Self-disrupt or self-destruct - Deloitte United States€¦ · before a slight rebound in 2016....

Self-disrupt or self-destruct Future of consumer business,South African edition M&A

Contents

From “owning the aisle” to “owning the consumer” 03

The growth conundrum 05

Unbundling the business model 07

Fragmentation – having the power of the big, but the agility of the small 09

Case study: Dollar Shave Club 11

The corporate fightback 13

Disruption in numbers 14

Capturing the promise of convergence 17

Making disruptive M&A a success 21

Endnotes 24

2

Self-disrupt or self-destruct | Future of consumer business, A South African perspective

In the past an evolutionary, linear approach to business development was a sensible strategy for consumer-product companies. All major consumer-product companies had a strong portfolio of core brands and relied on economies of scale to dominate their chosen markets. The growth strategy was defined by a philosophy of “owning the aisle”, so that whenever a product or geographic gap was identified, a new brand would be launched or a challenger brand acquired to fill the gap. Companies expanded in adjacent products or markets, once again using brand extensions and M&A to drive growth.

In recent years, however, the digital revolution has transformed the world and today an individual may be both a consumer and a creator. The average individual willingly shares data about themselves in exchange for convenience, such as shopping through digital channels, and this allows for the creation of valuable insight about the individual’s consumer preferences.

This paradigm gives a significant advantage to asset-light, digitally-native start-up brands that are using consumer data as the basis for competition and bypassing the traditional advantages of economies of scale and scope. These new challenger brands are using disruptive technologies and agile business models to engage with consumers directly, and using data exchange to compile a highly personalised social and economic profile of the target consumer. The most sophisticated of these challenger brands are using this privileged access to position themselves as a “trusted influencer” who can actively shape the consumer’s purchasing behaviour.

As a result, well-established companies now face the risk of decreasing customer loyalty that could result in shortened product life-cycles, diminished return on investment, and erosion of market share. Consumer-product companies have responded with significant investments in digital channels, customer analytics, and similar programmes.

However, the magnitude of the challenge means that CEOs need to consider M&A as a strategic enabler to capture innovation-led growth.

This means using M&A not just to capture market share, but also to acquire products, technologies, channels and talent that can reshape core businesses and markets in the years to come.

In this report we take a deeper look at some of the challenges and show how consumer businesses can use M&A strategically to win the battle for the consumer.

From “owning the aisle” to “owning the consumer”

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The only certainty is change In the past few years signs of a slowdown in global trade have emerged. There are many reasons for this slowdown, including synchronised weakness in economic growth across major economic regions, lack of capital investment, and a decline in global supply chains. The so-called BRICs (Brazil, Russia, India and China), which were for long the engines of global growth, remain badly affected and China in particular has revised down its annual growth expectations. An important factor has been the transition of the Chinese economy from export-led to consumption-driven growth. China is also producing more of its intermediate inputs domestically, affecting global trade volumes and global prices.

At the same time, world events ranging from “Brexit” to the North Korean crisis suggest political and economic policy uncertainty is set to be a central theme in the near-term future. Locally things like the uncertainty around land expropriation has made it difficult to attract investment and stimulate growth. In the coming years consumer product companies will need to recalibrate their global market, customer, supply chain, business investment and operational strategies to reflect the new realities, as well as gear themselves to thrive in this uncertainty.

Economy of expectations Despite the uncertain economic backdrop, the consumer business sector is in rude health. In the years following the financial crisis, a combination of astute financial management and rigorous cost containment meant that the consumer business constituents of the S&P Global 1200 index accumulated a record R7.12 trillion in cash reserves as of 2016.

Share prices of many of the consumer-product constituents of the S&P Global 1200 stock market index have been hitting record highs, driven by generous dividend policies and active share buy-backs.

However, the underlying revenue growth rate for these companies remains underwhelming, having declined for three consecutive years from 2012 to 2015, before a slight rebound in 2016. Clearly this is not sustainable.

In coming months and years we expect investors to pile pressure on CEOs and Boards, demanding strategic investments and M&A activities to unlock revenue growth and sustainable increases in cash flow. M&A is inherently a long-term strategy and so we expect deal-makers will come to terms with uncertainty as a ‘new normal’ parameter and focus on its potential to create unique value-enhancing deals.

