putting customers at the heart of the retail merger
TRANSCRIPT
Putting customers at the heart
of the retail mergerAll too often, it’s the customers who get ignored when retailers merge.
Now is the time for far-sighted retailers to start assessing the roles that
acquisitions can play in their economic comebacks—and to size up the
opportunity for revenue growth if they frame their M&A activity around
the customer.
By Dorree F. Ebner and Janet L. Hoffman
When CVS Caremark announced its intent to acquire
Longs Drugs in August 2008, the company was faced
with a decision about whether to rebrand its newly
acquired stores with the CVS pharmacy name. The
eventual decision was split. CVS decided to rebrand
stores on the West coast where it already had a
respected brand image and Longs was not a dominant
market player. But in Hawaii, where the Longs name
had had a strong customer reputation for half a
century, the newly acquired stores decided to keep
the name of the Hawaiian retail market leader.1
By including customer considerations
in its merger and acquisition (M&A)
approach, CVS is doing the right thing.
However, such particular considerations
are not typical among retailers. All
too frequently, the customers of both
the acquirer and the target have been
among the last stakeholders to be
considered amid the rush of due
diligence reports and valuation studies.
Of course, “rush” is hardly the word
to describe M&A activity in the retail
sector these days. Although over the
past decade there were more than
15,000 global retail mergers with a
total value of $1 trillion, deal-making
activity screeched to a halt in 2008
with deals such as CVS-Longs and The
Gap’s planned purchase of women’s
sportswear retailer Athleta being very
much the exception.
2 | Putting customers at the heart of the retail merger
3
However, the economic slump is
steadily shaking out weaker players—
Woolworths stores in the U.K., Linens
N’Things in the U.S., among many
others—and opening up more market
opportunities and deal targets for the
stronger players. When debt and equity
markets start to free up again, those
retailers will be well-placed to make
acquisitions that create cost synergies
and economies of scale—and put them
in even stronger market positions.2
Emerging from this economic trough,
though, retail acquirers will do well to
heed the consequences of sidelining
customers’ interests during the M&A
process—and to be careful of the
knock-on effects on shareholders
(See sidebar “Retail mergers show
negative returns.”).
The customer factor has never been so
important to the retail sector: Even if
consumers were spending freely, they
are not the consumers of yesteryear.
Brand loyalty is a tenuous thing; more
and more consumers come well-informed
and much savvier about their purchase
options. When switching costs are so
low, the issue of customer retention
takes on unusual importance. Studies
indicate that, in real dollars, it costs
between five and six times more to
attract a new customer than to keep
an existing customer.3 Accenture’s
research shows that increasing
customer retention by two percent
has the same effect on profits as
cutting costs by 10 percent.4
Accenture believes that retail executives
who envision acquisitions as part of
their recovery plans should put their
intended acquisitions in context of
the experiences they would like their
current and future customers to
have, and then work their way back
to deliver against those goals. In this
article, we will argue that successful
M&A activity in the retail sector must
manage the customer experience by
mobilizing dedicated customer experience
teams, using customer-centric integration
planning and tying synergies to top-
line growth and customer metrics.
Before we address each of those three
elements, it is important to review
five core principles for properly
managing the customer experience
(see Figure 1).
