lululemon expects Mirror’s revenues to reach $100 million in 2020, as compared with Peloton, which is guiding year-end revenues of $1.72 billion to $1.74 billion. Further, Peloton expects its connected subscribers to exceed one million by year’s end, whereas Mirror’s are said to number in the “tens of thousands,” in this in-depth Forbes profile of the company.  

It’s a deal that many could have seen coming, as Lululemon was an early investor in Mirror and Putnam got her introduction to Lululemon’s version of the “sweatlife” as a Lululemon ambassador. Further, Lululemon partnered with Mirror to offer sweat and meditation classes with its ambassadors through the in-home platform.

And it’s an expansive scope acquisition that takes a retail company like Lululemon into a new adjacent experiential services market.

Acquisition in scope not scale

Such a scope acquisition is what Kearney predicts is the wave of the future for M&A in its latest 2020 Consumer and Retail M&A Report. Traditionally, consumer and retail M&A deals have focused on scale acquisitions that simply expand market share in an existing market segment.

This acquisition diversifies Lululemon from a primarily athleisure goods retailer with experiences on the side into what the company describes as an “omnichannel ecosystem” that connects its sweatlife community wherever and whenever they desire.

While both brands will still sell things, it is a paradigm shift for Lululemon which now fully becomes an experiences-first, product-retailer second company, not the reverse.

“In the short term, it is not about massive scale and reach but instead deepening the relationship with their consumers across their entire fitness journey,” shares Dave Knox, author of Predicting the Turn, and who advises corporations on innovation.

“Lululemon’s acquisition of Mirror is a prime example of adjacent innovation, much like the moves that Under Armour made several years ago with their acquisitions of MapMyFitness and Endomondo,” he continues.

Changing shape of M&A’s

Merger and acquisition deals hit a speed bump this year as the coronavirus pandemic intensified. According to Forbes’ Sergei Klebnikov, first quarter 2020 was the worst period for M&A deals since 2016.

Financial market tracking firm Refinitiv shows worldwide M&A value fell 25% from first quarter last year. In the U.S. the decline was even larger, off 50% year-over-year in total value.

Narrowing to look only at consumer and retail M&As, Kearney found M&A activity reached its high in 2008 at $512 billion, then dropped precipitously in 2019 to $154 billion. It steadily climbed back to $469 billion in 2016, then took another sharp drop to $191 billion in 2019.

What’s changed from 2016 to 2019 in consumer and retail M&A deals is first, a rise in midsized deals ($100 million-$1 billion) and second, a shift from scale deals that grow market share in an existing market to scope deals that diversify into adjacent markets or expand capabilities.

Scale-type deals declined from 71% in 2016 to 44% in 2019, while strategically-expanding scope deals grew from 29% in 2016 to 56% in 2019. But since the value of M&A deals dropped so much over those three years, the total value of scope deals still declined from $136 billion to $107 billion in 2019.  

Looking toward M&A deals to pick up later in the year, Refinitiv’s head of M&A Cornelia Andersson predicted that rescue deals and restructurings will dominate. Private equity firms, hedge funds and other major investors will be looking to pick up troubled companies on the cheap, or as the Kearney report described, “bargain assets that show potential for turnaround.”

Undoubtedly, there will be a lot of bargain assets available, but are they the best bets for M&A in the post-pandemic market? Likely these bargain-asset targets will be more scale than scope, but that is the last place M&A money should be invested in given the warp-speed of change in the consumer and retail market.

What’s needed is not more business, but business model innovation

Just growing market share through scale M&As is so old-school, believes Predicting the Turn’s Knox. Scale deals aren’t going to take the acquiring company into the future, but keep it anchored in the past.

That future scope-changing potential is what justified Unilever paying upwards of $1 billion for the Dollar Shave Club it acquired in 2016.

“This wasn’t a scale deal for Unilever. They were a big business already. It was a scope deal of diversifying its omnichannel approach and to go direct to consumer,” he shares. “If you are looking only at growing market share in a scale deal, you are ignoring the biggest threat to consumer brands: these markets are being redefined.”

Newly-emerging companies like Dollar Shave Club or Mirror are not hindered by their past, but are creating the retail market’s future.

“This is a wake up call. Now is the time to swing, to take advantage of the changes and do something different,” Knox says. “We’ve always been good at looking at our competition. But we’ve been very bad a looking at adjacent companies and what they could mean to our businesses. Those adjacencies can have unexpected consequences for our existing businesses.”  

In conclusion, the Kearney M&A report, based upon polling 100 consumer and retail executives, stressed the future for M&A is to focus on business-model innovation through scope deals, rather than market-share growth through scale deals.

“The crisis reinforces how vulnerable many business models are to unforeseen shifts in supply chain, consumer channels, and local demand. Here again, the pandemic didn’t create new trends as much as it accelerated existing shifts,” the Kearney report states.

Unfortunately, in the current market where cash-rich companies and investors are going to have many scale-type pickings to choose from, the best adjacent, expansive, scope-type targets are going to remain thin on the ground.

Lululemon is wise to have pulled the trigger early on Mirror. “The last few months have made this sort of innovation even more important as brands diversify their business models and revenue streams,” Knox declares.

“Lululemon was already going down this path by offering fitness classes in some of their stores. Now they can have a similar relationship with consumers in their homes through Mirror,” he concludes.