When news broke of a retail acquisition between two UK supermarkets, Sainsbury’s and Asda, there were many mixed reactions. At the time of writing, Sainsbury’s is the 2nd largest UK retailer with Asda in 3rd place. The tie up would build a huge retailer, similar in size to Tesco – who fill the number 1 position in the UK, and number 11 globally according to Deloitte.
Tweets were keen to identify the fact that they have different a customer base to each other and therefore will turn shoppers off. Meanwhile, plenty of observers were quick to point out specific examples where both brands had stores in close proximity. It appeared that some people perhaps assumed that this was a deal agreed over a couple of beers on the Friday night. Which in turn, perhaps would explain how news came out on the Saturday I suppose! :).
The “everyday analyst” isn’t always right
While Twitter makes for some entertaining reading, they may not necessarily be up to speed with how this sort of business actually happens. Certainly when I have consulted or advised on these sort of changes, there are many moving parts, all unseen, all with the risk of becoming dangerous.
So, making a retail acquisition isn’t a quick decision. I’m sure you can appreciate that!
There are many aspects to be considering. Reports suggest that there are still 15 months before the Sainsbury’s / Asda deal completes demonstrate the amount of work to be done. Oh – and that’s just to get the purchase over the line which means the integration work can then start in earnest.
So, what are some of the key considerations in making a retail acquisition?
Does the Proposed Retail Acquisition Align to the Strategy
There are many potential reasons for one retailer purchasing another. The same is true for mergers and partnerships too. There are generally 4 overarching goals to achieve through a retail acquisition:
- Expansion – increasing the reach and scale by buying into new territories or new niches. This could also be with a view of buying the locations that a retailer holds.
- Profitability – either pure increases to the bottom line or through increasing margins by making cost efficiencies with the combined companies.
- Investment – investing in growth businesses could be to get a better ROI (return on investment) than other options or it could be a higher risk gamble for the future.
- Capability – retailers are often seen acquiring smaller businesses that have a complex skill mastered. This can be a way to generate retail growth quickly and reliably.
By buying another business, a retailer has the ability to quickly fulfil an element of their strategy. If it doesn’t fit with their strategic vision, it’s likely to be a much bumpier ride along the way.
What to Consider Before Striking a Deal
There are many aspects that need to be reviewed before even getting to the stage where a completion date is set. It is essential to dive into the details on finances of course. It will also be important to check the operational health of the business. Stakeholder management will be important as there are 3rd parties that need to play their part. Finally, it will be important to start building the plan for once the deal goes through. Making the adoption or integration successful is ultimately what the whole activity is about.
All of these aspects should be tied back to the overall goals of the retail acquisition. The reason for purchase changes how you would want to consider each element.
Financial Health
Probably one of the most obvious considerations when making a deal to lead to retail growth or to fulfil another strategic goal. What are the aspects that need to be considered along the way to check good financial health?
Cashflow
This can often be the cause of business failure, in particular retail business failure. Retailers have a high volume of monthly or weekly payments, such as rents and staff salaries, compared to other industries. Does the cashflow make sense or is there trouble in the immediate future?
P&L (profit & loss)
How has recent performance been? Does there a growth trajectory or has the business stabilised? If this is the case, then perhaps it is hitting it’s peak or perhaps waiting on a major investment to infrastructure before continuing to the next stage of it’s life?
But reviewing the financial health is wider than a review of the most recent set of accounts. You’d also want to be considering:
Forecasts
What is the future of the new business (and of the buyer’s business too in fact). Will combining businesses boost total sales through effective collaboration? Or would they cannibalise each other, swapping market share between them?
Asset review
It’s no surprise that businesses are often bought for huge sums of money, but just what is it that you’re getting for all of that money? This detail needs to be carefully considered. It’s also important to consider IP (intellectual property) here too. This IP could include patents, designs, trademarks and website addresses.
Liabilities review
Occasionally, you’ll hear of businesses being sold for £1 or $1. Bargain, right? Not necessarily though – especially when you consider the liabilities or debts that you would inherit. This could include pensions, commitment to property rents and rates, staff salaries, tax bills and a whole raft of pitfalls.
Operational Health
Finances in order? Check.
