Retail M&A
Buying a pathto omnichannel

Consumer products and retail sector

Introduction
It’s no secret that retailers are scrambling to develop
future-ready businesses and operating models that
fit consumers’ expectations for a seamless shopping
experience across all physical and digital touch points.
For many, the road to internal capability development
has proven to be arduous, with daunting challenges
that puzzle even the largest retailers, including:• Laying out a long-range plan with a clear road map• Identifying the most important capabilities to develop• Freeing up resources to fund development of the identified capabilities• Attracting the right talent to create those capabilities• Getting to appropriate scale• Integrating new capabilities into existing operations

Meanwhile, the consumer, the competitive
context and the technology environment
are evolving rapidly, resulting in theperpetual whiplash that leaves manyretail executives feeling as though a pathto omnichannel is impossible to forge.
The journey from concept to scaled,meaningful operations requires a pace,a focus and a way of thinking with which
many retailers struggle. These dynamics
can result in vulnerability, as singleminded competitors that approach old

retail challenges from different angles
fight for share in the market. Even
unprofitable challengers can be
disruptive by giving consumers a tasteof what might be possible, raising
expectations for all. As a result, manyretailers, recognizing the complexity ofbuilding differentiated capabilities quickly,
have looked to acquisitions to ramp up
omnichannel capabilities and allow them
to be competitive in today’s pressurized
retail market.

Retail M&A Buying a path to omnichannel |1

Profiling recentomnichannel acquisitions
Such analysis begs the question: for what objectives andunder what circumstances should retailers pursue acquisitions
for the sake of omnichannel development? To answer thatquestion, EY-Parthenon analyzed 60 deals completed by thetop 100 US retailers in the past five years that warrant
classification as an omnichannel-enhancing deal (see Appendix).
More specifically, we looked at deals initiated by the top 100retailers (as defined by 2017 US revenue) that met one ormore of the following criteria:• A store-based retailer acquiring an operating
e-commerce company• An e-commerce-centric company buying
a store-based retailer• A retailer (store or e-commerce-centric) acquiring
a company whose primary functional capability would
enhance the acquirer’s omnichannel operations, which
can include anything from marketing technologies,
to logistics to advanced analytics.
These deals ranged from small tuck-in deals up toAmazon’s acquisition of Whole Foods Market in 2017 andWalmart’s acquisition of Jet.com. In each case, the deals
fulfill some combination of the following strategic objectives
initially surveyed:Consumer products andretail statistics

42%

90%74%• Expanded offering• Customer experience transformation/enhancement• Technology/intellectual property procurement• Talent acquisition

2| Retail M&A Buying a path to omnichannel

46%

of consumer products
and retail-focused
executives intend topursue acquisitions in
the next year.
Source: EY Digital Deal
Economy Study
January 2018of companies are
considering digital
capital allocation
planning.
Source: EY Digital Deal
Economy Study
January 2018of companies take an
inorganic approach todigital growth, up 7%
since 2017.
Source: EY Digital Deal
Economy Study
January 2018

say their M&A due
diligence processes
are not highly effective
for digital acquisitions.
Source: EY Digital Deal
Economy Study
January 2018

For example, Signet’s acquisition of James Allen enhanced
Signet’s e-commerce offering, a key executive and shareholder
priority. But James Allen also offered Signet access tonovel 360-degree diamond imaging technology and online
visualization that could contribute to the sophistication ofSignet’s platform more broadly. Likewise, Target’s acquisitionof Ship’t builds a presence in grocery while advancing lastmile delivery capabilities. Other examples include PetSmart’sacquisition of Pet360, which hosts an online platform forveterinary health information and care advice. Pet360 does
not necessarily represent share gain, but does broaden the“community” of PetSmart’s customers — thus strengthening
the omnichannel customer experience with relevant intellectualproperty. Overall, the deals we believe are most poised forsuccess are those that fulfill more than one strategic objective,
and specifically for those deals undertaken for share gain, thatthe target can enhance the omnichannel offering beyond mere
portfolio expansion.

Of the 60 deals we analyzed, 75% fulfill more than one of the deal
criteria. Many notable deals simultaneously expand e-commerceshare and strengthen omnichannel presence through improvements
to customer experience, technology or talent.

Retail M&A Buying a path to omnichannel |3

4| Retail M&A Buying a path to omnichannel

The seven steps to pursuing omnichannel in retail
Based on our research, EY-Parthenon teams have identified seven steps to consider when pursuing omnichannel acquisitions in retail.

Strategic alignment

01

First, a company should lay out a clear long-range omnichannel vision and strategy.
This process, which by definition is cross-functional, prioritizes the capabilities
required to fulfill the company’s vision. This basic building block is often overlooked
and can therefore reflect a problematic absence of a common definition of“omnichannel” among the senior leadership.

Capability and CX road map

02

Second, the omnichannel strategy should identify the capabilities and consumer
experiences needed to enable the omnichannel strategy. This discrete road mapshould specify key enabling capabilities and channels, their relative priorities andthe timeframe in which the company wants to enable them. In addition to pure sharegain, these enablers should represent tangible advancements and innovation against
baseline e-commerce capabilities.

Execution assessment

03

Third, it’s important to a) decide whether each capability or channel requires speed
to market in order to create a sustainable advantage and b) determine the size andrisk profile of an effort to develop it organically. This typically requires a high level ofcoordination across multiple internal functions to create a well-informed assessment,
and an evaluation of the possibility of achieving similar outcomes via acquisition or via
partnership/joint venture.

