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Winning companies in retail and consumer industries use deals and partnerships to build capabilities

Few industries have felt the impact of disruptive change more than consumer and retail. To adapt and prosper in a changed—and changing—environment, consumer and retail companies need to master the art of finding the right M&A targets, venture investments and strategic partners. It takes time, talent, and focus to get the full benefits of the capabilities, technology, and expertise that these deals and relationships can bring.

To beat disruption, use partnerships, M&A and investments

Across industries, traditional business models are being disrupted. Markets and processes are being digitized and old sources of competitive advantage are turning into disadvantages. Continual innovation in products and customer experiences are required and companies must get good at data analytics to gain customer attention and build loyalty.

Nowhere are these shifts more apparent—or more challenging—than consumer and retail businesses. But, according to KPMG research,1 consumer and retail CEOs--like other CEOs--are concerned about their organization’s ability to innovate (Exhibit 1).

Exhibit 1: Consumer and retail CEOs are concerned about their ability to innovate

This is why, to keep up, large incumbents in consumer and retail rely increasingly on M&A, strategic partnerships, and venture investing. The deals range from Walmart’s game-changing acquisition of Jet—which became the foundation of a successful and rapidly growing e-commerce capability—to early-stage venture investments, minority stakes, and partnerships aimed at quickly filling in gaps in capabilities or finding a shortcut into new categories or markets.

This makes the sourcing, pricing, execution, and management of such deals a core competency that has as much impact on performance as traditional industry expertise, such as merchandising or package design. Again, like leaders in other sectors, consumer and retail CEOs are especially interested in strategic alliances. In a recent KPMG survey, CEOs of all kinds said they expect the No. 1 source of growth for their companies in the next three years will be strategic partnerships, followed by organic growth, M&A, and joint ventures (Exhibit 2).

In this paper we look at a range of strategic transactions that have been used to accelerate innovation and position consumer and retail companies for the new competitive landscape. Each type of transaction or alliance brings its own challenges in selection, execution, and management. Based on our work with clients across consumer and retail, we identify pitfalls and best practices for realizing strategic and financial value.

Exhibit 2: Strategic alliances are seen as key growth

Using M&A, strategic partnerships, and venture investing to adapt to disruption

Strongly disagree

Disagree

Neither agreeor disagree

Agree

Strongly agree

0% 10% 20% 30% 40%Consumer and retail CEOs All CEOs

Consumer and retail CEOs All CEOs

1© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Strategic partnerships and alliances Consumer and retail companies continue to see M&A as a mechanism for growth, but they are increasingly focused on deals that drive innovation, too. Mergers, strategic partnerships, alliances, joint ventures, and venture investing give traditional organizations the ability to experiment and test innovative concepts and technologies before they make long-term or significant financial commitments. Some companies looking to develop completely new products have created or sponsored innovation incubators where they collaborate with early-stage companies. Forming strategic partnerships and alliances with established innovation leaders can be a much quicker route. Walgreens, for example, is partnering with two tech companies to accelerate development of their health-care service offerings.

Walgreens: From pills to wellness

Two recent deals by Walgreens (Walgreens Boots Alliance) illustrate the drugstore chain’s determination to evolve beyond pharmacy to become a provider of health-care services. Walgreens and Microsoft announced a seven-year agreement in January to work together to develop new health-care delivery models, technology, and retail innovations. The announcement came on the heels of a December 2018 announcement between Walgreens and Verily, an Alphabet company, to collaborate on a number of projects aimed at both improving health outcomes for patients with chronic conditions and lowering the cost of care.2

2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Consumer and retail companies are also looking for partners in unusual places. For example, some food and beverage companies have partnered with academic institutions or public-sector organizations to generate more data or to share knowledge related to nutrition, improved food quality, or other product attributes in order to fuel product or operational innovations.

