Online, offline, or both? This is the question which has been facing both established e-tailers and retailers in recent years, and 2017 has been the year when some have started to take action to exploit the benefits of an omnichannel approach.
In terms of buying into onmichannel, e-tailers making the jump into physical retail is the area which has attracted much commentary in recent weeks and months, but why and how is this happening?
Benefits of the high street
It’s worth remembering the offline space still accounts for the vast majority of sales, albeit the proportion of digital sales is growing fast. Data from Statista tells us digital sales are expected to account for 17.6% of UK retail sales this year compared with 16.8% in 2016, while 60% of sales in 2017 are likely to involve the internet in some way, compared with 46% in 2012. However, this statistic is not necessarily reflective of sales concluded. For example, a shopper may use the online platform as part of their research, but often still desires to touch and experience the product in store before making their payment.
So should all online retailers follow Amazon’s lead with a “quick-fix” acquisition?
It’s worth noting that Amazon’s acquisition of Whole Foods was a particularly compatible match. Firstly, in the grocery market around 85% of consumers prefer to shop in-store rather than online, the highest percentage of in-store purchases of the main retail categories according to the most recent Total Retail Survey by PwC. The acquisition allows Amazon to break into this market using Whole Foods’ strong brand credentials and established infrastructure. Secondly, Amazon can utilise Whole Foods’ 450 stores as distribution centres for its existing business and as test centres for elements of the Amazon Go business.
It is therefore crucial to think not only about the purchasing trends in your particular sector but also the specific synergetic benefits of your business once merged with your acquisition target when considering setting up a physical presence through acquisition.
We are also expecting a moderate increase in M&A activity in the retail sector through Q3 and Q4 of 2017 and onwards into 2018 as those e-tailers currently eyeing potential offline targets begin to make their move. In this environment, our best advice to those currently at the exploratory stage is to be aware that going physical can be costly, time consuming and risky as you chase the benefits of a physical presence.
Going bricks and mortar – a ‘how to’ guide
Once you have highlighted your acquisition target, the process of acquisition must be managed carefully. There are several important points to consider before embarking on your clicks to bricks venture…
Points to consider
1. Deal Structure
- Are you looking to acquire the shares of the company, or only its assets? The former model is the more common and is generally hugely favoured by the shareholders of the target entity but an asset sale can reduce the risk for the purchaser as certain historic liabilities can be specifically excluded from the transaction;
- Who will run the acquired business and will the price be contingent on targets being met? An earn-out model is extremely common in these types of acquisition;
- When and how will the price be paid? Paying everything on day one may not be the best option for either buyer (in terms of risk) or seller (in terms of maximising value).
2. Timing
M&A is a multi-faceted process. As a buyer, you can expect to commit material management time to engaging with:
- Assembling the right advisory team;
- Funding of the acquisition;
- Negotiation of headline terms;
- Confidentiality and exclusivity agreements;
- Due diligence of the legal, tax, employment, real estate and financial elements of the target;
- Preparation and negotiation of key documents.
The entire transaction can take several months, although this varies depending on the particular details of the transaction. Buyers should be prepared and put in place measures to ensure that their own business does not suffer from neglect whilst the transaction is ongoing.
3. Cost
Budgeting is crucial when it comes to acquiring a business. Not only does consideration need to be given as to how the purchase will be funded, but also how the value of the target business will be assessed and how any cash or debt attached to that business will be dealt with on completion. For example, will completion be based on historic performance, future projections or a combination of the two?
The legal and other professional costs, including any bank arrangement fees if the acquisition is to be funded by debt, should be considered at an early stage and all taken into account in making the assessment of the viability of the transaction.
Sam Pennington is a Partner in the Corporate team at Lewis Silkin LLP.