Talent assessment

04

Fourth, companies need to assess whether they have the talent to reliably develop
the desired capabilities in-house or if supplemental talent is needed. This is often
the Achilles’ heel of this process, as retailers can both under- and overestimate
their internal talent pools, especially as it relates to new and emerging capabilities.
According to the EY Capital Confidence Barometer, over half of consumer products
and retail executives struggle to identify and hire people with the right skills.

Retail M&A Buying a path to omnichannel |5

Target identification

05

Fifth, an industry screening process will identify viable acquisition targets that canprovide the capabilities needed to achieve the omnichannel strategic objectives.
Through this process, a company can also discover potential targets that haveadditional, valuable assets they could leverage beyond a customer and revenue
base: for example, are there patents, unique workflows, customer databases,technology skills, innovation and analytics capabilities, relationships, and otherintellectual property that would enhance the acquirer’s seamless delivery of a greatcustomer experience?
As convergence between the retail and technology sectors continues to increase, arigorous target screen should not only identify intuitively viable acquisition targets, it
should identify hidden disruptors as well. Tools such as EY Embryonic can enrich thescreening process and inform M&A decisions by leveraging data analytics to identify
overlooked players that are likely to have a meaningful impact on a given company orindustry in the future.

Enhanced value assessment
06

Sixth, a company needs an articulated perspective on the size (and sources)of enhanced value to be expected from the new omnichannel skills, and a planfor measuring the added value. This could include defensive value, in whichbuying the asset could deprive competitors of unique omnichannel capabilities thatconsumers value.

Implementation rating

07

The final consideration should be a reflection on a company’s track record ofsuccessful integrations. Sporadic acquirers have a spottier record of creating andsustaining value from acquisitions than serial acquirers, as they lack successfulmodels of effectively integrating new companies at a strategic and operating level.
Is there a clear deal thesis and vision of the post-acquisition operating model?
Omnichannel acquisitions can be tricky given their value is most often tied tomultiple drivers, not one strategic dimension, and often bring on board very
different cultures, capabilities and technologies. And they generally requiresignificant integration activities, since keeping them as stand-alone entities
defeats the underlying purpose of capability enhancement.

Conclusion
Given the rate of change in retail andthe migration to consumer behavior
that rewards superior omnichannel
execution, we have little doubt that the paceof acquisition of these kinds of companies

6| Retail M&A Buying a path to omnichannel

will continue for some time. Retail leaders
will be those that are prepared, pick theright assets and successfully handle theintegration of new channels, capabilities
and talents.

Retail M&A Buying a path to omnichannel |7

Appendix
Below is a list of 60 deals that were analyzed by EY-Parthenon
consumer teams. These deals have been initiated by top 100 US
retailers (as defined by 2017 US revenue) in the past five years
that warrant classification as an omnichannel-enhancing deal.

The deals fulfill some combination of the following strategic
objectives initially surveyed:• Expanded offering• Customer experience transformation/enhancement• Technology/intellectual property procurement• Talent acquisition

8Technology/IPExpandedofferingxx

Transformation/enhancementAcquirer

TargetAce Hardware

The Grommet

Albertsons

PlatedAmazon

Colis Privé

AmazonEvi Technologiesx

AmazonGoodreadsx

AmazonGraphiqx

AmazonShoefitrx

AmazonBody Labsx

AmazonOrbeusx

AmazonWhole Foods Marketx

AmazonSouqx

AmazonEMVANTAGE Paymentsx

AmazonGoPagoxApple

BookLampx

Apple

Ottocatx

Apple

Beats Electronicsx

Bed Bath & Beyond

Indie Designersx

CVS Health

Drogarias Pachecox

Dick’s Sporting Goods

Affinity Sportsxx

Dick’s Sporting Goods

GameChanger MediaxxGamestop

Geeknetx

Gamestop

Simply Macx

Gap

Weddington WayxHEB Grocery CompanyFavorx

Hudson's BayGilt| Retail M&A Buying a path to omnichannel

Talentacquisition

xxxxxxxxxxx

Technology/
IP

Expandedoffering

Transformation/enhancement

Talentacquisition

Acquirer

Target

IKEA Group

TaskRabbit

KrogerdunnhumbyUSA

Macy’sBluemercury

Nordstrom

BevyUpxx

Nordstrom

MessageYesxx

Nordstrom

Trunk Club

Office Depot

CompuCom

PetSmart

Pet360Rite Aid

Envision Pharmaceutical Services

Rite Aid

Health Dialog Services

Sears Holdings

SNUPI Technologies (WallyHome SensorTechnology)xx

Signet Jewelers

James Allenxx

StaplesPNI Digital Mediaxx

StaplesHappy Studio

StaplesRuna

StaplesAccolade Promotion Group

TargetIngredient 1x

TargetPoweredAnalyticsxx

TargetZettataxx

TargetGrand Junction (application software)xTargetCooking.com

TargetShipt

The Home Depot

Global Custom Commercex

The Home Depot

The Company Storex

Walgreens Boots Alliance

Consumer Health ServicesxWalgreens Boots Alliance

Sleek MakeUP

x

WalmartParcelx

WalmartSCM

xWalmartTEDI Translogic Express DedicatedxWalmart

Jetx

Walmart

Simplexityx

Walmart

Bonobosx

Walmart

Moosejaw Mountaineering andBackcountry Travelx

Williams-Sonoma

Outwardxxxxxxxxxxxxxxxxxxxxxxxxxxxx

x

Retail M&A Buying a path to omnichannel |9Contacts
Joshua Chernoff
Managing Director
EY-Parthenon
Ernst & Young LLP+1 312 879 6848
joshua.chernoff@parthenon.ey.com

EY | Assurance | Tax | Strategy and Transactions | Consulting
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