The principles become the “cheat
sheet” that the customer experience
teams must keep in mind throughout
the acquisition process—from when
the teams are set up through to the
time you defi ne metrics and measure
results against them. Let’s examine
each in turn:
1. Know how brands are
perceived—the target’s as
well as yours
Although many retail acquirers move
quickly to rebrand acquired operations,
it is important to assess what might
be gained or lost by applying a blanket
rebranding approach. Many retail
acquirers tend to overestimate the
power of their own brands while
underestimating the shopper’s attach-
ment to the target’s brand. When
Federated Department Stores, now
Macy’s, acquired May Department
Stores in 2005, Macy’s decided to
rebrand all the May stores, an approach
that had been successful during its
previous acquisitions. Macy’s felt the
approach meshed with its “one brand”
strategy and would allow more cost-
effective marketing and promotional
campaigns. But former May customers
balked at the rebranding; some
protesters urged boycotts against
Macy’s. From the former Marshall
Fields fl agship State Street location
in Chicago,4 to the former Bon
Marche downtown Seattle store,5
customers expressed concern over
lack of association with the newly
rebranded Macy’s. According to one
The importance of customer experience principles
Figure 1. A framework for putting retail acquisitions in context of customers’ experiences
survey, lack of customer and employee
buy-in for the new national brand and
private-label assortments were big
factors in the lackluster sales results
and above-plan markdowns at the new
Macy’s stores in 2006.6
2. Be alert to how customers
view pricing changes
Retail acquirers can quickly run into
trouble if shoppers associate price
increases with the merger. A recent
Accenture survey found that best
prices were the second highest reason
why shoppers spend most of their
monthly budgets at their preferred
retailers: Sixty-two percent of
respondents indicated that price
was important.7 So it is critical to
use a phased or strategic approach
to the management of pricing.
4 | Putting customers at the heart of the retail merger
Build Customer Measures into Synergy Plans
Conduct Customer- Centric Integration Planning
Mobilize Customer Experience Teams
Customer Experience Principles
Reviewing price sensitivity across
categories and regions helps defi ne a
successful pricing strategy that allows
acquirers to achieve pricing synergies
and manage negative impressions of
any price increases. Once the deal has
closed, new pricing data should be
analyzed to calculate price elasticity
across product categories and regions.
Price elasticity is greater when products
are commoditized, readily available and
have actual or perceived substitutes.
In retail grocery, for example, where
demand for many products is quite
elastic, price-sensitive consumers will
soon switch to another grocer or
product if prices are increased without
related benefi t.
3. Rethink product
mixes carefully
When two retailers merge, their
category management teams must
quickly make hundreds of product-
mix decisions—such as how much and
what type of local versus national
product to include, or what the mix
of private label and branded product
should be in each region—in order to
move toward a common product set.
The challenge is to strike a balance
between keeping local brands that
local customers like and introducing
new private label or national brands
to capture the purchasing synergies
which often prompt consolidation of
the product mix. Also, analyzing newly
available data and assessing the product
selection tradeoffs will prepare the
integration teams to proactively manage
product mix changes and create
positive perceptions of the changes.
For example, if local or private label
products are going to be removed, it’s
essential to give customers fair warning,
explaining the changes and giving them
a glimpse of the new and exciting
products they can expect instead.
4. Over-communicate the
changes to your customers
Often, retailers avoid sharing much
news with their customers, fearing
confusion at least and backlash at
worst. But it is almost always worse
to not communicate merger news.
It is not enough to disclose the new
corporate name. Customers deserve
specifi cs—even if they are as basic as
in-store signage showing a timeline for
the change and describing some of the
important details. The more customers
can feel that there are exciting and
benefi cial changes ahead, the more
they are primed to become reliable
customers after the merger.
In one recent case, a large retailer that
was absorbing newly purchased stores
failed to properly inform the acquired
chain’s shoppers about the stores’
upcoming conversion and rebranding
changes. The issue was especially acute
in regions where the acquirer had had
little presence. Local rivals pounced
on the opportunity, displaying signage
that welcomed former customers
of the old brand. That was not the
worst of it: In geographies where the
retailer’s existing and acquired stores
overlapped, it also found it tough to
maintain consistent prices between
nearby stores that were now part of
the same chain.
5. Create happy employees
(leading to happy customers)
Employees, particularly those in day-
to-day contact with shoppers, are an
integral part of a retailer’s brand and
customer experience. So they must be
equipped with key messages about the
change before and during the transition.
But employees’ contributions to the
brand are not the only reason to
generate grass-roots enthusiasm for
the merger. Typically, mergers generate
substantial anxiety about job losses. At
the same time, high turnover is a curse
on the retail sector; industry-wide,
nearly four-fi fths of all hourly associates
quit within a year, and many of them
are customer-facing employees. Best
practice calls for careful planning and
creation of the “to be” management
structure—the teams that will lead the
combined organization post-merger,
drawn from the acquirer’s and
acquiree’s management rosters.
