Special Report: Mergers and Acquisitions

As the retail sector consolidates and the larger players grow stronger, a rising number of consumer goods (CG) firms, such as Adolph Coors Company and Molson Inc., Hershey Foods Corporation and Wm. Wrigley Jr. Co. are executing merger or acquisition strategies. While the impact of mergers and acquisitions (M&A) activity in the CG industry appears to be positive on the surface, many obstacles must be overcome to reap the benefits of supplier rationalization, distribution efficiencies and trade fund optimization. Some of these obstacles include:

• Unifying leadership and strategic direction

• Rating and reducing the supply base

• Divesting duplicated manufacturing and distribution facilities

One of the largest and often overlooked barriers to a successful merger or acquisition is the alignment of information technology (IT) with the business goals and strategies of the new entity. "The alignment is particularly challenging if one company runs a highly centralized and standardized IT environment and the other company being merged or acquired runs a highly distributed IT environment that is not standardized," says Mike Dominy of the Yankee Group. Ultimately, Dominy believes bigger is better in the CG industry only if the larger entity can use IT to reduce supply chain costs and deliver improved sales, marketing and channel effectiveness at equal or increased level of customer service.

New Trends Emerge
As the world's population begins to age and growth rates sputter, it is increasingly difficult for CG firms to drive the organic growth that Wall Street demands. In response, many CG firms take the next logical step of acquiring businesses that are complementary to their own. While this is a traditional driver of the M&A mindset and activity, many leading companies are choosing instead to divest and prune brand portfolios. Procter & Gamble shed its JIF and Crisco brands, while Kraft sold off Altoids. The thinking behind brand purging is that there are limited company resources, like trade promotion funds, to drive the business. "Fragmenting efforts and investments across a set of brands leads to dilution of the effectiveness of these investments," says Nick Handrinos, Consumer Business CRM Practice Leader, Deloitte. "Also, retailers are demanding more and more category focus, fewer larger brands and less overall complexity. The justification of adjacent or semi-complementary brands is very difficult."

Implications Appear
The aforementioned implications point towards a tough road ahead for CG firms looking to jump on the M&A bandwagon. Handrinos cautions that the failure rate of integration is exceptionally high during acquisitions. Due diligence extends to not only the I-Banking financial models and a clear understanding of culture, systems, processes and assets should all be well understood and analyzed. "These analyses should serve as the blueprint of the integration work, not just a brief that made the deal go through," says Handrinos. "Ensure your own organization is the template within which you want the acquired company to conform. You'd be surprised by how many companies do not think through the operational details of the transaction."

When it comes to divesting brands, companies should be certain they understand the true "core" of the business to avoid you shedding a "jewel" that proves more valuable than once understood.

The Retail Ramifications
On the retail front, CG firms can continue to expect emphasis placed on a handful of retail giants to take up a large share of volume. This places more pressure on figuring out how to extract more profitability out of the same volumes. "Creating and managing detailed cost of serve information is incredibly important as CG companies strive to change those practices that drive cost upward," says Handrinos. Retail management and execution are even more critical as fewer parties make up the lions share of distribution.

This places more pressure on fact based selling, supply chain (in-stocks) and category management capabilities. "Consumer goods companies must figure out how to work with an ever fewer set of buyers to promote and drive the volumes," says Handrinos. "The risk of falling out of distribution has now increased dramatically." Upset one major customer and upwards of 20 percent of a volume is put at risk.

While it isn't exactly clear if a bigger organization means a better organization, brand competition will continue to heat up as the major CG players converge on the same retailers. Regardless of company size, brands need to be sharp ensuring that their relevance and differentiation is clear and that the consumer value proposition is well articulated.