Putting customers at the heart of the retail merger

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.


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.


Figure 2. Mobilize your customer experience teams





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


Figure 4. Conduct integration planning with shoppers constantly in mind





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.


Figure 5. Build customer measures into the synergies you target





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.


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.

[email protected]

About the authors


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.

[email protected]

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.

Documents

Putting customers at the heart of the retail merger