There are also alliances between traditional companies an innovative tech companies outside their industries. For example, Dunkin’ Donuts has been working with the navigation app provider Waze since 2012. Most recently, the two companies collaborated on a new function that allows Waze users to place orders at Dunkin’ Donuts through an in-app feature.3

When to think about strategic partnerships

How quickly do you need to get to market to protect share—or take share?

How long would it take to build and launch your own offering?

Is there a benefit to being the first mover in this product, approach or geography?

1

2

3

Kroger finds a partner to help it take the lead in driverless delivery service

In late 2018, The Kroger Co., America’s largest supermarket chain, announced a partnership with Nuro, a developer of self-driving vehicles, to create what they expect to be the first consumer delivery service using self-driving vehicles. Kroger plans to begin service this year in Scottsdale, Arizona and Houston using Nuro’s R1, a custom vehicle that has no driver, no passengers,

and only transports goods.4 Customers will be able to place orders on Kroger’s website or app. The R1 is fully autonomous, but initially will be accompanied on its rounds by cars with drivers (National roll-out depends on National Highway Traffic Safety Administration’s approval in states where unsupervised self-driving cars are not yet permitted.)

3© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Consumer or Retail Incumbents

— Existing customer base

— Distribution networks

— Brand recognition

— Production capabilities

— Scale and reach

— Massive amounts of data

Strategic Partners

— Ability to innovate

— Digital capabilities/knowledge

— Data analytics capabilities

— Talent with required skill-sets

— Agile and adaptable processes

— Culture of creativity

Exhibit 3: Mutual aid: How partners complement each other

When it comes to driving innovation in consumer and retail, strategic partnerships and alliances are a great place to start. This is because alliances and partnerships can provide a high degree of flexibility for companies that might want to experiment with a number of different options in order to determine which will have the best ROI long-term.

In order to get the most out of any strategic partnership, alliance, joint venture, or other innovative co-creation opportunity, companies should take the time to step back and evaluate where they are today, where they want to be tomorrow, and what types of partnerships and alliances can help them bridge the gap.

First, understand what each partner brings to the table. To succeed, these arrangements must offer mutual benefits. Large, established companies have significant benefits they can offer, such as global distribution, efficient operations, or access to a large base of customers. They typically partner with startups and other organizations that have complementary capabilities, such as a culture of creativity, advanced digital know-how, and talent with specific technical skills (Exhibit 3).

Strategic M&A: Keys to success

Strategic partnerships and alliances

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There is no one right way to drive innovation through partnerships. Companies need to think about what will work with each type of partnerships or alliances they forge. For example, with one partner, a company might start with very informal arrangements, such as setting up regular meetings or labs simply to spark ideas or to share knowledge. With another partner, they might decide to formally work together to co-create a product to see how well they work together.

Companies should be ready to experiment with different partners rather than try to treat all partners equally. The reality is that different partners will want different benefits from their relationship; companies need to understand what their partners want and find ways to provide that value even as they extract their own.

Experiment with partners – test different ways of working together

An initial screen of potential partners provides a chance to identify competitive advantages, enabling first-level target identification and prioritization. Concentrating on a small set of targets then helps ensure that resources are effectively utilized. Commercial due diligence provides a way to understand the market environment and validate potential

partners’ financial projections. A thorough market review also identifies industry risks and data about industry norms for testing budgets and forecasts. Overall, these insights help set realistic expectations and build confidence in the partner’s ability to support the relationship.

Conduct rigorous target screening and commercial due diligence

In order to maximize the long-term benefits of a strategic alliance or partnership, companies should invest time and effort to ensure that the right structures and processes are in place on both sides. Without these, many strategic alliances can quickly lose steam as other priorities come up.

To start, companies should collaborate with partners to agree on appropriate governance structures and necessary resources, documenting the specific accountabilities and responsibilities of each party. Companies should also

determine how they will jointly monitor, track, and report on results, in addition to defining specific risk management processes and procedures. By working together on the partnership structure, companies and their partners can ensure both sides are truly committed to the partnership while also ensuring that penalties or repercussions are defined should either side not meet their responsibilities.

