Market Pressures Create Retail Diamonds in the Rough

Heading into 2026, middle-market dealmakers had their sights set on persistently resilient sectors like business services and manufacturing.

Retail, on the other hand, has been consistently ranked as the industry least expected to experience an uptick in deal activity this year. ACG’s Q3 2025 Market Pulse Survey, its 2026 Outlook Survey, and its Q1 2026 Market Pulse Survey all found as much.

“I’m not surprised by the surveys,” says Mike Ross, U.S. consumer markets deal leader at PwC. “Retail certainly is tough right now.”

Want to hear more of what PwC’s Mike Ross has to say about retail M&A? Listen to the Middle Market Growth podcast.

Recent PitchBook data puts weight behind that sentiment, finding a 10-year low for consumer M&A in the middle market in Q3 of last year, as well as a 10-year low for PE-backed consumer businesses going public in 2025.

The findings may suggest a bleak outlook for retail-focused dealmakers. Ross notes that in the nearly 25 years he’s been at PwC, he’s never seen such a challenging retail environment—but he also warns dealmakers not to write off the industry entirely: “All those challenges are also where the opportunity tends to emerge.”

The Current State of Retail

Recognizing the industry’s nuances is vital to understanding where retail opportunity exists, says Ross. “It’s important to recognize that retail isn’t just one market. It’s a collection of markets,” he says. “Grocery, value, apparel, specialty luxury—they’re all operating under very different consumer dynamics. Understanding those differences is critical when you’re evaluating M&A opportunities.”

Gordon Brothers, a retail-focused investment firm, remains “bullish” on the market. Consumer sentiment is one driver of continued optimism in the industry. “Interestingly, consumers have remained resilient in a challenging market,” notes Gordon Brothers Chief Investment Officer Frank Morton, despite economic uncertainty and market disruptions like tariffs and rising energy costs. A Conference Board poll released in February supports this finding: While consumers reported pessimism with regards to inflation and the cost of goods, the Conference Board consumer confidence index actually increased.

Where and how consumers are spending their cash, however, has seen dramatic fluctuations in recent years.

The consumerization of sectors like pharmaceuticals now sees shoppers buying prescriptions the way they purchase other consumer products. The integration of financial services like lending on e-commerce platforms has raised the bar for what experience consumers expect at checkout. The lines are blurring between retail and other industries, says Ross, while the introduction of artificial intelligence has presented retail businesses with an opportunity to understand and even anticipate shopper trends, while wielding high-quality data as a competitive advantage.

For retail businesses able to pivot, evolve, and embrace such dramatic changes, growth opportunity remains strong.

And even for those struggling, investors can still find ample opportunity. “Overall, we are seeing robust activity across the retail sector, and as clear ‘winners’ and ‘losers’ emerge, this creates a significant opportunity in terms of financing acquisitions, restructuring engagements, liquidity events, and long-term investments,” says Gordon Brothers Head of Brands Tobias Nanda.

Carve-outs, Take-Privates, and Turnarounds

Ross says PwC has been tracking an uptick in deal value within retail M&A despite a flattening of deal volume thanks to several recent high-ticket transactions.

Perhaps most notable was Sycamore Partners’ acquisition of Walgreens Boots Alliance last March in a deal valued at about $10 billion.

Other large transactions include Authentic Brands’ acquisition of a majority stake in Guess for $1.4 billion in August, as well as Dick’s Sporting Goods’ purchase of Foot Locker in September for about $2.4 billion.

“We’re seeing larger transactions, which often happens at the beginning of an M&A cycle as dealmakers pursue first-mover advantages now that translate into a pickup in midmarket activity,” Ross says. “Some of the largest deals in 2025 have been take-privates and turnaround situations.”

The opportunity uncovered by distressed investors has been particularly large in the retail space, creating what Nanda describes as a bifurcation in the market.

One group of acquisition targets includes companies experiencing significant growth and in need of capital to weather macroeconomic factors and take advantage of aforementioned opportunities to meet changing consumer demands, like investing in AI or enhancing the customer experience at checkout.

The other group, he says, may be in distress due to market uncertainties, rising costs, and an inability to adapt to the changing environment. For potential acquirers, this means an opportunity to reimagine business models, revive a business, or cherry-pick valuable add-ons for existing platforms.

The hobby and craft supplies market is a good example of this split. Last month, Round 2 Holdings, backed by middle-market private equity firm Praesidian Capital, acquired Lionel. The transaction formed Lionel Brands Group, consolidating its model train and collectibles platform. Though a niche segment, the model trains sector is expected to grow at a 16% CAGR through 2029.

On the other hand, craft retailer Michael acquired the intellectual property and private label of Joann last June, after the fabrics and craft supplies store filed for bankruptcy and shuttered all locations. Though the reasons for Joann’s decline are numerous, analysts highlight the brand’s inability to offer a competitive e-commerce experience as a key factor—not a decline in the crafts market. (Indeed, Michael’s plans to increase its yarn assortment by 25% in 2026 to meet consumer demand.)

Carve-outs and take-privates have also emerged as promising avenues within retail as corporates rethink their own approach to market and offload non-core assets to weather rising inflation, elevated interest rates, and geopolitical uncertainty. For example, Monomoy Capital Partners, which announced last month it signed an agreement to acquire Jiffy Lube from Shell for about $1.3 billion, allowing Shell to focus on its core energy operations.

Pressure Creates Diamonds

Retail’s current challenges make for an undeniably difficult M&A environment. But “difficult” does not equate to “nonexistent.”

As dealmakers expect activity to pick up in the middle market, they must be highly selective and juggle numerous key considerations, including changing consumer trends. According to PwC, high-income households account for a growing portion of overall spend yet are still most likely to make a purchase on promotion. A younger generation of perpetually online shoppers has raised the stakes for e-commerce and logistics. And consumers are increasingly prioritizing an interactive, relationship-building experience with their favorite brands.

While there are plenty of pressure points for retailers, there are just as many opportunities to embrace the change and come out on top. For middle-market dealmakers, understanding the consumer, enhancing back-office operations, and taking advantage of the convergence with other industries will drive dealmaking, though experts warn there is no one way to approach the market.

“The biggest mistake that could be made right now is to underwrite a deal based on the ‘average consumer,’” says Ross. “I’m using quotes here, because I’m not even sure what an average consumer looks like.”