The growth conundrum

050

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3000

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6600

-4%

-2%

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S&P Global 1200 CB companies – Average share price (R)

S&P Global 1200 CB companies – Revenue growth (%)

Revenuegrowth (%)

Share priceperformance (R)

2011

2012

2013

2014

2015

2016

Figure 2.1 Revenue growth and share price index of S&P Global 1200Consumer Business (CB) constituents

Incl M&A Ex M&A

47%

46%

45%

44%

43%

42%

41%

40%

39%6 7 8 9 10 11 12 13 14 15

Figure 2.2: Top-10 global beauty players losing share excluding M&A

R7.12 trillionin cash reserves

Figure 1. Cash reserves of consumer business constituents of S&P Global 1200 Index

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Unbundling the business modelGlobal consumer business companies that have stand-out performance tend to fall, broadly, into one of three main business model categories. First, those that prioritise operational excellence – in which standardisation, cost control and predictability are central. Second, those that capitalise on product or brand leadership – where product R&D and speed-to-market are of particular importance. Third, those that focus on getting close to their customers, using data analysis to form deeper relationships with an ever-broadening customer base.1

In theory, dominance in any of these three business models should create significant barriers to entry that help defend product lines. However, in practice, most companies have tried to optimise all three business models within one organisation, thereby creating sub-optimal structures that generate internal friction and below-par market performance. This provokes more cost inefficiencies, makes the businesses less responsive to market changes and stifles innovation within product divisions.

Against this backdrop, the dynamics of disruptive innovation are playing out as shown below:

1. Shifts in technology Technological advances are providing breakthroughs in Artificial Intelligence (AI), cognitive computing, robotics, digital, analytics, manufacturing and design. But it is the potent combination of the sustained drop in computing and storage costs and significant improvement in computing power and data bandwidth that is paving the way for the widespread adoption and functionality of new technologies. For consumer-product companies this means instant access and multiple consumer touch points are within its control. This also opens up new ways to reach the consumer and many companies are searching to go directly with asset light delivery partners like Orderin, Mr D Food and Uber Eats.

Unbundling the business model

Source: e-marketeer, Alcamai, Upfront ventures, Deloitte Shift Index

Storage costs(per GB of data)

Computing costs(per 1 million transistors)

Annuale-commerce spend

R1.910bn R34.58tr

Average internetspeed

56kbps 17200kbps

Mobile phoneusers

318m 4.33bn

Internet Users

400m 3.47bn

2015+1990s

Figure 3. Significant global shifts in technologySource: e-marketer, Alcamai, Upfront ventures, Deloitte Shift Index

R8372 R0.29

R3266 R0.44

MinimalRevenue R37.1bn

14kbps 6596kbps

6.7m 37.5m

2.4m 2.6m

South Africa

South Africa

South Africa

South Africa

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2. Shifts in consumer behaviour The disruptive potential of these new technologies is further amplified by shifts in consumer behaviour. Whole new sets of consumer demographics are being formed, underpinned by diversity and a multiplicity of viewpoints. This in turn is inspiring the following social business models:

• consumers preferring trusted advice from peers over corporates – for example, peer-to-peer rating sites such as TripAdvisor or Etsy. Currently this model is more prevalent in categories such as Watches, Handbags and other experiential products.

• consumers preferring access over ownership – for example, Rent-a-Runway. Currently this model is prevalent in categories where product outlay is significant.

• businesses preferring ‘collaboration over competition’, which can easily turn ‘insight into innovation’ – for example, Unilever Foundry, Unilever’s platform for start-ups and innovators to engage, collaborate and explore business ideas.

3. Shifts in capital investment There is an abundance of capital from venture investors to fund entrepreneurs who can use new technologies to create innovative products and services. In 2016 alone, global venture investments totalled R1.7 trillion. While the US still receives the bulk of venture funding, newer markets such as China and India are emerging as venture-funding powerhouses in their own right. Although the South African venture funding industry as a whole is relatively small in comparison, it is well established and locally significant, experiencing a compound annual growth rate of 9.4% since 1999 to 2017 with R158.6 billion in funds under management and cost of investments made during 2017 of R31.3 billion, indicating a heightened interest in the South African market. Between 2009 and February 2017, 892 individuals have invested in S12J Venture Capital Companies (VCC’s). Collectively, they have raised R1.8 billion through 49 investment vehicles.