Create the right partnership structure

Not all partnerships will succeed. Companies should recognize this and have a means to regularly evaluate whether a partnership is working. When a partnership is not delivering, companies should quickly determine whether (and how) it can be strengthened or if it should be wound down. If a partnership isn’t creating value, move on.

Like any transformation or innovation initiative, companies need to be agile and ready to change. By being flexible, companies will be better able to adjust their course based on changing market conditions, changing demands from their stakeholders, and the outcomes of their different innovation efforts.

Be agile

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Strategic M&A M&A remains an important tool for reshaping consumer and retail organizations to fit changing demands. No company exemplifies this better than Walmart. After years of in-house efforts to build up its e-commerce capabilities, the global retailing giant turned to M&A in order to more rapidly advance its strategic e-commerce priorities. Walmart bought Jet.com in 2016 for roughly $3 billion and, in 2018, made four more strategic acquisitions: Art.com, BareWeb, Eloquii Design, and the massive $16 billion purchase of India’s largest online retailer, Flipkart. In 2019, the company purchased Israeli start-up Aspectiva, which uses AI and data analytics to craft product recommendations for shoppers. These deals have helped the No.1 bricks-and-mortar retailer jump to third place in U.S. online retail in 2018, overtaking Apple.5

Consumer goods companies are also acquiring startups that can help them navigate through changing markets by developing custom products and user experiences. In August 2019, Nike acquired Celect, a Boston-based predictive analytics company, one a series of tech deals.6

Celect’s technology will be integrated into Nike’s website and mobile apps and used to predict what styles of shoe and apparel consumers are looking for. In announcing the deal, Nike acknowledged that it had struggled to build this capability in-house.

To move beyond its traditional brands and business models, the giant Kraft Heinz—itself the product of a $46 billion mega-merger in 2015 – has made a number of strategic moves to accelerate growth. In 2018, it bought wellio, a food tech company that uses artificial intelligence to provide personalized, on- demand food choices to consumers.7

M&A can drive innovation for consumer and retail businesses, but buyers need to weigh how much effort and planning and execution skill will be needed to achieve projected benefits. In order to achieve success, companies need to spend a significant amount of time understanding not only their prospective target’s potential value, but also how they will leverage, manage, and retain that value over time.

Making M&A work – Kellogg’s acquisition of RXBAR

To keep up with changing customer preferences, food processors need to move quickly to keep up with shifts in demand, offering new products and variations for health-conscious consumers, for example. In October 2017, Kellogg Company acquired RXBAR, the maker of “clean-label” protein bars (made with natural ingredients) for $600 million. The deal brought Kellogg what is believed to be the fastest growing nutrition

bar brand in the United States – and a company with a strong millennial customer base and an e-commerce sales channel. For RXBAR, the deal offered a way to accelerate growth and further scale its brand. The acquisition has been a success on both sides, in part because Kellogg continues to operate RXBAR as a standalone entity.8

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Data will be the chief currency of success in the future. Consumer and retail companies that learn to use data analytics and technology platforms to drive customer engagement will be well positioned to understand their customers and respond more effectively to changing customer needs. At the same time, companies need to recognize that data today is not strictly internal. They need to use data from a myriad of sources including social media, e-commerce platforms, internal transactions systems and customer service systems.

Companies should work to identify ways to better understand their customers and how the market is evolving. This means examining customer trends and buying patterns across channels and harnessing data and analytics to truly uncover valuable and unique customer insights. This process initially can help organizations identify where there is white space on the shelf, where they have a big opportunity, or where they might have performance gaps. This can help organizations prioritize their innovation efforts and determine where they need to focus their attention.

When to think about M&A

Are there companies that could provide you with rapid expansion into new markets or product areas?

Is M&A required to keep certain advantages out of the hands of your competition?

How can you turn fast growing competitors into new value for your organization?

