Legacy Retailers Need a New Acquisition M.O.

2018 is expected to be another record year for mergers and acquisitions (M&A) in retail. However, what's unique is the types of deals that will be driving the market. Three-quarters of the executives surveyed for A.T. Kearney's 2018 Consumer and Retail M&A Report said that they're using acquisitions to help their companies acquire new capabilities, expand their product portfolios, and access new customers and geographies.

The means for deals are certainly there, but for retailers to truly benefit from new acquisitions, they need to dig into their motives. Consolidation is no longer a means to drive bottom-line growth. Future-focused retailers instead need acquisitions that can align their companies with changing consumer needs, and tee them up to capitalize on new buying patterns.

The best way to do so? By targeting acquisitions that have mastered adjacent consumer segments, new go-to-market models and new technologies. That's step one. Then to truly kick-start top-line growth, legacy retailers need to identify what makes these acquisitions so successful, and infuse those learnings across the rest of their organization.

The Retail M&A Rally Takes a Breather in 2017

Consumer and retail M&A activity has been on the rise since 2009. Last year activity leveled off, with 2017 deal value down 16 percent overall from 2016 levels. However, when you exclude “mega” deals valued at $30 billion, value was down only 2 percent.

The biggest deals highlighted both ends of the strategic M&A spectrum — that is, consolidation and convergence. Amazon.com's $13.7 billion acquisition of Whole Foods provided a prime example of convergence and using M&A to capitalize on adjacent opportunities. For example, the e-commerce heavyweight is already exploring how to use Whole Foods to improve its on-demand food delivery services.

Instead, the goal remains top-line growth. After years of disruption and ceding market share to innovative upstarts, industry stalwarts are ready to test the age-old notion that the best defense is a good offense. Eighty percent of the consumer and retail executives we surveyed noted that traditional retail and consumer product businesses will be active in the M&A market this year. For many that means driving growth by aggressively pursuing targets that have mastered different consumer segments, innovative go-to-market models, and new technologies or brands. This will include convergence across traditional sectors and will become a fundamental part of the new growth model.

Optimism from those at the top is certainly contributing to the M&A market’s resilience. Our annual survey asked executives whether M&A has helped create, destroy or maintain value at their company. An overwhelming 71 percent of respondents reported that M&A is creating value, up significantly from 48 percent last year.

Changing Your Acquisition M.O.

Retailers looking to acquisitions to ignite their own growth need to take a new approach that goes far beyond a buy-and-hold mentality. To get the most from acquisitions, you need to:

1. Think of reverse integration. Your acquisition is going to have pockets of excellence and talent. To really drive growth across your entire organization, identify what those are and allow these new experts to teach your company what they know. Examples of these pockets of excellence include product development, speed to market, agile marketing techniques, and their use of digital to capture consumers.
2. Stay relevant to customers. Laser in on why the acquired company's products resonate so deeply with its customers. Help it not only protect and grow that base, but also find ways to introduce those new customers to your other brands.
3. Take advantage of synergies. To be sure, the mothership can offer efficiencies to help the acquisition more quickly scale. However, also look for ways the smaller company can bring efficiencies to its new parent. For instance, a startup's innovative go-to-market approach could benefit your existing brands.

For legacy retailers, ramping up growth requires out-of-the-box actions. By drawing out the strategies that makes your acquisitions successful and incorporating those across your other operations, you'll keep your acquisition on track and bring new life to your existing brands that need it most.

Bahige El-Rayes is a principal with the global management consulting firm A.T. Kearney. He can be reached at Bahige.ElRayes@atkearney.com.