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UK retailers search for new growth formula

UK retailers are experiencing another turbulent year. Following mixed results over the 2017 Christmas trading period, weak sales and administration announcements, rumours of potential collapses and news of store closures have become a recurring theme since the start of the year as retailers get to grips with operating in an increasingly tough environment.

While all retailers are being challenged by changing market conditions, low consumer confidence, a weak pound and technological disruption, traditional retailers are evidently being impacted the most. Poundworld and Carpetright are the latest household names to succumb to retail’s woes, and more are being earmarked to follow. Reports suggest that around 650 shops and restaurants have either shut down since the start of the year or are at risk of closure.

Current market upheaval is forcing many retailers to rethink their growth strategy. Recent Accenture Strategy research found that 71% of retailers globally believe that their current growth strategy is at high risk of disruption, and less than a quarter (23%) are very confident that they will achieve their 2020 projected growth targets.

Many of the iconic traditional bricks-and-mortar retailers and department stores – the bedrock of British high streets – are at risk due to their slowness to innovate or adapt to changing consumer behaviour.

And eCommerce players are not exempt. While online sales continue to grow at a steady pace, online pureplays face a different type of challenge, specifically around scale, speed and cost of delivery, and fulfilment.

Fuelling growth

To ignite growth, we expect to see more retailers join forces with other players with natural synergies through mergers – as we’ve seen in the UK’s grocery market of late – or ecosystems as a route to offering customers new value and experiences.

We’re already seeing it with the likes of Next partnering with Rockar – the omnichannel vehicle retail specialist – to sell cars in Next stores at the Manchester Arndale shopping centre. Ikea also recently announced that it’s partnering with TaskRabbit to give customers an easy furniture assembly service. Both examples demonstrate how leading retailers are rethinking the customer proposition.

Acquisitions of smaller digital players will also be a path to growth for some retailers. Digital deals in quick succession can help retailers quickly improve their competitive agility as they benefit from cutting-edge technologies that they don’t currently possess, greater market dominance, access to new customers, as well as a new and diverse talent pool.

Many will be exploring such deals to gain eCommerce capabilities to help them enhance the overall omnichannel experience. 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.

Bolstering digital capabilities

Those that prefer to buy-in digital capabilities over building them from scratch will need to think differently about how they identify digital acquisition targets which often look very different from traditional targets. The good news is that just over half of retailers globally (57%) 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.

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 enter or capitalise on a new market? 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: While founders of digital start-ups often have high expectations on the value of their businesses, what retailers pay for them need to be firmly grounded in the reality of accelerated time to market, and the cost of buying versus the cost of building, rather than in multiples.

With pressure mounting on UK 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 rise of digital deals presents new challenges. Identifying hot targets and snapping them up quickly 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.