if organic growth fails… BUY!

Now that Sobey’s parent (Empire) has bought FarmBoy, it’s time to re-review some of the main reasons for acquisitions:

  1. Cheaper to buy than build- and removes one strong competitor too!
  2. Buys existing brand equity, store traffic pattern, loyalty
  3. Immediacy– sales generated the day you sign the check (now that’s fast incremental sales!!!)
  4. Less risk, Less work: signing a check for a proven successful business does indeed reduce the risk you might learn it’s not that easy to hire/redeploy a sufficiently skilled team, and then build it from scratch

Loblaws nicely integrated Shoppers locations and their Optimum team into its operations stable and T&T without losing some of those acquisition’s best assets or people. Canadian Tire is a master of wise acquisitions. The Empire-FarmBoys news is well covered here, though it’s too early to say whether it will be seen a wise buy in the long term:

http://www.canadiangrocer.com/top-stories/headlines/empire-deal-to-fuel-aggressive-farm-boy-expansion-83027

alas we must also mention some of the risks of acquisitions:

Overpaying for an asset: sometimes there are liabilities unaccounted for in the books (ask pet giant Mars about their purchase of destined-for-lawsuits Greenies!); sometimes the valuation seems mighty inflated (eg Chipotle?); sometimes there are bidding wars that push a price above rational levels when Executives are desperate to be seen to ‘win’ (just as any one has seen happen at a live auction:  Disney-Comcast-Sky, anyone?).

Messing up the execution: WalMart and Target both bought existing Canadian-based retail chains – and, after extensive location analysis & store remodeling, both launched. Only one of the two remains in business today: hint:  it’s NOT the one that messed up their launch execution.

Messing up the corporate culture analysis: Well executed efforts include TD buying Canada Trust and tapping into some of their best executives, brand icons, etc. And a certain (Cincinnati?) CPG firm although noted for ‘gutting’ the staff at virtually every acquisition target, then replacing them with their own staff, is actually pretty adept at doing this well.  But there are many examples of inept people management eg when merging vastly different cultures:

  • HP= Sales; Compaq = Engineering/Tech Expertise;
  • I suspect Amazon-WholeFoods cannot be a comfortable fit;
  • Scotiabank (Canada’s least tech savvy bank) buying tech innovator Tangerine???
  • 3G Capital bought Tim Hortons- soon after, Tims’ Oakville office staff were gutted, spending on community charities was cut, food/beverage staffing was ‘cost optimized’ – and now franchisee rebellion is in the air

Messing Up the Brand: no matter how hard P&G tries, it just can’t stop… being P&G! Safe, strategic, sound— but never edgy, irreverent or fun.  They bought Clairol’s Herbal Essence haircare (riding a share peak based on the success of irreverent positioning & saucy “Orgasmic” ad campaign) but evidently they just couldn’t un-P&G themselves; the next few years we TV viewers witnessed some of the most awkward, cringe-inducing, ham-fisted ads ever aired. Just about as sexy, saucy & irreverent as the iconic couple in Grant Wood’s American Gothic.

Doubling Down at the expense of other opportunities: this ‘Opportunity Cost’ drawback is imo the least visible flaw in making an acquisition, since it can take years (or decades!) to see the ‘true cost’ of a huge acquisition. When Kimberly-Clark bought Scott Paper in 1995, good or bad, it lifted their share in current categories but cost them the capital for any major further acquisitions or forays into new business for decades. Tissue & diapers aren’t hot ‘unit growth’ categories in Western economies; KC’s current CEO could legitimately blame their low-growth reality on the unimaginative –  but safe!- 1995 Exec team who depleted the WarChest for decades to come by doubling down on ‘current category share’. Same argument for HP- by now, they might have become an IBM or a Google or an Oracle- but the buyout of Compaq in 2001, inflated their short term share in PC’s/ Laptops, yet cost them the chance to be serious about paying attention and resources to new categories.

Steven

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