Bringing two retailers together does not always ensure instant success or results. Mark Faithfull looks at the secrets of getting the process right

Netto

Whatever the natural synergies, complementary store portfolio or product category gaps that a proposed merger is supposed to fulfil, there is rarely a coming together of store brands that doesn’t involve a corresponding period of adjustment pains.

So while Asda’s bold move for Netto gives the grocer an instant shoehorn into small supermarkets - a market it has largely missed so far - it will no doubt bring with it plenty of surprises, complications and operational challenges as the Netto chain is absorbed.

Indeed, Asda need look no further than the recent merger of Co-operative Group and Somerfield for evidence of the inherent difficulties. Co-op’s move for Somerfield reflected its desire to get closer in scale to the giants of grocery retail and the acquisition of the Somerfield store portfolio gave it a quick push in that direction.

Acquisition fallout

But as Retail Week revealed at the end of April, sales have slumped at former Somerfield stores following the company’s acquisition, with sales at converted Somerfield stores falling 12.2%.

A confidential board report revealed that the business was trading £33m below budget for the first two months of its financial year, while a Co-op spokesperson rebutted: “We have always said integrating two big businesses like this would be a complex matter. Our plan remains to protect the bottom line, while ensuring the best possible value and service for customers.”

Jason Knight, partner at consultant PIPC, says that marrying two retail cultures is always a difficult matter and that pre-planning as much as possible and then acting fast are key elements of delivering a successful integration.

Knight worked on the Littlewoods and Shop Direct merger in 2005 and says that a focus on securing the deal and coping with, for example, Competition Commission inquiries, can distract retailers from this.

“One of the key pitfalls we see in our work is the amount of afterthought about the post-deal integration,” Knight says.

“Our experience is that it is rarely desirable to mix two IT systems. It is preferable to look at which better matches the business model and which is more technologically advanced, and go with that. As an outside business it is often easier to push those changes through because you are seen as objective.”

Knight stresses that this creates certainty more quickly and should be based on a clear focus on the end-architecture the retailer is looking for, rather than attempting to achieve an unlikely consensus. He also believes that establishing an operational platform first is preferable, before rationalising store portfolios or re-examining supply chains.

“As a professional business this may not be possible but if parallel changes can be avoided while the operating platform is established then it does help to avoid the disruption of change,” he reflects. “For example, with Littlewoods and Shop Direct there was a lot of operational consolidation such as warehousing, call centres, distribution centres and supply chain. At the end of the day how much a retailer chooses to change at once depends on their attitude to risk.”

Guy Grainger, head of retail at agent Jones Lang LaSalle, points out that property portfolios often take some time to rationalise anyway, especially in a slower moving market. “It will probably take 12 months or so to reorganise a store portfolio,” he says. “A lot also depends on what is to be done, whether two brands will be formed into one, whether new fit-outs are needed and how much crossover or cannibalisation there is between the building stock of the two retailers.”

Shore Capital analyst Darren Shirley adds that in assessing a merger he would be looking for key areas such as complementary estates, adding that in the case of Morrisons’ acquisition of Safeway there was an initial issue for Morrisons in working out how to accommodate its typically 30,000 sq ft to 40,000 sq ft offer in slightly smaller format Safeway stores.

“We would be considering what a retailer might have to modify, supply chain issues, IT and in-store availability post-merger,” he says, stressing also the importance of at least one of the two retailers coming from a position of strength. “If you have two struggling retailers merging then it can be rather like two drunks trying to hold themselves up,” he reflects.

Execution Noble retail analyst Caroline Gulliver adds that a similar company culture is important - indeed, Knight recalls that one of the challenges of the Littlewoods/Shop Direct merger was bringing workforces from the geographically near, but culturally far, cities of Manchester and Liverpool together - plus a clear growth path.

“We want to see some angle of growth, whether that’s bringing new customers, or extending the product offer to the same customers,” she says.

“And, of course, we want to see cost synergies and buying economies.”

Whatever the merits or challenges of mergers, we will probably see more. Grainger points out that in the wake of the demise of Woolworths, a number of regional general merchandisers and discounters have emerged and consolidation, and a merger between some of those entities is likely down the line.

How they enact those mergers may not be so easy.

Feather & Black: lessons learnt

Specialist furniture retailer Feather & Black is currently basking in the glow of storming performance updates and the opening of its 35th store, but as managing director Adam Black recalls, its first acquisition taught the business some valuable lessons.

Black established Feather & Black with Robbie Feather, who had bought Yorkshire-based CJ Furniture and had turned the sleepy business around.

The pair continued the progress and opened four stores, two of which were adjacent to outlets for the 18-store The Iron Bed Company. The latter approached them about what was essentially a reverse takeover, with the smaller business buying its larger, by then struggling, neighbour.

However, what Black describes as a “wobble in the economy” derailed the original business plan for the merged retail operation. After its bank refused to extend banking facilities it struggled on and Feather & Black was eventually bought by Wade Furniture Group.

Black reflects on a number of errors made by the business during and after the acquisition process. “We achieved most of our objectives with the merger but we were caught by the economic slowdown,” he reflects.

“Looking back, once the bank denied us further facilities we should have gone for a pre-pack administration, which would have allowed us to get rid of the half dozen stores that were not performing, renegotiated all our contracts and emerged in good shape to continue profitably. But although pre-packs were available they were not well known.”

He also believes the business should have borrowed more. With a greater exposure to the bank - which turned Feather & Black down because the bank had lost money on several unrelated retail clients - it would have been less likely to refuse its continued backing.

“A lot of it is down to experience,” he reflects. “We tried to change too much in one go, from taking the offices from a large head office to the corner of a warehouse, to changing the store brand. At the time The Iron Bed Company name seemed to limit us in terms of the product offer but it was a well established brand. The fleet of vans we inherited was ideal for beds but unsuitable for furniture, we had an unexpected tax investigation and a copyright lawsuit thrown at us.”

Black says that while he remains an optimist he would look at any future acquisitions with a more suspicious eye. “It’s a bit like buying a home, the seller never quite tells you everything,” he says. “When making an acquisition you should assume the worst and then add 10%.”