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Comment: Making a success of digital acquisitions

We have seen many examples in recent years of UK grocery retailers acquiring companies in the digital space (think Morrisons and Kiddicare; Tesco and Blinkbox, and many more). However, the money retailers spent on M&A in the digital space has not always delivered success and there is a high level of risk in integrating the acquired business. As a result, a large number of these deals subsequently resulted in a sale of the same asset at a later point. So have these digital acquisitions been a classic case of marketing myopia? Had retailers lost sight of their core business in the rush to emulate the likes of Amazon and Google? Or can acquisition be a viable route to accelerate retailer's digital transformation?

Tesco first invested in Blinkbox Entertainment in 2011, and then acquired Blinkbox Music and Blinkbox Books (Mobcast) in 2012 with the aim of taking on Netflix, Amazon and BSkyB. Earlier this year, as part of the plan to turn around Tesco, Tesco decided to sell Blinkbox Entertainment to TalkTalk for circa £25 million and Blinkbox Music to rival streaming service Guvera for around £5 million. It furthermore decided to close Blinkbox Books service, after talks with Waterstones to buy the platform broke down. Our verdict on this is that Tesco had a robust digital strategy in place and had competing head-on with Netflix, Amazon and B SkyB clearly in its sights, via an online movie service, plus books and music. However, these bold moves pushed Tesco into unknown waters with little knowledge on the subject within Tesco's core business. In the end, given the struggles Tesco are facing in its core business, it was probably a sensible (and necessary) decision from the new CEO to sell or shut the acquired operations and focus on its core business of selling groceries.

Another example would be Sainsbury's acquisition with aNobii, a social networking site aimed at readers, from HMV in 2012. In 2013, the company then changed the name of the eCommerce part of the website to eBooks by Sainsbury's, having the international social network part of aNobii as a subsidiary. In March 2014, eBooks by Sainsbury's sold its international social network subsidiary aNobii to Italy's largest publishing group, Mondadori. The asset sale will enable eBooks by Sainsbury's to focus exclusively on its core business of developing and growing its online retailing activities and eCommerce platform in the UK. Circumstances have forced Sainsbury's to focus back on its core business.

So why did these acquisitions fail? Our view is that there was a mixture of three factors:

But not all digital M&A has failed: Walmart's investment in Yihaodian (a China-based B2C eCommerce website with a niche in online groceries) has been a huge success for both parties. Yihaodian has been able to take significant benefit from the firepower of Walmart, leveraging Walmart's product range bargaining power with suppliers. At the same time, Yihaodian has become the online arm of Walmart in China, selling everything from disposable diapers to digital cameras to laundry detergent, with 1.4% of the China B2C eCommerce market share.

Another interesting example – also from the US – is Neiman Marcus's acquisition of Mytheresa.com, a Munich-based online luxury retailer, in September 2014. The Mytheresa website retains its own unique identity, though the company has been able to leverage Neiman Marcus's retail experience (and deeper pockets) to enhance the overall user experience. For the moment, the business remains an independent subsidiary, so the acquisition risk is mitigated. And an additional benefit for Neiman Marcus is having a beach-head in Europe to gain access to – and insights on – the European market.

So if M&A is not an automatic "silver bullet", how can retailers accelerate their digital journey? How about developing the digital capability in-house? For example, Clarks has been selling shoes for almost 190 years, but is moving with the times. The company has established in-house 3D digital team way ahead of the wave; today it has full capability of developing 3D printed prototypes which reduce product development lead times and costs. Although this approach requires time and investment, it has much lower risks and supports the business in the long run.

On the other hand, if retailers are already behind in developing its own technology-led growth opportunities they should build relationships with the digital and technology incubators, accelerators and investors early. Finding opportunities to engage innovative start-ups, and provide support to those organisations you believe in will not only save time, but also put retailers in a good position to identify opportunities for growth ahead of the curve. 

There are some great examples of leading retailers finding and supporting digital innovation:

In conclusion, M&A is one potential route to accelerate digital growth for a retailer. Walmart's acquisition of Yihaodian shows how transformative this can be. Retailers have tended not to succeed where they have branched away from the core business of retailing into business models which are more akin to publishing, media or content provision. The skills required to run such a business are very different and the acquired business is vulnerable to being sold on when times get tough. There are other 'safer' routes to digital success which are less risky, require less investment and appear to be yielding some promising results. That being said, we believe that as pure-play businesses reach scale, we will see more traditional retailers buying online players, especially online players which offer access to new customer types (in new geographies or niche segments). Watch this space…

The Kurt Salmon team writes a regular column on technology in retail for Essential Retail.

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Kurt Salmon