Guest Column | July 2, 2018

Adjacencies, Convergence Are Now The Name Of The M&A Game

By Bahige El-Rayes, A.T. Kearney

Nation’s Largest HIE Merger

With interest rates finally heading up in the U.S. and around the world, the drive for U.S. retail companies making innovative acquisitions to stay relevant is becoming ever more evident. In A.T. Kearney’s recent study on Retail and Consumer M&A, we found more optimism than ever about the value of acquiring smaller, innovative companies. Nearly three-quarters of executives we surveyed reported making acquisitions to access new customer bases and geographies, expand their product portfolios, and, most notably, acquire new capabilities — a show of confidence that was up from 48 percent the previous year.

Bearing this out, M&A deals have been on the rise every year since 2009, while private equity forms are still sitting on piles of dry powder and brick-and-mortar retail companies reporting record amounts of cash. Legacy companies are fighting for a relevant future as they search for new markets, new consumers, and new ways to grow — and M&A seems to provide a viable solution.

However, in looking at the current M&A model — large company acquires small, innovative startup with a loyal and outsize customer base — it’s clear these acquisitions will have to take on a new attitude. Simply swallowing whole these small companies and expecting them to conform to a huge, traditional corporate culture is not only disadvantageous, it’s missing the entire point of acquiring them in the first place. Our study clearly shows companies that have traditionally stood on their own need to seek convergences with these smaller companies, while finding adjacencies among industries and sectors.

Convergence And Adjacency Deals In Retail

Convergence deals not only blur the lines between online and physical channels, but pave the way toward more industry-adjacent opportunities. In a classic example of a convergence deal, Amazon’s acquisition of Whole Foods dominated M&A headlines last year. And while there are signs of traditional M&A changes taking place in Whole Foods, the ecommerce giant has also been taking its lessons on specialty food retailing and incubation. Amazon has been using its clout to explore grocery delivery, adding another adjacent industry to the mix.

While this may seem innovative, Alibaba had paved the way two years earlier by launching Hema, a high-end Chinese supermarket, which reinvents grocery shopping in a seamless blend of online and offline experiences. Tech and retail have converged here with full-service grocery and in-store dining opportunities, online ordering capability — which account for more than 50 percent of Hema’s total orders — and customer data collection. It’s still unclear whether the Hema chain is profitable, but this points to another aspect of the “new” M&A that major retailers will need to get under their belts: In order to innovate and expand, a lot of failure has to happen along the way.

An Innovative Approach To Acquisitions

Retail companies can start by targeting acquisitions that have already made their mark by developing adjacent segments, new technologies, or innovative marketing approaches. But from there, traditional retailers need to identify and learn from what makes these smaller startups so successful, moving beyond the buy-and-hold mentality to truly converging with the younger company’s mindset. Here are three strategic approaches that can help retail companies get the most from their M&A ventures:

  1. Look for Synergies. As the acquiring company, you can of course offer these smaller acquisitions efficiencies that will allow them to scale up more quickly. But be on the lookout for ways they can bring efficiencies into your organization. They may have a low-cost, social-driven go-to marketing approach that could connect customers to your existing brands and save you marketing dollars.
  2. Reverse integrate the acquired company’s areas of excellence. There are bound to be pockets of talent and excellence that made this startup so successful in the first place — find them and ask these innovators to show you and your entire organization what they know, how they did it, and whether it can be adapted to your bigger structure. One of the key advantages these small companies have had is agility which plays out in the fact they can bring a new product to market twice to three times faster than legacy companies. Let them teach you how they do this. Other examples include their use of social and digital to find and bring in customers, and, as mentioned above, their ingenious and often low-cost marketing techniques. Remember, these companies got started on scraps, and they can bring that leanness to the table for your advantage.
  3. Always put relevance to the customer first. Without customers, there would be no retail. Zoom in on how and why your newly acquired company resonates so deeply with their customers. You can use that resonance to introduce their customers to your other brands by helping them to protect and grow that base. By doing this in a sensitive way you will be forging relevant connections to them.

Finally, retail companies need to understand M&A in this new incarnation is characterized by many fast failures. By investing often and keeping the acquired company’s ethics close, those failures will eventually lead to successes.

About The Author

Bahige El-Rayes is a principal in the consumer and retail practice of A.T. Kearney, a global strategy and management consulting firm. He can be reached at Bahige.ElRayes@atkearney.com.