Is Walmart’s Offline to Online Shift Too Little Too Late?

The 5 Rules for Thoughtful Digital M&A

The big consumer companies we grew up with are in trouble and it may be startups that can save them. Just ask Warren Buffett.

Many top retail and consumer products companies are now facing the moment when their leadership is at peril as consumer behaviors permanently shift away from store-based buying and faceless packaged goods to online-oriented consumption and authentic brands.

The megadeals everyone was talking about in 2016 were of legacy consumer businesses acquiring digital companies to offset these negative macro trends through innovation. Two well-reported examples were Unilever acquiring Dollar Shave Club and Walmart acquiring Jet.com. Both Dollar Shave Club and Jet.com are next generation ecommerce companies that could in theory help catapult Unilever and Walmart into the next era of retail. But is acquiring an online businesses enough when you’re competing against Amazon?

Less than six months later, the impact of these acquisitions became evident in last week’s two major business stories. Warren Buffet, the great trend-spotter and investor, has made his assessment and is voting with his checkbook.

First, Buffett believes that Walmart’s Jet acquisition is too little, too late, too desperate. Buffett dumped his shares of Walmart in fear that the huge retailer has not shifted quickly enough to capture evolving consumer demand, witnessing Amazon’s consistent outflanking of Walmart through online best practices.

The retailer should have been more aggressive over time by embracing many thoughtful acquisition of relevant smaller startups, rather than making just one bet on Jet.com. An ongoing strategy of consistent startup acquisitions would have positioned Walmart to be in a far better position today. Former Walmart CEO, Mike Duke acknowledged in 2012 that the company’s greatest modern misstep was not consistently investing more in ecommerce. Now they are paying the price.

Second, Buffet was said to be providing financing for Kraft Heinz’s $143 billion acquisition offer for Unilever, which was announced on Friday and ultimately withdrawn over the weekend. Unilever has consistently acquired venture capital-backed startup brands, such as Dollar Shave Club and Seventh Generation, to make its products more appealing to modern consumers. Unilever’s acquisition premium is a partly a nod to the wisdom and consistency of this acquisition strategy.

Walmart and Unilever are not alone. Many traditionally-offline retailers continue to report signs that retail stores are underperforming while seeing offsetting benefits of ecommerce expansion. In January, Target reported in-store sales in November and December declined by 3% while online sales climbed by more than 30% and they aren’t the only ones. As a result of these reports, retail stores are announcing store closings, stopping construction on new locations, and rethinking the balance and investment in online and offline.

A thoughtful M&A strategy can fill these online gaps and allow today’s incumbents to maintain their market leadership. Bain & Company, the top-tier consulting firm serving the Fortune 500, recently advised its clients that a strategy of consistent digital acquisitions can allow incumbents to thrive:

“Some executives instinctively believe that a single acquisition of a digital player will transform their business to deliver the digital part of their corporate strategy. But from our experience, that’s simply not the case. In fact, the best companies acknowledge that their first digital acquisition may actually be less accretive, if not dilutive. Instead, they prepare themselves for a series of organic and inorganic moves. They guide their inorganic efforts with a well-devised approach that is both consistent and repeatable across all four steps of the M&A value chain: M&A strategy, corporate financing, due diligence and merger integration.”

Bain & Company

So how do startups position themselves to benefit from these acquisitions? The most attractive M&A candidates will have exploited a consumer niche that incumbents have ignored or take for granted, built a brand that consumers adore, leveraged technology in a way that fundamentally shifts the consumer and/or profitability dynamic, and assembled a team that incumbents would have a hard time hiring directly.

Finally, just as incumbents should stretch on prices they pay for acquisitions, startups should be realistic in their exit expectations, understanding that most M&A will be smaller, consistent, targeted acquisitions rather than huge, one-off, billion dollar exits. Such realism could generate solid returns for the founders and their VC investors while paving the way for startups to make an outsized impact, leveraging incumbents’ reach.

Five Rules for Digital M&A:

These rules were summarized from an analysis by Bain & Company, The Changing Rules for Digital M&A, February 10, 2017

1. The best acquirers are extremely clear about how digital M&A will enable their strategies

2. A consistent and repeatable acquisition strategy pays off in the long term, rather than large one-off purchases

3. Acquirers who think that digital assets are too expensive are short sighted. Strategic acquisitions that signal that a digital acquisition is not a one-off, but is part of a strategy can be well rewarded over time, even if the acquisition feel expensive in the short term

4. Deals that expand a company’s scope by adding new customers, products, markets or channels typically perform better than scale deals, which grow a company’s scale by adding similar products or customers

5. Post-acquisition integration should be implemented smartly to avoid losing the culture and advantages of the startup inside the acquirer