Food Meals, dining, food products etc

Feastly, VizEat, OLIO, Josephine

Travel Accomodation, experiences, guides, tours etc

Airbnb, Yelp, GeoSure, ThirdHome

Logistics Food delivery, groceries delivery, parcels delivery etc

Postmates, Instacart, Deliv, Dosta Vista

Figure 4. A sample of crowdsourced alternatives in consumer business sectors

Accessories, clothesand makeup

Poshmark, VillageLuxe, ShearShareFashion

Food Meals, dining, food products etc

Feastly, OLIO, JosephineEatwith, Hello Pretty

Travel Accomodation, experiences, guides, tours etc

Airbnb, Yelp, GeoSure, ThirdHome, Travelstart,Lekkerslaap

Logistics Food delivery, groceries delivery, parcels delivery etc

Postmates, Instacart, Deliv, Dosta Vista, Picup

Figure 4. A sample of crowdsourced alternatives in consumer business sectors

Accessories, clothesand makeup

Poshmark, VillageLuxe, ShearShare, Hello Pretty Fashion

While the US still receives the bulk of venture funding, newer markets such as China and India are emerging as venture-capital powerhouses in their own right.

In addition to venture funding, other new forms of capital raising have emerged. Innovative forms of capital raising, such as crowdfunding, are allowing entrepreneurs to reach the market with a product prototype in a relatively short period of time. For instance, the UK-based milkshake brand Canny reached its R2m crowdfunding target within a week and plans to use this sum to expand its business. A number of South African crowdfunding platforms like BackaBuddy,

StartMe, Thundafund and Jumpstarter have recently emerged. Local platform Thundafund has since its inception in 2013 raised from over 19 700 contributors to fully-fund 408 projects. One of the Thundafund campaigns was created by a local band, Fokofpolisiekar, to fund the independent release of their first album in eleven years. The campaign raised just over R1m in 9 days.

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Combined, these trends are lowering the barriers to entry for product development, cutting the cost of infrastructure to support demand fulfilment and allowing for the proliferation of direct-to-consumer-product channels. Fragmentation in product categories can accelerate the development of new businesses that are entirely focused on the customer and informed by data and analytics that help to define consumer needs and the product offering. This means challenger start-up brands can build profitable businesses that were simply not possible even a few years ago. This phenomenon is a function of what Deloitte’s Centre for the Edge calls The Big Shift.3

The extent to which a consumer product or brand category will fragment depends upon two factors:4

• the degree to which customers look for more specialisation and customisation in the products and services they buy.

• the degree to which barriers to entry, commercialisation and learning are diminishing.

Manufacturing processes geared towards traditional economies of scale become a performance disadvantage when customers demand greater specialisation.

It is clear that these structural shifts in the landscape are here to stay and consumer-product companies need to re-engineer their longer-term value proposition to remain relevant in various markets and segments.

As a consequence, well-established consumer-product companies are finding that many household name brands are vulnerable. In South Africa, global brand Coca-Cola is being challenged by new local private label brands like Zip-Cola in the Shoprite Group. It is evident, every major product category faces challenger brands that are rapidly eroding market share.

Fragmentation – having the power of the big, but the agility of the small

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Figure 5. Unbundling consumer business product categories

Powdered &

Nut

ritio

n

Fruit &

Skincare

WellbeingMeal Kits

Dairy

Household

Pet C

are

SodasEnergy Drinks

Spiri

ts

Win

eBe

er

Herbal Drinks

Herbal Drinks

Aids

Personal Care

Unbundling consumerbusinessproduct

categories

Health & BeautyFo

od & Nutrition

Alco

hol

Household

Soft Drinks

Health Connection; DouxMatok;

Earth Products; Faithful to

Nature

Radical Skincare; Esse; Nimue;

Babo Botanicals; Bio Oil

Devils PeakHouse BeerStellenbrau

BrewDog

Sorbet; Harry’s;

Aunt Flow;Pure Beginnings

Vivino; Wine of the

Month; Getwine; Goverre;

Copa di Vino

Drinkeasy; Somabar;

Bottles App; Blackhorse Distillery

MATI; Enebev; Power Horse;

Scheckters Organic

Sir Fruit; Coco Libre; Bos Ice Tea; Suja Juice

The Craft Soda Company; Roots; Pura Beverages; Fitch & Leedes

Vega; Medico Herbs;

Organica; Spinn

Sweat X; Aunt Fannie’s;

Nu-Eco; Pure Simple

Tails.com; Petnet; ePET

Store; Absolute Pets

Raised Real; Bumbles; Hipp

Organic; Olli

Kite Hill;Good Karma;

Almond Creamery; Fair Cape

Freshly; UCOOK;

Home Chef;Daily Dish

Products

Well-established consumer-product companies are finding that many household name brands are vulnerable. It is evident, every major product category faces challenger brands that are rapidly eroding market share.

