We expect a sharp increase in deals activity in the coming months as companies drive forward their recovery strategies. Companies will be making critical M&A decisions if they need to scale up capabilities quickly or divest non-core businesses.
The most successful transactions prioritise value from the start and one of the most critical drivers of value is a repeat-purchase customer base. Consumer behaviour has changed rapidly during the pandemic, accelerating existing trends and starting new ones. Many of these are here to stay. So what are the potential implications of these changes when you’re considering M&A and value creation?
Predictions in this environment tend to be quite specific to the sub-sector of the business. The pandemic has had dramatically different customer impacts. The habits and behaviours of existing and potential customers, especially their trends outside of the target business area, alongside their wider exposure to UK consumer sentiment and the economy are key factors in indicating your future customer trading and value creation opportunities.
Forced experimentation - changes in access and availability of products and services during the pandemic pushed consumers towards brands and channels they wouldn’t normally choose – has widened consumers’ horizons and redefined customer loyalty.
Some of these changes are likely to be long-lasting. Almost 90 percent of online grocery shoppers, for example, plan to continue buying online when social-distancing measures are removed. This experimentation has also introduced other factors in consumers’ decision-making and they are increasingly exercising preferences beyond brand.
We have seen a strong uptick in environmental and social priorities in buying decisions, particularly if forced experimentation causes customers to move away from long standing brand decisions. There is also a renewed opportunity to revisit current pricing strategies that point directly to value creation (especially if there is strong environmental or social evidence to the business or brand).
Different consumer groups have been affected by and reacted differently to the pandemic. The retail sector, for example, saw a deep dip in consumer confidence in the early summer. This rebounded to pre-pandemic levels in September – but was by no means uniform among different age groups and consumers in different regions. This variability will continue post-Brexit, post-vaccine and post-furlough so understanding the current (and target) customer base in this light will be critical for near term value creation considerations.
Income disparity has been amplified and the spending behaviour of different age groups has been disproportionately affected. Where demand depends on a cohort likely to be sharply cutting back on spending - such as the early-years working demographic - the targeting plan needs to be reviewed. This should also recognise the lead time in building a new customer engagement model is measured in months, not weeks. Can you still realise the full deal potential if a longstanding customer group is likely to no longer be purchasing (at the same frequency or buying level) and what will the cost of finding and securing a new customer base look like?
The pandemic has accelerated digitisation in multiple ways, from remote working to soaring digital sales. Some rebalancing is inevitable as we return to a certain level of face-to-face interaction, but the momentum remains with digitally enabling customer engagement and channels to market. Many businesses have responded with short term digital measures. To avoid giving away too much margin over time due to increased digital channel purchasing, these need to be consolidated into something more sustainable and scalable, or re-considered at a more enterprise-wide level.
One expected growth area, for example, is B2B commerce platforms. Many B2B businesses rely on a field sales model – sales or service people travelling to serve business customers – which has been significantly impaired by lockdown and tier restrictions. The challenge for B2B businesses is that their sales models necessitate an expert or specialist intermediary (such as a beauty salon, for example) to reinforce brand value. But we’ve seen through the pandemic that the intermediaries (such as wholesalers and small-medium businesses) are readily willing to embrace digital channels. We believe B2B commerce platforms – more efficient and price effective than the traditional field sales model – will grow quickly in significance. They would not necessarily replace field sales teams, but instead supplement them to improve productivity and new customer opportunities. The threat of B2B Marketplaces (such as Amazon Business) stealing market share will continue if the business does not provide its own digital-enabled channel and cross-upsell opportunities. Can you still realise the full deal potential if the digital investment has not been made and what might be the impact on the channels to market?
More and more organisations are looking for ways to create value using their own or someone else’s data. Every company says it has a customer database. But is the information truly meaningful? Does it provide a useful picture of the market and spending behaviour? Or is it just a list of names collected over the years?
For data to have value we look for three basic conditions: it’s identifiable and definable, it promises future economic benefit, and it must be under the organisation’s control. There is an inherent risk for those who rely on third parties for reaching customers. As support for the third party cookies is phased out by all major browsers, this will become acute. Cookies are currently key for brand personalisation and targeting of new customers.
Those that take the time to properly understand the value of their data and seek third party partnerships to augment that insight will unlock significant value. It’s as important to know what your customers are doing outside of your business as it is within your own walls. Those that don’t master their data risk wasted investment in costly implementation programmes with little or no upside. Can you still realise the full deal potential if the customer intelligence is not available and the programmes are not fit for purpose.
The most successful transactions prioritise value from the start and businesses looking to M&A as part of their recovery strategy can learn a lot from looking at the habits and behaviours of existing and potential customers. To understand what the future might hold. To understand where the value might lie. And to understand whether they're divesting or acquiring appropriately.