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3

Strategic M&A: Keys to success

Use data to understand your customers and how the market is evolving

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Venture investing

Corporate VC participation in global venture deals 2012–2Q’19

Source: Venture Pulse, Q2’19, Global Analysis of Venture Funding, KPMG Enterprise. Data provided by PitchBook, July 5, 2019.

Capital invested ($B) % of total deal count

In their quest for growth and innovation, consumer and retail products companies have become active venture investors. Participation of corporate investors in VC deals has grown significantly over the past eight years, from less than 1 percent of VC deals globally in 2010 to a high of more than 20 percent in the third quarter of 2018. While corporate participation in VC deals globally dropped in the final quarter of 2018, driven primarily by a drop-off of investment in the U.S., corporations continued to increase

investment in Europe and Asia. In Europe corporate deals rose to 25 percent of the total and in Asia, corporate investors participated in almost 30 percent of deals.

In 2017, Walmart created Store No. 8, a tech incubator to invest in and nurture tech companies. Store No. 8’s portfolio includes Spatialand, a virtual reality company that is expected to help lead Walmart’s foray into VR, and Jetblack, a members-only personal shopping service.

When to think about venture investing

How certain are you regarding the innovations you expect to be important in the future?

Are there a number of promising start-ups that could be valuable in the future, but do not have a proven value proposition to date?

How much innovation will be required in order to make leaps forward in terms of product offerings?

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2

3

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Venture investing: Keys to success

Venture investing should be approached with the same rigor as any other transaction. But there are special considerations, too. When backing innovative young companies, investors are making big bets on relatively unproven talent, technology, and business plans. During due diligence, pay special attention to the founding team. Learn about the other investors and partners.

Due diligence should deepen your understanding of the company’s market opportunities and risks. Use data and analytics tools to understand the trends that are shaping demand for the company’s goods and services and to validate management assumptions about growth and

profitability. What is the typical customer profile and what influences their purchasing behavior? Which geographic, demographic or other segments are growing fastest and why? Are any segments being overlooked?

Venture investors should be active partners with the companies in which they invest. Investors can help guide young companies onto paths to success, by opening doors and helping to expand networks. Investors can offer mentorship, training programs and marketing support where appropriate (at trade shows and in marketing communications, for example). Find out what would be most valuable to the company’s management.

L’Oréal uses venture investments to go deeper in personalized products

L’Oréal has made a significant foray into personalized products, a growing area of focus for many companies in the consumer and retail space. In March 2018, L’Oréal launched Custom D.O.S.E, a technology that uses unique information about each consumer to mix tailored skincare treatments. In 2019, the company partnered with UBiome, a microbial genomics company, to learn more about skin bacteria to help formulate skincare products.

In order to move further into the personalized products space, L’Oréal launched a corporate venture capital fund called BOLD: Business Opportunities for L’Oréal

Development in December 2018. The fund plans to take minority positions in promising, innovative start-ups, providing them with guidance, connections, and expertise to help them grow. L’Oréal is placing few limitations on the business models of these companies; it is expected to consider a mix of value propositions, including digital, marketing, retail, research, supply chain, communication, and packaging specializations. BOLD has already made its first investment: a minority investment in Sillages Paris, a French start-up that uses AI technology to produce customized fragrances for online distribution.9

Strategic M&A: Keys to success

Venture investing

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ConclusionConsumer and retail businesses will continue to be shaped by new technologies, business models and shifting consumer demands. The pace of these changes will largely be driven by nimble young players that can innovate rapidly and exploit new marketing and sales channels. For large incumbents to keep up, they need to access the talent, knowledge, and skills that are at the leading edge. And the surest, fastest way to do this is through M&A, venture

investments, and strategic partnerships. This is why consumer and retail companies that learn how to find the right deals and partnership—and manage them effectively—will be the winners. These are the players that will reshape and transform their business and accelerate growth, even as they continue to leverage the power of their scale, supply chains, distribution networks and customer bases.

10© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

How we can helpStrategic alliances, innovative partnerships and smart M&A deal making can all help mature consumer and retail companies remain competitive in a world marked by continuous disruption. Determining which path is the right one for any business depends on many factors, from strategic alignment and the impact on competitive position in key markets to the structure of the agreement itself.

Our team of industry professionals in the U.S. and around the world has the knowledge and experience to help your organization use digital technologies to transform the business and stay competitive in a fast-changing world. We can also work with you to identify the partnerships, alliances, joint ventures and M&A targets that can accelerate your progress, growth and success. KPMG can help you:

Gain valuable, data-driven business insights using best-in-class analytic tools

Conduct due diligence on new opportunities from commercial, operational and risk perspectives

Quantify synergies between your business and partners or targets to enable and enhance value creation and realization

Plan, stand up and operationalize new partnerships or joint ventures

Collaborate with all stakeholders to ensure strategic goals align with value drivers and implement value creation opportunities

Establish governance structures that support each party’s responsibilities, aligning contributions with decision authorities

Assess tax considerations and evaluate tax options and alternatives.

11© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Authors

Andrew is a Managing Director in KPMG’s Strategy group and focuses on helping consumer and retail companies maximize value through M&A, joint ventures and partnerships. He brings extensive experience helping clients to achieve strategic and financial goals through transformative transactions and partnerships. Andrew has led large complex initiatives as an external advisor and within industry across North America, Europe, South America and Asia.

Andrew LindsayManaging Director, KPMG Strategy (U.S.)

Ankur focuses on large-scale buy-side and sell-side transactions, including helping companies on various aspects of due diligence, carve-out readiness, and post-close integration. Ankur has advised companies in the food and beverage and apparel industries, and has a special focus on assisting clients with complex and multifaceted global challenges.

Ankur JainDirector, KPMG Strategy (U.S.)

12© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

1 Agile or irrelevant: Redefining resilience 2019 U.S. CEO Outlook 2 Jordan Novet and Jon Fortt, “Microsoft signs a huge deal with Walgreens, as Amazon’s growing interest in health care looms large,”

CNBC, Jan. 15, 20193 Dunkin’ Donuts Partners With Waze To Launch Order Ahead Feature Within Waze App4 Kyle Wiggers, “Nuro expands Kroger driverless deliveries to Houston,” Venture Beat, Mar. 14, 20195 Digital Investments Pay Off for Walmart in Ecommerce Race, eMarketer, Feb. 14, 2019. 6 Peter Verry, “How Nike’s Newest Acquisition Could Help It Understand What Consumers Really Want,” Footwear News, Aug. 6, 2019. 7 Mary Ellen Shoup, “Kraft Heinz luanches new innovation hub, acquires food tech firm”8 Stephen J. Bronner, “The Founders of RXBar, Acquired by Kellogg for $600 Million, Built the Company by ‘Having a Bias Toward Action,”

Entrepreneur, Jan. 29, 2018.

Endnotes

13© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. DASD-2019-1875

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For more information, contact us:

Mark Schmeling U.S. Consumer & Retail Sector Leader, U.S. Consumer & Retail Advisory Leader 312-662-2820 mschmeling@kpmg.com

National lead

Preston Parker M&A Services Advisory Lead 703-585-9997 prestonparker@kpmg.com

Practice lead

Andrew Lindsay U.S. Consumer & Retail M&A Services, Managing Director 404-593-5917 ajlindsay@kpmg.com

Industry leads

Rob Ernst U.S. Consumer & Retail Deal Advisory Co-Lead, Financial Due Diligence 212-872-6558 roberternst@kpmg.com

Kevin Martin U.S. Consumer & Retail Deal Advisory Co-Lead, Financial Due Diligence 571-635-4078 kevinmartin@kpmg.com

Ankur Jain U.S. Consumer & Retail M&A Services, Director 720-210-7447 ankurjain10@kpmg.com