After a period of relatively “easy” growth and attractive margins, independent ecommerce players are increasingly under pressure from the ecommerce giants. One answer is the building of a strong customer base and brand where M&A often is an effective way forward, says Jürgen Schwarz, Capitalmind’s Partner for Retail & Consumer Goods.
Welcome, Jürgen. Tell us, how can M&A help to build a brand?
M&A can significantly support the brand building strategy of an online retailer, either by raising growth capital or by attracting a strategic partner with strong reach to the relevant customer base, e.g. via wide (social) media coverage. One particular variant of M&A is a media partnership with a company like SevenVentures and this is really relevant in supporting a brand building strategy. These media-for-equity and media-for-revenue partnerships have been the driving force behind household brand names like Zalando and Lieferando.
In your role as M&A advisor, you negotiated the sale of outfitter.com to SIGNA Retail (owner of Karstadt Sport) - and you are also one of the co-founders of outfitter.com! What did the deal aim to achieve?
Outfitter was facing increasing competition from several other online teamsport market players with strong backing from financial investors. We were concerned about being outpaced and losing our strong market position. Our answer was to strengthen the Outfitter brand and improve our operating excellence. These strategic measures required considerable financing which we aimed to realize with a new partner.Therefore we set-up an international M&A process.
At that time, SIGNA Retail needed an improved ecommerce solution for Karstadt Sports, and the associated online marketing know-how. For many brick-and-mortar retailers it is very difficult to develop their own ecommerce solutions, indeed past examples indicate that their own organic efforts are unsuccessful. We have seen several cases where traditional retailers have acquired an ecommerce business which was successfully bolted onto their existing operations.
What were the results and what were the key learnings?
Plain and simple, Karstadt Sport now has a state-of-the-art online shop and Outfitter has access to growth capital and a strong partner to further build its brand. As for key learnings, I would say it is important that the company being purchased retains enough independence in its strategic business focus. It’s worth saying that the deal has to work on a human level too; we were lucky that in our case it did.
Which leads on to an important, more general question: how is the value of a brand calculated during the M&A process?
Vital for me is the brand’s relationship to its customers. Does the brand have an exact picture of its target and actual customers and is it engaged in targeted marketing to this group? Which percentage of organic and paid traffic converts into sales? How many repeat orders and returning customers does it have? How have customer acquisition costs developed over past months and years? The answers to those kind of questions provide a view on the brand’s strength, as well in the context of strong positioning against existing and possible upcoming competition. The greater the customer loyalty, the more valuable a brand is.
And finally: in your view, how can smaller and mid-sized players compete with the multi-billion-dollar marketplace Amazon in today’s world?
We are now in a situation where Amazon is becoming a primary source for supply and product search. Amazon Prime “locks” its customers in. Nearly 40% of all online retail in USA is already on Amazon. One way of bypassing the Amazon universe is to create a direct customer link by communication of content and brand essence via (social) media campaigns and provision of a best-in-class service. Another way of retaining customers is by offering an exclusive product assortment, such as a limited collection lines from leading manufacturers, brands and/or private label (“own”) brands. A further strategy to gain and retain customers is to attract and entertain them with special events. 1-2-3.tv is a good example of a retailer which offers entertainment via (reverse) auctions. Rather than standard teleshopping shows, continual auction events run throughout the day, onTV, website, mobile devices and App. These events secure a strong customer link. Compared to its direct competitors HSE24 and QVC, both offering comparable product assortments, 1-2-3.tv’s customer KPIs are significantly better. The differentiated experience has built them a very loyal customer base, as well against Amazon.