How supply chain is shaping the retail M&A agenda

As retailers focus on omnichannel, supply chain leaders play a key role in identifying new capabilities and optimizing the operating models.

Supply chain is becoming a key competitive advantage in the retail sector. Retailers are striving to optimize the omnichannel experience for their customers. Supply chain leaders are pivoting from traditional cost-minimizing initiatives to acquiring and integrating disruptive capabilities they need to reimagine their operations and meet consumer demands for rapid fulfillment.

As the backbone of the entire retail fulfillment process, supply chain needs to play a pivotal role in a company’s inorganic growth strategy. Recent acquisitions show how capabilities like same-day or next-day delivery have become the de facto customer expectation. Going forward, these efforts will likely include more non-retail transactions, such as Target’s acquisition of Grand Junction, a transportation technology company, to improve and expand retailers’ delivery capabilities.

The M&A agenda, once dominated by footprint expansion and scale, is being bolstered by a drive to enhance select operational capabilities that fall under the supply chain purview. For example, Kroger, which earlier prioritized geographic expansion with acquisitions like Harris Teeter and Roundy’s, is now focused on strengthening its operational capabilities. The US grocery retailer has worked with Nuro for same-day and next-day autonomous vehicle grocery delivery and has expanded into adjacent categories by acquiring Relish Labs (Home Chef), which offers weekly meal kit delivery services and recipes to subscribers.

To drive this transformation in the next decade, supply chain leaders can include three key priorities in their agenda:

• Identifying operational capabilities that will differentiate them in the marketplace
• Optimizing the operating model through strategic relationships/M&A
  
• Working with the right experts to build and sustain targeted capabilities

Inorganic channels for retail: M&A and strategic alliances

M&A is a quick way to:

• Match speed to market
• Foster diversification
• Gain market power
• Develop capabilities for long-term perspective
• Focus on backward integration to establish better control on the sourcing side of the supply chain
• Generate supply chain synergies

In terms of strategic alliances, commercial alliances are leveraged to:

• Fill a key product gap quickly
• Fix go-to-market gaps
• Enhance customer touch points
• Expand reach in an asset-light way
• Increase efficiencies/ cost optimization

Technology collaborations are focused on:

• Working on digital innovation in operational functions like supply chain
• Expansion of omnichannel capabilities
• Tech-enabled customer touch points
• Collaboration of skills, technical know-how, resources and other assets

The buy vs. partner decision requires companies to consider several factors (as listed in graphic below) with a well-established change management process for employees. Broadly, an acquisition is a preferred option when the capability is central to the operational focus of the retailer, while a partnership is preferred when integrating the two businesses would not produce sufficient synergy benefits to outweigh the costs of the transaction.

An Ernst & Young LLP (EY) analysis of retail transactions over the past five years shows that companies have been aggressively bolstering capabilities in the end-to-end supply chain. The below graphic shows examples:

Once the company chooses the right “buy vs. build or partner” strategy for the complementary capability, choosing the right target comes next. Assessing the parent and target company’s respective operating models and building a joint future state model are central to identifying the right target during diligence. Other factors such as customer segments and stickiness, cultural fit and leadership vision, financial health and valuation also play crucial roles in filtering prospects.

In conclusion, for most traditional retailers, the road to build a next-generation supply chain is long and will continue to be so for the next few years as new capabilities continue to emerge in the marketplace. COOs, CFOs and corporate supply chain officers will benefit from viewing supply chain as a critical enabler in gaining competitive advantage in the marketplace — not just by driving operational efficiencies and fulfilling customer demand, but also by way of enhancing customer experience and building sustainable business models that can drive profitable growth for years to come.

Ernst & Young LLP Managers Venkat Maddila and Amit Srivastava contributed to this article.