Doing so facilitates learning and
avoids creating “us versus them”
tensions. Having fi eld management
from both sides working together
within newly defi ned divisions helps
to support the sharing of knowledge
and culture. And it will build a sense
of unity among fi eld managers that is
soon felt by the employees they manage.
Acquirers also must assess the trade-offs
that may result from drastic or negative
changes if employee compensation
and benefi ts are not carefully managed.
Those subtleties eluded a major retailer
when it changed several categories
of benefi ts in the belief that it was
improving the benefi ts picture for
employees of the company it was
buying. But the retailer had failed
to foresee that part-time employees
were adversely affected by the changes.
Many of those unhappy part-timers
were in direct contact with customers.
As a result, the retailer’s levels of
customer service took a dive during
its merger integration.
Retail employees must have tools to
enable them to contribute positively
to the customer experience and
brand image. Beyond providing store
associates and fi eld management with
necessary training, key messages must
be reinforced and employees provided
with clear guidelines that empower
them to handle challenging situations
during post-merger integration—for
instance, stock-outs or discontinuation
of products that have been favorites
with shoppers.
5
So what are the bedrock elements of
managing the customer experience
through a retail merger? The first one
involves the mobilization of dedicated
teams to drive the initiatives (see
Figure 2).
The overall process of managing the
customer experience must start with
the formation of “customer experience
teams”—dedicated groups whose
foremost task is to assess the impacts
on customers of the upcoming
acquisition and integration. There
are several ways to structure the
team; one example is illustrated in
Figure 3. Whatever the actual structure,
it should be set up to work with
the principles described above. Two
critical roles stand out:
Manage external
communications
The customer experience teams should
gather data as early as possible to
initiate communications with the
merging company’s customers. As a
precursor, it is critical to define all
customer segments and all the business
areas that interact directly with those
segments. One way to do this is to
identify high-value customers that
span your defined segments and
develop customized letters that will
consolidate the information that
pertains to them. This approach works
well and is applied regularly in the
financial services industry. With the
advent of loyalty programs, it’s feasible
to conduct this level of segmentation
in the retail sector as well.
At the very least, customers deserve to
know how the merger might change
product availability, choice and price.
It is important that all customer
communications are unified and
cohesive; often, shoppers receive
mixed and too frequent messages
about mergers from several sources.
By clearly defining the segments
and grouping messages together, the
company will be perceived as more
capable and integrated in its approach
to the integration. It is also imperative
for all communications to be fair and
honest. It will help if the communications
explain clearly why certain difficult
decisions—store or distribution center
closures, for example—are being made.
Unrealistic promises will not work.
6 | Putting customers at the heart of the retail merger
Figure 2. Mobilize your customer experience teams
Build Customer Measures into Synergy Plans
Conduct Customer- Centric Integration Planning
Mobilize Customer Experience Teams
Customer Experience Principles
Mobilize your customer experience teams
Identify the highest-value
customers and track
their loyalty
In any merger, the loss of key customers
is a big risk. The customer experience
team must be able to identify and
retain the most profitable customer
segments to ensure successful growth
of the business after the merger. To
begin with, the team must be staffed
with sufficient resources from the
marketing and customer service
organizations of the acquired chain;
those individuals have the best under-
standing of their markets and customers’
demographics. The information gathered
about the highest-value customers
can then be used to build the processes
and metrics that will help determine
specific impacts on those customers
(By defining its customer segments
and their associated value and then
crafting communications and targeted
retention programs, a large bank was
able to retain nearly 90 percent of
its most valued customers following
its merger with another financial
institution.). At the same time, the
team should be able to benefit from
a smooth integration of customer
information systems—spearheaded
by an equivalent IT integration team—
so the acquirer has access to data on
customers’ shopping patterns and on
their loyalty.
