How to Conduct Retail Due Diligence + Checklist

The challenges that face retail companies all over the world are well known. Most outlooks for the industry are far from rosy, with a recent UBS report suggesting that 80,000 retail stores will close by the end of 2026. 

In an environment like this, the due diligence underpinning investments is more important than ever.

DealRoom’s due diligence platform helps investors in the retail space on an ongoing basis to navigate the increasingly stormy waters. In this article, we look at this process as well as providing a checklist of what investors should look out for.

Buy-side retail due diligence

When the term ‘retail due diligence’ is used, it typically refers to the analysis conducted by the buy side into a retail company’s operations and financials. 

In this article, we also pay more attention to the perogatives of the buy side. In the checklist below, the emphasis is on what the individual tasks the buy side needs to conduct. Essentially, every step should be taken to ensure that the company being required is adequately equipped to be successful in the increasingly challenging global retail environment.‍

Sell-side retail due diligence

Sell-side retail due diligence, as the name implies, is the preparatory work conducted by the sell side that essentially facilitates buy-side due diligence.

For example, knowing that the buy side will want to see previous years’ audited financial statements, sell-side due diligence will make obtaining these documents a priority. Or, given how sustainable supply chains are now such an important issue, sell side due diligence might involve collecting documents that attest to the sustainability of the company’s supply chain.

Why is retail due diligence important?

All due diligence is important, but its importance increases when the company being analyzed is operating in a more complex or challenging context. Although the retail environment is not particularly complex, for a number of years now it has been among the most challenging of all environments to conduct business.

Retail is no longer a case of ‘build it and they will come,’ so retail due diligence is an absolute necessity. Its importance can be summarized as follows:

• Movement to online: The global transition to ecommerce is well underway, and is now approaching a quarter of all retail sales. Retail due diligence will aim to establish how well the target company is positioned to deal with this transition.
• Changing customer preferences: What is that customers want? We’re continuously told that they want experiences, but what does that mean? Retail due diligence will seek to address the value that the target company brings to the customer.
• Competitive advantage: Ultimately, the barriers to entry in retail are miniscule compare to other industries. Retail due diligence aims to assess how safe a retail company is in its competitive environment.

The retail due diligence checklist

The list below is far from exhaustive, but provides some indication of the detailed analysis that should be conducted by anybody considering an investment in retail:

1. Financial due diligence

(see also DealRoom’s financial due diligence checklist here)

1. Previous three years’ financial statements and tax returns.
2. Trend analysis of financial results (paying particular attention to seasonality).
3. Working capital analysis (e.g., how is the company’s inventory turnover?).
4. Analysis of the company’s capital structure, and its evolution.

2. Competitive environment analysis

1. Who are the company’s major competitors?
2. What advantages does the company have over there and new entrants?
3. What is the company’s value proposition to customers?
4. Is the company’s success dependent on a current trend or a longer-term trend?

3. Analysis of Company’s long-term assets 

1. What is the company’s income per area of commercial real estate?
2. What is the company’s return on capital?
3. In what condition is the company’ s real estate stock (bricks and mortar real estate is notorious for requiring regular renovation).
4. Are there underperforming real estate assets?
5. How have different units performed over the past three years?

4. Contracts and Suppliers

1. Is the company operating any franchises and what do these entail?
2. Who are the company’s suppliers and is their supply chain sustainable? 
3. In addendum to this question - who are the second- and third-tier suppliers in the supply chain and are they operating sustainably?
4. Does the company have any exclusivity agreements with suppliers?
5. How secure are the suppliers’ own operations? 

5. Sales and marketing

1. How does the company generate sales and how effective is this process?
2. Is the company’s marketing potential maximized?
3. Does the company position itself differently to others?
4. Who is the company’s target market and how effectively does it reach them?

6. Information technology

1. How effective are the company’s POS systems? Do they need to be updated?
2. What are the company’s agreements with 3rd party platforms (e.g. Amazon)?
3. Does the company have an ecommerce platform and how is it managed?
4. What inventory and smart asset management software is used according to a company’s overall management strategy?
5. In addendum to the above, how well does the company perform in inbound logistics?
6. What kind of customer service channels are in place to deal with customer returns, complaints, etc.?
7. Is the company maximizing its ecommerce potential?
8. Is the company using in-store technology of some form?
9. Is technology a key part of the company’s customer value proposition?

7. Inventory due diligence

1. Does Target have adequate safeguards against inventory theft?
2. What is inventory turnover?
3. How many times during a certain period the Target’s inventory must be fully replenished?
4. Are the items included in inventory were properly costed
5. Determine the accuracy of the cost of goods sold
6. What are the inventory reserves? (Assess the adequacy of those reserves.)

Conclusion

Rumors of retail’s demise have been greatly exaggerated.

Retail, even in bricks and mortar form, will continue to offer a revenue-generating outlet for investors into the future for a simple reason:

Shopping in the physical world is one of the world’s most popular leisure pastimes. That’s not to say that investing will not become increasingly challenging. Retail due diligence is essential for anybody considering taking this leap.

Talk to DealRoom about how we can aid you to ensure successful investments during unprecedented challenges for the retail sector.