Why M&A Trumps R&D As a Growth Mechanism Today

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In the era of shrinking footprints, the path to growth looks much different than it did a decade or two ago. Back then, revenue gains were derived from taking your prototype and stamping out cookie cutter copies of it all across the country. Then came e-commerce. Now virtual storefronts cover much more ground than any flagship ever could, and consumers are trading trips to the mall for clicks on the web. The shift has left established brands and retailers scrambling to develop new growth strategies, as online pureplay businesses eat around the margins.

“The thing that lead retailers to be successful for the last 20 to 30 years are not success factors now,” Matthew Hamory, principal KPMG strategy consumer and retail co-lead, said, speaking at the company’s Consumer & Retail Media Roundtable yesterday. He said having huge stores with vast assortments, servicing a specific category like pet care items or office supplies, that look the same from city to city has become detrimental to growth for a lot of chains. “That game is over in almost all sectors.”

Today how retailers need to look at each area of their businesses has changed. For instance, he said, operating stores is no longer about labor and efficiencies in your four walls, it’s about building relationships and customer interaction. Similarly, marketing isn’t about splashy television campaigns, its about loyalty programs and creating bonds with shoppers.

This new reality requires a new model—one that most retailers haven’t adopted. “We don’t see the significant structural changes that we feel are necessary for them to make these changes,” Hamory said. “The national players are struggling the most because they hewed most closely to the [old] model.”

Independent stores—even bookstores, which were the first casualties of the web—are fairing best in this new normal for one reason: “They stayed close to the customer, which is really hard to do at scale,” he said.

[Read more about how established retailers are transforming to woo consumers: KPMG: Tech Investments Seen as Roadmap for Consumer Engagement]

But does this mean large retailers will wither and die? Some might. KPMG says the U.S. is overstored by 30 percent, which means some chains will shrink while others disappear altogether.

The ones that remain, however, will still need to grow.

In fact, growth is the No. 1 priority for U.S. CEOs ahead of maximizing shareholder returns and allocating capital for the long-term, according to John Macintosh, national sector leader, consumer goods for KPMG.

But what’s the path if liberally opening new locations is off the table?

“We’re seeing a buy vs. build mentality that we haven’t seen in a long time,” KPMG’s managing director of corporate finance Mark Belford, said. “M&A is the new research and development.”

Onboarding fresh ideas and innovation from new companies is the easiest path to growth for business that Belford said are often built around inertia with an old guard that doesn’t reward fresh ideas. This stands in contrast to the crop of start-ups threatening to disrupt every aspect of retail today. “For the new guys, it’s all about innovation,” he said.

Established companies are also looking to acquisitions to help them accelerate their organization’s transformations. “The rate of change is so rapid, it’s nearly impossible to outpace it organically,” Belford said.

The best example of this is Walmart’s acquisition of Jet.com. Suddenly the 55-year old mass merchant had an executive, in Jet’s founder Marc Lore, who could develop an online strategy that could plausibly fight Amazon.

Bringing these new companies on board also helps neutralize them as a threat. “A lot of companies have been wrestling with the start-ups, which collectively have put a big dent in CPG companies, so they’re looking to buy them,” Macintosh said.

He said the buyers are hoping to learn the culture as much as the strategies.

Ultimately the acquisitions could be a lifeline for both the old guard and the up-and-comers. “The start-ups do a great job, but short of Amazon making it, there’s not a lot of folks that can get to where they want to get,” he said. “The disruptors may find they can only grow to a certain size.”

But he said he sees opportunity when the new ideas from the start-ups are plugged into the infrastructure from the established brands and retailers.

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