7
Figure 3. Sample organization design of a customer experience team and its responsibilities
Customer Experience Team Lead
External Communications
Welcome package
Mail house and postage management
Mass mail
Emergency communications
Impact analysis
Retention program development
Promotions
Marketing collateral
Coordination with branding rollout
Call centers
Voice Response Unit (VRU)
Market research
Customer satisfaction
Growth and stability
Customer retention
Promotion implementation
Retention Marketing and Growth
Measurement/ Research
Business/Operations Liaisons
Too often, integration planning during
retail mergers becomes focused on the
tactical activities needed to convert
or rebrand stores to align with the
national strategy, with little regard
for the critical customer aspects.
What is needed is detailed integration
planning with the customer foremost
in mind—planning that includes
identification and resolution of
customer-facing issues, management
of cross-functional interdependencies
and execution of customer-focused
integration testing.
The customer experience teams will
handle several of these activities. In
many cases, the teams also need to
coordinate planning efforts within
and among the business units. Before
the merger’s pre-close phase, scenario
planning should begin so that business
leaders can understand the impacts of
key decisions on customers at a range
of customer “touchpoints” and at
different points during the integration
cycle. This approach was used during
a large retail banking merger; the
customer experience team assessed
the availability, during the conversion
weekend, of the bank’s ATMs, call
center, branches, and automated
telephone response system. The scenario
planning helped ensure high availability
as the systems and channels were
changed over.
Of course, before decisions are made
based on the planning scenarios, the
hypotheses behind those scenarios
must be validated post-close with
appropriately detailed due diligence.
For example, if a decision is made
pre-close to modify the product mix
in one sales region with the goal of
increasing assortment or improving
gross margins post-close, the decision
should be validated by analyzing
Conduct integration planning
with shoppers constantly in mind
information not previously available,
such as POS data and customer
analytics data specific to that regional
market. Three activities require close
attention during planning:
Assess and address impacts
on customers
A recent Accenture study revealed that
nearly 70 percent of consumers are
likely or very likely to defect from their
favorite retailer if the competitor does
not cause their most troubling service
annoyance and the favorite store does
not eliminate it.3
To truly understand a merger’s positive
and negative impacts on customers,
M&A integration assessments should
be conducted across the organization.
Why? Because decisions made in one
department will undoubtedly impact
other areas. Our experience shows
8 | Putting customers at the heart of the retail merger
Figure 4. Conduct integration planning with shoppers constantly in mind
Build Customer Measures into Synergy Plans
Conduct Customer- Centric Integration Planning
Mobilize Customer Experience Teams
Customer Experience Principles
the value of establishing a cross-
functional team that is charged with
assessing, reviewing and informing
integration activities and decisions
from a customer perspective. Ideally,
the team will be able to pick out and
quickly address customer annoyances.
For example, customers who are
accustomed to certain types or timing
of promotions are likely to be unhappy
if those promotions are withdrawn or
are run at quite different times.
Manage the
interdependencies
Integration management must also
assess how integration decisions will
impact or be impacted by existing
initiatives in order to avoid potentially
negative customer experiences such
as out-of-stock situations or customer
service that deteriorates when
store staff are overburdened. Cross-
functional collaboration is essential
to identify interdependencies between
integration plans and ongoing initiatives
such as store system upgrades or chain-
wide planogram changes. Proactively
developing alternate or interim solutions
to manage such conflicts will help to
prevent undue strain on the stores—
and on customer relationships.
Interdependencies can arise from
unlikely sources. When a large retail
pharmacy chain faced falling customer
service scores in its newly acquired
stores, its managers learned that a root
cause of the problem was an increase
in the headcount of inadequately
trained temporary labor. The temps
were being hired to make up for
increased turnover among the acquired
chain’s employees who were choosing
to leave rather than spend time training
in the acquirer’s systems. In this case,
the acquiring company had not made
the link early enough between store
systems conversions and customer
service levels.
Run customer-focused tests
on integration
Once the integration approach has
been designed and the integration
teams are ready, it’s useful to test the
approach in a few pilot stores or in a
simulation. The tests must be carried
out thoroughly and thoughtfully,
working to a definite timetable but
also allowing for the right kinds of
learning before the company starts
scaling up its integration efforts.