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The market for men’s razors has long been dominated by Gillette, which still has 67 per cent market share and ubiquitous presence in shops and advertising channels. On paper, this is a typical mega-consumer brand with significant barriers to entry.

But it could be argued that this market was also particularly ripe for disruption. The customer base is at least to some extent captive, margins are high and many businesses in the chain – local manufacturers, advertisers, wholesalers and retailers – could be side-stepped. Importantly, consumers had long complained about the price, and Gillette’s sales in the US, its largest market, had been stagnant for a number of years. This gave Dollar Shave Club an open door to disrupt.

Dollar Shave Club is a direct-to-consumer razor business that delivers razors and other personal grooming products to consumers by mail. Together with other low-cost online providers such as Harry’s, Dollar Shave Club offered a cheap subscription model through outsourced production. While it might not look like a threat on paper, its direct-to-consumer social marketing campaign became a viral phenomenon, jump-starting sales and generating immediate brand recognition and credibility.

Dollar Shave Club still has a relatively low-value share of the market, but its unit share is growing fast. By forming a direct connection with the consumer, in an almost cost-free process, Dollar Shave Club and others like it, are eroding Gillette’s market share. In response Gillette recently announced a price cut. Until recently, that would not have been considered possible.

When P&G acquired Gillette in 2005, it paid R839bn for the market dominance it secured. When Unilever bought Dollar Shave Club in 2015, it paid just R15bn for a company that looks set to help disrupt a global market. However, the irony may be that the value in companies like Dollar Shave is much more in the customer insight it provides, as well as valuable lessons in direct-to-consumer marketing, than the returns from product sales. In this regard, Unilever might have made quite an offensive move by buying Dollar Shave Club.

As a footnote to this deal saga, Dollar Shave Club’s closest competitor – Harry’s – bought Feintechnik, their razor supplier. Harry’s realised that in addition to slick social-media marketing, controlling and maintaining a high-quality supply chain is vital as other challengers continue to enter the market.

Case study: Dollar Shave Club


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Is acquisition the new innovation?Consumer-product companies are increasingly using M&A as a strategic expedient to capture innovation-led growth opportunities. There has been a sharp and continuing increase in M&A deals done with the primary purpose of acquiring capabilities or technologies across key disruptive innovation categories such as Digital, Social, Artificial Intelligence (AI), Internet-of-things (IoT), Robotics and others. By our estimate, consumer business companies have invested R221 billion acquiring or investing in disruptive innovation assets in 2015-16.

M&A provides one of the clearest routes towards capturing digitally native consumers and taking advantage of shifts in consumer trends. For example, in recent months established personal care companies like L’Oréal, Estée Lauder and Coty have been continuously acquiring independent challenger brands that have grown through the use of online influencers, social selling and user-generated content. But online presence and influence take time and investment to build. Investors, too, like the M&A approach. Share prices that were formerly closely correlated to like-for-like sales (a measure that excludes the impact of acquisitions) are now equally likely to respond to growth in market share through acquisition as they are to organic top-line growth.

M&A is also the choice of strategy for companies that need to bolt on an online or technology component that they lack. For instance, Walmart recently acquired Jet.com, one of the fastest-growing digital commerce companies in the US, to enhance its digital channel growth and reach out to new consumer segments. Additionally Walmart spent R235 bn to aquire a 77% stake in India based Flipcart allowing South African based media company Naspers to sell their stake for R32.37bn. In South Africa, Makro (owned by Walmart) has acquired a majority stake in delivery start-up WumDrop.

The corporate fightback

Tyson Campbell Soup

Company

Kellogg’s Sodexo LVMH

Figure 6. A Selection of Global Corporate Venture Capital Funds

R2.2bn fund R1.8bn

fund R1.5bn fund

R815m fund

R815m fund

2016 2017

This acquisition plans to decrease the customer order-to-delivery time for customers located within a 20 kilometre range from three days to three hours.

