Digital Deals and Partnerships Powering Growth in Retail
The U.S. retail industry is experiencing another turbulent year. After a strong start to the 2017 holiday season, where sales rose to $691.9 billion – the largest gain since the Great Recession – they quickly fell again in January and February as consumers tightened their purse strings and focused on rebuilding their finances post-Christmas.
While retailers are being challenged by changing market conditions, consumption habits and technological disruption, traditional retailers are undoubtedly struggling the most. According to reports, 1,773 stores have shut down operations in the U.S. since the start of 2018, many are at risk of defaulting on their debts, and analysts predict the number of retailers filing for bankruptcy this year could match or even exceed last year’s highs.
Current market upheaval is forcing retailers to rethink their growth strategy, particularly many of the iconic traditional bricks-and-mortar and department stores who have been slow to innovate or have failed to keep up with their customers. Ecommerce players are not exempt. While online sales continue to grow at a steady pace, online players face a different type of challenge, specifically around scale, speed and cost of delivery, and fulfilment.
Digital Deals and Partnerships Take Off
Over the course of the next year we’ll see many legacy retailers acquire digital players in quick succession to accelerate growth by bolstering e-commerce capabilities and enhancing the overall omnichannel experience. Nordstrom is one of the latest players to do exactly this, recently announcing the acquisition of digital start-ups, BevyUp and MessageYes. These digital capabilities will offer customers greater personalization, instant purchasing options and new social experiences.
The motivation behind the digital deal trend is growing appetite from retailers to quickly gain cutting-edge technologies they don’t currently possess, benefit from a new talent injection, and accelerate competitive advantage due to increasing pressure from ecommerce players. According to new research, 82% of retailers globally said they have either acquired or have considered acquiring a digital company in the past two years, and over a third globally have completed five or more digital acquisitions in the same period.
Preferring to buy digital capabilities over building them from scratch, traditional retailers are becoming savvier at identifying digital acquisition targets which can look very different to traditional targets. Fifty-seven percent of retailers are already using a different pre-deal team and evaluation criteria for digital M&A transactions, and another 58% are using different valuation and cost models.
In addition to going down the acquisition route, many retailers are also joining forces with digital players through partnerships and ecosystems to offer customers new value and experiences. For instance, Walmart has recently announced it is expanding its partnership with digital automotive marketplace, CarSaver, to sell cars from kiosks at Walmart stores.
Likewise, Kohl’s recently announced that it will lease store space to food grocer, Aldi, in a bid to optimize its existing real estate footprint and increase store footfall by offering customers new value. Both examples demonstrate how retailers are rethinking the in-store environment and giving consumers access to a wider array of products and services.
Steps for Digital M&A Success
For retailers to gain maximum value from digital acquisitions, they should consider:
• Understanding the exact need for digital capabilities: For example, is the goal to create new digital products and services? Create an enhanced customer experience? Connect in-store and online channels? Or better leverage customer insights to inform strategy?
• Rethinking the search process: Digital acquisition targets look very different from traditional targets. Finding them can be challenging. Target ideas may come from research universities, innovation labs, patent searches or partners at venture capital firms. Very often the technologies are cutting-edge, highly specific and not yet fully tested for viability.
• Reworking the valuation approach: Traditional valuation models were not built for digital assets and can break down as a result. It is imperative to consider the original purpose and intent of the acquisition and test that it fits with the wider business.
• Mapping the value in multiple ways: Plays into an emerging space are rarely ever a one-and done event. Instead, they usually require stringing together multiple acquisitions into a single coherent capability. Be open-minded when mapping forays into emerging areas and consider what else is necessary to make a strong play before proceeding.
With the pressure on retailers to find a new growth formula, digital deals can help boost capabilities and offer customers new value. While it’s always been important to get M&A strategy right, the digital deal arena presents new challenges. Identifying hot targets and snapping them up in a compressed timeframe before competitors do can be challenging, but with a revised approach and different evaluation criteria, retailers will be well-positioned to accelerate their digital gains.