One large retail acquirer found out
the hard way about the value of
comprehensive pilots. It did not allow
enough time after its pilots were
completed to conduct a post-mortem,
address the issues identified and
assess the risks of moving quickly
to ramp up the number of store
conversions. The consequence? The
retailer lost a large number of customers
because conversions of several of its
acquired stores did not go smoothly.
However, the company quickly realized
its problem, slowed down the conversion
program and began to systematically
address the fundamentals. Based on
analysis and focus groups conducted
with employees and customers, the
retailer realigned several of its integration
programs. When conversion activities
were reinstated, they were much more
successful, with fewer issues reported
and a steady increase in customer and
employee satisfaction.
9
The final foundation element is
the inclusion of the impacts of the
investment and synergy plans on
revenue measures. These measures
must not simply assume that the
acquirer will capture 100 percent
of the acquired chain’s customer base.
A more stringent analysis will forecast
a reasonable retention rate and
an average market basket as store
integration activities proceed. Here
are the most important steps:
Ensure that the synergy plans
align with the strategic
growth objectives
In many cases, integration managers
are brought into the process after
the deal has been formulated and the
synergies have been defined. They are
charged with developing an execution
strategy that will allow them to
achieve both the strategic objectives
of the deal and realize the deal synergies.
If the strategic objectives of the deal
are clear and the acquisition supports
the goals of the acquirer, then the
activities needed to realize the deal
synergies should be in line with
those needed to achieve the strategic
objectives of the deal. If not,
management should understand
why not, and quickly work to refine
the synergy and integration plans
to ensure that they are consistent.
Executing integration plans and synergy
plans that are not in alignment can
result in costly integration expenses
that do not yield the expected returns,
or much worse, compromise the base
business and its future growth.
Build customer measures into
the synergies you target
Measure the impact that
synergy achievement will
have on customers
Consider a case where rebranding
and conversion of the acquired retail
locations meshes with the acquirer’s
objective of establishing a national
brand. In that case, the rebranding
effort must help realize the defined
synergy targets. The only way to do
this is to assess exactly what is being
gained by converting the stores, and at
what cost. In one recent retail merger,
75 percent of the synergies were
realized without having to conduct
any integration/rebranding activities
at the store level. By knowing, early
on, as much as possible about where
a merger’s synergies will come from,
it’s possible to avoid much of the cost
and disruption to customers of a major
rebranding and system conversion effort.
10 | Putting customers at the heart of the retail merger
Figure 5. Build customer measures into the synergies you target
Build Customer Measures into Synergy Plans
Conduct Customer- Centric Integration Planning
Mobilize Customer Experience Teams
Customer Experience Principles
11
This underscores two key points. First,
it is vital to ensure that your execution
strategy is aligned with the achievement
of synergies. Integration leaders must
question any activity that does not
correlate clearly to a synergy—especially
when it has a high cost. Second, it’s
essential to measure all true synergies
and dis-synergies. If the integration of
stores and brands is not documented
to contribute to the synergies, then
further analysis is needed to determine
how the integration will improve sales,
margin, etc. If the customer experience
has not been addressed, it is highly
likely that value will be destroyed.
Balance short-term synergy
goals with long-term
revenue growth
Large integrations require the attention
and effort of many talented professionals
across the organization, and excessive
focus on merger integration can cause
the base business to suffer. So acquirers
must make special efforts to balance
their drive for cost synergies with
initiatives that will continue to propel
their overall revenue growth. Senior
managers must ensure that they
continue to devote time to “running
the business,” in terms of both short-
term goals and long-term objectives.
As such, initiatives such as innovation
and operational improvement deserve
full support and appropriate staffing
and funding.
Retail M&A activity may be flat for
now, but it will pick up again as the
economic downturn sifts the strong
from the weak, and as debt and equity
markets begin to thaw. Now is the
ideal time for growth-minded retailers
to be exploring their acquisition
options and short-listing their
best moves.