Corporate venture capital Corporate venture capital (CVC) has emerged as a fundamental part of corporate innovation strategy, providing companies with an important conduit into the external innovation ecosystem. Many consumer business companies have also launched dedicated corporate venture units that are investing in a range of innovative assets and verticals. Global consumer-product CVC funds invested R76.3 billion in 2015-16 across a range of technologies, social business models and challenger brands. Some of the most active CVC funds are the ones launched by LVMH, Kellogg’s, Tyson, Amazon, Rakuten, Unilever and Adidas.

Beyond financial returns, these investments provide invaluable access to new technologies, business models and trends, all crucial to growth through innovation. For instance, General Mills recently launched 301 Inc. – a stand-alone corporate venture capital unit – and has taken investment positions in a diverse set of emerging brand categories such as Beyond Meat (meat substitutes), Kite Hill (alternative dairy products) and Rhythm Superfoods (plant-based snack foods).Five South African based Invenfin, the venture and growth capital division of Remgro, has invested in companies like Ad Dynamo (digital advertising), ArcAqua (ozone-based sanitisation technology), Bos Brands (ready to drink iced teas), ORSO (tyre management system for heavy commercial vehicles) and LifeQ (health informatics).

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Topexits

of Consumer Business companies, in S&P 1200 index have made investments or acquisitions in the disruptive innovation segment

of the 25 largest Consumer Business companies have an active startup investment vehicle

Consumer Business companies, disruptive M&A and Corporate Venture activity (2015-17)

Corporate Venture investments across disruptive segments (volumes 2015-17)

M&A activity in disruptive segments (volumes 2015-17)

Most Active Corporate acquirers (2015-17)Most Active Corporate Venture Investors (2015-17)

91out of 5

deals announced by the S&Pglobal 1200 CB companies

during 2015-17 was related to Disruption Innovation category

Deal volumes

352deals

35%

65%

Deal values

R677bn

72%

28%

Digital IoTSocial FinTech AI&ML Big Data

Topinvestments

Topstart up M&A

Topconvergence M&A deals

Meituan Dianping(R58.9bn)

Lyft(R38.8bn)

Grail(R17.7bn)Careem(R12.5bn)GO-JEK(R8.1bn)

WePay (R5.1bn)Datacert(R4.3bn)Misfit

(R3.8bn)Clavis Insight

(R2.1bn)Olapic

(R1.9bn)

Walmart – Jet(R48.6bn)

Dr Pepper Snapple – Bai(R25bn)

Unilever – Dollar Shave Club (R14.7bn)

Unilever – Seventh Generation(R10.3bn)

Amazon – Souq.com(R9.6bn)

Walmart – Jet.com (R48.6bn)


UnderArmour – MyFitnessPal (R7bn)

Amazon – Annapurna Labs (R5.4bn)

Adidas – Runtastic(R3.6bn)

R13.2bnfunds committed byConsumer Business companies 2015-17

R1.8bnsize of average corporate venture fund raised by Consumer Business companies

Amazon.com15

8

5

5

5 7

AccorHotels27

Amazon.com

26

Unilever PLC

TripAdvisor

6

Wal-Mart Store

Unilever

16

United ParcelService

Rakuten

13

Lowe’sCompanies,

Inc

Bed Bath& Beyond

Rakuten Inc

15

48 52

24 14

21 6

17 6

13 4

M&A Corporate venturing activity

Global Disruption in numbers

14


Topexits

of Consumer Business companies, in S&P 1200 index have made investments or acquisitions in the disruptive innovation segment

of the 25 largest Consumer Business companies have an active startup investment vehicle

Consumer Business companies, disruptive M&A and Corporate Venture activity (2015-17)

Corporate Venture investments across disruptive segments (volumes 2015-17)

M&A activity in disruptive segments (volumes 2015-17)

Most Active Corporate acquirers (2015-17)Most Active Corporate Venture Investors (2015-17)

91out of 5

deals announced by the S&Pglobal 1200 CB companies

during 2015-17 was related to Disruption Innovation category

Deal volumes

352deals

35%

65%

Deal values

R677bn

72%

28%

Digital IoTSocial FinTech AI&ML Big Data

Topinvestments

Topstart up M&A

Topconvergence M&A deals

Meituan Dianping(R58.9bn)