You’ll also want to make sure that the operations are going to be a good fit before making a major investment.
Customer propositions
Adding another retail business to an existing one could be good or bad from a proposition perspective. If the brands will combine and become one, will both sets of customers be happy to become one? If they’ll stay as separate brands, will there even be any opportunity for combining propositions? How will customers feel if presented with two similar but different offerings from the same company? For example, if a particular SKU is being sold for different prices, or perhaps variation in the cost of delivery fees.
Alternatively, there are other considerations if the deal has been made to take advantage of a new niche or capability. How will existing offerings be positioned alongside new propositions? Where would the synergies be? Will it be confusing for customers?
Operational assessment
The buyer and the seller need to see how each business works. This is important to ensure a good fit between the operations. What is essential to deliver the customer propositions? Is there an operating model in place – or is activity driven in a reactive manner? It will be important to understand the intricacies of the operation as much as possible too. For example, what are the KPIs (key performance indicators) and how do they drive behaviours, decisions and successes? How robust is the operation to deal with changes or disasters?
It is important to understand as much about the ways of working as possible before completing on a retail acquisition. Think about buying a house – you’d want to do a survey to understand as much as possible before putting your money down, right? The same is true here (just for a lot more money).
Operating model integration
Now that you understand the operation, do the two businesses have similar operating models?
There could be opportunities for aligning operating models and building collaborative shared working groups. Removing duplication can deliver substantial cost savings from both operating models.
Once a deal is complete, the focus will be on the integration. The planning has to start before the deal is complete. This sort of retail programme or project is perhaps one of the largest and most complex available. There are many different stakeholders, each presenting completely different points of view. The integration project team need to define different workstreams and align them. Risks are abundant throughout. There can also be contractual deadlines and milestones that have to be delivered.
Keeping diverse operating models
Building a larger business can often result in cost efficiencies by integrating both to use the same operating model. However, there are also reasons for not doing this.
If the overall goal is to buy in new capability through this retail acquisition, the aim here should be to change as little as possible with the operation. After all, the expertise is the whole reason for the purchase so why would the inexperienced want to walk in and set out new “efficient” ways of working? The knowledge and trade secrets that are being purchased could be lost completely.
What can and cannot be changed may be defined by the negotiations and contracts. These terms may also give timescales to protect the smaller business.
Getting Other Approvals Before Completing the Retail Acquisition
Other people may need to review and approve big business decisions like this before it can go ahead and complete. The 3rd parties who still have a say can include:
Regulatory reviews
There are a number of regulations which a retail acquisition would need to pass before it can complete. Regulatory review will look to maintain competitive marketplaces and check that if the deal itself is ethical. To do this, government bodies and official trade organisations may want and need to check the terms and consequences of the purchase.
Shareholder agreement
Larger businesses aren’t unfortunately able to go about making important decisions in the boardroom alone. A major investment, such as a retail acquisition, will need to go to the wider shareholder vote before it can complete. For publicly listed companies, with many small shareholders, this vote can be easily swayed. The press and media coverage can be as influential as the official facts.
Deal Done and Complete. Now What?
Once the retail acquisition has officially completed, the fun can really start.
Retail projects to actually do the integration can start. There will be considerations of systems, people, processes, procedures and policies.
This is the stage where the complexity ramps up. The business plan will miss targets if the integration doesn’t happen correctly. The purchase will not deliver on the goals and that is a path towards pain and anguish. This is when both sides will need expert Retail Project Managers to guide the direction and get things done.
Speculation starts as soon as a retail acquisition is announced (or even rumoured). Behind the scenes, there will be many people jumping into the discussions to firstly get to the deal and secondly make the integration successful. The real direction will not be confirmed for a number of months. It will then be even longer before you can see the difference. In the meantime, all eyes will be on the everyday analyst’s view of what could happens with a combined Sainsbury’s and Asda.
About the Author
Oliver Banks is an expert at delivering retail change projects and programmes. He has experience in programme managing and advising on the integration of retail operations. He’s familiar with the type of challenges they present along the way. When taking these on, he blends classic project management techniques from PRINCE2, PMBOK and Lean Six Sigma with a dose of pragmatism and business reality to ensure these important retail projects are led, managed and delivered successfully.