But unless they put their shoppers’
needs at the very heart of their
acquisition strategies, they are unlikely
to see lasting success, measured by
buoyant market valuations long after
the merger. Accenture’s observations
of merger activity across many
decades and many industries confirm
the importance of considering the
merger’s impact on the customer. In
no other industry outside of retail
is that so important. A sharp focus
on the shopper must be pivotal in
all major decisions, including store
realignments, branding, pricing, and
even employee training and human
resource management.
The retailers that truly understand
why a relentless focus on the
customer is so necessary will be
the names we can expect to be
shopping at a decade from now.
The retailers that still don’t get it
may soon be emblazoned with
“Everything must go!” signs.
Conclusion
Contributors:Accenture Partners Jay Hentschel and
Chris Donnelly and Accenture Consultants
Brendan Dugan and Sarah Mansour
contributed to this article.
12 | Putting customers at the heart of the retail merger
13
Retail mergers show negative returns
Accenture’s research shows that when compared to other industries where merger integration is more mature—sectors such as finance and telecom—retailers’ shareholder returns are less consistent and often create negative value compared to the industry as a whole. We examined the post-deal shareholder returns for many of the largest acquisitions over the past decade in the retail, financial services and telecom sectors, comparing returns after the close of the deal to the respective sector index in order to control for industry trends.
Results showed that in the first year after deal close, acquirers in the financial service industry saw returns 3.4 percent above their sector index
while telecom acquirers realized returns 2.8 percent higher than their sector index. However, retail acquirers realized returns 2.5 percent below their sector index. Similar patterns emerged in subsequent years: Financial service acquirers obtained returns half a percentage point above their sector index in the first two years after deal close; telecom acquirers realized returns 4.0 percent below their sector index. Retail acquirers produced returns 5.3 percent under their sector index.
While focusing on customers may not guarantee high returns, not focusing on them will certainly contribute to negative returns.
Dorree Ebner is a senior executive
in Accenture’s Growth Strategy group
focusing on merger integration. During
her career, she has worked primarily
with large companies undertaking
significant merger integration efforts.
Ms. Ebner has been involved in
leading, planning and/or execution
of more than 10 large mergers
across the Banking, Health Services
and Retail Products industries. She
has created and continues to own
Accenture’s merger methodology and
tools, conducting several lectures on
post-merger integration topics.
About the authors
14 | Putting customers at the heart of the retail merger
Janet Hoffman is the Global
Managing Director for Accenture’s
Retail practice serving 32 out of the
47 Retail companies in the Fortune
Global 500. Janet has worked with
retailers in all major retail segments
with recent emphasis in the apparel
and grocery segments. Janet works
with clients in the critical areas of
replenishment optimization, advertising
effectiveness, pricing strategy,
shrink management and supply
chain optimization. Janet is a Board
member of the Accenture Foundation
and a member of the Board of
Directors of RILA, the Retail Industry
Leaders Association.
1 “Longs was the last regional
chain drugstore”, The San Francisco
Chronicle, August 14, 2008
2 “Dealmakers’ Confidence Reaches
All-Time Low: ACG-Thomson Reuters
Year-End 2008 DealMakers Survey
Reveals Obstacles and Opportunities
for M&A and Private Equity Investing
in First Half of 2009…Debt Markets
Projected to Improve”, Association
for Corporate Growth press release,
December 9, 2008, www.acg.org
3 Act Now! Customers Are Limited -
Accenture Study, page 5, May 2007
References
15
4 O’Connell, Vanessa, “Reversing
Field, Macy’s Goes Local”, Wall Street
Journal, April 21, 2008
5 Linn, Allison, “Some shoppers sad to
see stores renamed”, Associated Press,
March 4, 2005
6 S&P Industry Surveys: Retailing
General, November 15, 2007
7 Reducing the Risk of Customer
Defection, March 2008 – Accenture
Study
About AccentureAccenture is a global management
consulting, technology services and
outsourcing company. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive
research on the world’s most successful
companies, Accenture collaborates with
clients to help them become high-
performance businesses and governments.
With approximately 177,000 people
serving clients in more than 120
countries, the company generated
net revenues of US$23.39 billion for
the fi scal year ended Aug. 31, 2008.
Its home page is www.accenture.com.
Copyright © 2009 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.