Frank Layo, is managing director, Kurt Salmon, part of Accenture Strategy; J. Neely is managing director, global M&A lead, Accenture Strategy.
While retailers are being challenged by changing market conditions, consumption habits and technological disruption, traditional retailers are undoubtedly struggling the most. According to reports, 1,773 stores have shut down operations in the U.S. since the start of 2018, many are at risk of defaulting on their debts, and analysts predict the number of retailers filing for bankruptcy this year could match or even exceed last year’s highs.
Current market upheaval is forcing retailers to rethink their growth strategy, particularly many of the iconic traditional bricks-and-mortar and department stores who have been slow to innovate or have failed to keep up with their customers. Ecommerce players are not exempt. While online sales continue to grow at a steady pace, online players face a different type of challenge, specifically around scale, speed and cost of delivery, and fulfilment.
Digital Deals and Partnerships Take Off
Over the course of the next year we’ll see many legacy retailers acquire digital players in quick succession to accelerate growth by bolstering e-commerce capabilities and enhancing the overall omnichannel experience. Nordstrom is one of the latest players to do exactly this, recently announcing the acquisition of digital start-ups, BevyUp and MessageYes. These digital capabilities will offer customers greater personalization, instant purchasing options and new social experiences.
The motivation behind the digital deal trend is growing appetite from retailers to quickly gain cutting-edge technologies they don’t currently possess, benefit from a new talent injection, and accelerate competitive advantage due to increasing pressure from ecommerce players. According to new research, 82% of retailers globally said they have either acquired or have considered acquiring a digital company in the past two years, and over a third globally have completed five or more digital acquisitions in the same period.
Preferring to buy digital capabilities over building them from scratch, traditional retailers are becoming savvier at identifying digital acquisition targets which can look very different to traditional targets. Fifty-seven percent of retailers are already using a different pre-deal team and evaluation criteria for digital M&A transactions, and another 58% are using different valuation and cost models.
In addition to going down the acquisition route, many retailers are also joining forces with digital players through partnerships and ecosystems to offer customers new value and experiences. For instance, Walmart has recently announced it is expanding its partnership with digital automotive marketplace, CarSaver, to sell cars from kiosks at Walmart stores.
Likewise, Kohl’s recently announced that it will lease store space to food grocer, Aldi, in a bid to optimize its existing real estate footprint and increase store footfall by offering customers new value. Both examples demonstrate how retailers are rethinking the in-store environment and giving consumers access to a wider array of products and services.
Steps for Digital M&A Success
For retailers to gain maximum value from digital acquisitions, they should consider:
• Understanding the exact need for digital capabilities: For example, is the goal to create new digital products and services? Create an enhanced customer experience? Connect in-store and online channels? Or better leverage customer insights to inform strategy?
• Rethinking the search process: Digital acquisition targets look very different from traditional targets. Finding them can be challenging. Target ideas may come from research universities, innovation labs, patent searches or partners at venture capital firms. Very often the technologies are cutting-edge, highly specific and not yet fully tested for viability.
• Reworking the valuation approach: Traditional valuation models were not built for digital assets and can break down as a result. It is imperative to consider the original purpose and intent of the acquisition and test that it fits with the wider business.
• Mapping the value in multiple ways: Plays into an emerging space are rarely ever a one-and done event. Instead, they usually require stringing together multiple acquisitions into a single coherent capability. Be open-minded when mapping forays into emerging areas and consider what else is necessary to make a strong play before proceeding.
With the pressure on retailers to find a new growth formula, digital deals can help boost capabilities and offer customers new value. While it’s always been important to get M&A strategy right, the digital deal arena presents new challenges. Identifying hot targets and snapping them up in a compressed timeframe before competitors do can be challenging, but with a revised approach and different evaluation criteria, retailers will be well-positioned to accelerate their digital gains.
Frank Layo, is managing director, Kurt Salmon, part of Accenture Strategy; J. Neely is managing director, global M&A lead, Accenture Strategy.