The period 2008/2009 has been characterized as “The Great Recession”, referring to the global economic crisis that began in December 2007 increased throughout 2008. Though there remain serious economic challenges in Europe (Greece, Ireland, Italy, Spain, Portugal, Hungary) there are hopeful signs of improvement in the retail sector in the United States. Online merchants, in particular, seem to be well on their way to recovery here in mid-2010.

Tully & Holland is a United States investment bank that advises on mergers and acquisitions (M & A) and private placements. The firm specializes in consumer product manufacturers and distributors, multi-channel marketers, and retailers. The managing director of Tully & Holland, Stuart Rose, recently released a comprehensive report updating the Internet Retail industry overall and reporting on trends in the M&A internet retail market.

Despite the very difficult challenges of 2009, especially and including losses and restructuring for small and medium-sized businesses, the fourth quarter of 2009 showed strong signs of growth in the fastest growing sectors of the retail industry. Conversely, the M&A sector continued to struggle, although Tully & Holland predict slow but steady growth in this area over the next five years.

Tully and Holland studied the retail marketplace for the years of 2001 through 2008 before summarizing 2009 and making forecasts for 2010 and beyond. One benchmark used in the 2009 summary document was Compound Annual Growth Rate or CAGR. Although the CAGR of Internet sales grew 18.6% from $34.5B to $150B between 2001 and 2009, the actual annual growth rate declined to a near-negative rate in 2008. Other findings for total retail sales and e-commerce include

• E-commerce grew as a percentage of total retail sales from 1.1% in 2001 to 3.7% in 2009.
• Online retailers enjoyed a very strong Q4 in 2009 over Q408 with YOY (Year-Over-Year) sales increasing 14.6%. That increase represented 4.3% of total retail sales.
• Publicly-traded internet retail companies experienced large increases in their stock prices, increasing 130% from February of 2009; contrasting with the S&P 500 Retailing Index which increased about 70% in the same time period.

Merger and acquisitions for Internet retail did not fare as well in 2009, reporting an overall decline of 37% in deals from a total of 57 deals in 2008 to only 36 deals in 2009. The decreased availability of credit brought on by the financial sector crisis, as well as a weak overall U.S. economy are thought to be the major causes for the drop in M&A activity. There were five major transactions which comprised the majority of deals: Retail Convergence, Zappos, NextRx, Circuit City, and Ticketmaster.

The message from Tully & Holland for SMB Internet retailers is that along with growth will come increased competition and reduced prices and margins. To avoid becoming a target for acquisition, SMBs should concentrate on increasing their brand recognition, strengthening their supply chains, and upgrading their financial performance.