Lyft(R38.8bn)

Grail(R17.7bn)Careem(R12.5bn)GO-JEK(R8.1bn)

WePay (R5.1bn)Datacert(R4.3bn)Misfit

(R3.8bn)Clavis Insight

(R2.1bn)Olapic

(R1.9bn)

Walmart – Jet(R48.6bn)

Dr Pepper Snapple – Bai(R25bn)


Unilever – Seventh Generation(R10.3bn)

Amazon – Souq.com(R9.6bn)

Walmart – Jet.com (R48.6bn)


UnderArmour – MyFitnessPal (R7bn)

Amazon – Annapurna Labs (R5.4bn)

Adidas – Runtastic(R3.6bn)

R13.2bnfunds committed byConsumer Business companies 2015-17

R1.8bnsize of average corporate venture fund raised by Consumer Business companies

Amazon.com15

8

5

5

5 7

AccorHotels27

Amazon.com

26

Unilever PLC

TripAdvisor

6

Wal-Mart Store

Unilever

16

United ParcelService

Rakuten

13

Lowe’sCompanies,

Inc

Bed Bath& Beyond

Rakuten Inc

15

48 52

24 14

21 6

17 6

13 4

M&A Corporate venturing activity

15


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The confluence of technological advancements in emerging areas such as AI, Digital and IoT, changing customer preferences and an evolving regulatory landscape are reshaping how products and services are developed, delivered and consumed. Traditional sector boundaries are being blurred, leading to convergence of business models across sectors such as health, finance, retail, manufacturing and others. This is creating opportunities for non-traditional competitors to enter the market with new consumer offerings.

Companies have started using M&A and corporate venturing to invest in these disruptive technologies and related service models to develop cross-sector market offerings for consumers. Take Fintech, for example, where one would expect investment to emanate naturally from financial services companies. Instead we found a staggering 65 per cent of M&A investment during 2015-16 come from the non-financial services sector. This is because innovative segments like payment processing reduce the cost of providing the complete service to the consumer and have the potential to disrupt a range of sectors. For example, Metro AG, the German retailer, recently invested in Orderbird, an iPad-based point-of-sale system for restaurants, in order to boost digital engagement with customers.6

We expect that in the near future small, strategic M&A deals will create new consumer offerings, reshaping competition in the consumer business sector. The non-traditional competitors likely to make inroads into consumer businesses will come from sectors such as technology, finance, health and manufacturing. For example, American Express, which recently ended its partnership with Costco, made a venture investment in Boxed.com, a mobile commerce start-up that has developed a platform for bulk and wholesale goods in competition with well-established Costco.7

Another area ripe for convergence is Nutrition which bridges the gap between the health, food and technology sectors. Recently J&J invested in DayTwo, an Israeli start-up that offers a personalised nutrition programme based on individuals’ microbiome analysis.8 Not only does DayTwo help J&J with clinical nutrition research, it also opens up for opportunities to partner with food companies in the wellness diet area and offer the sort of product personalisation that can protect product margins from erosion.

Similarly BUPA, the health insurance company, licences an App called Foodswitch, which helps consumers make better food choices when grocery shopping by scanning barcodes and revealing the total fat, sugar and salt content in that particular food.9 Such Apps are making it simpler for the consumer to develop a personalised dietary plan and eliminate unwanted items from an online shopping basket at the click of a button. Packaged food companies also want to react quickly to these shifts in consumer preferences but struggle to do so. By the time they gather data on the trend, develop their response, change their manufacturing and supply chain and provide the adapted product – same taste, less salt or sugar – the consumer has already made a choice.

Consumer business companies are also venturing outside their comfort sectors and investing in convergence opportunities that could create a whole new set of markets. Adidas recently acquired the digital fitness platform Runtastic to develop opportunities resulting from the convergence of the fitness, lifestyle and health communities.10 Similarly Acre Venture Partners (backed by Campbell Soup) has invested in Sample6, an agri-tech start-up that has been developing synthetic biology-based bacteria diagnostic technologies that allow for more frequent testing, ensuring the production of safe, high quality food.11

Capturing the promise of convergence

Adidas recently acquired the digital fitness platform Runtastic to develop opportunities resulting from the convergence of fitness, lifestyle and health communities.

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Google acquired Nest Labs, the manufacturer of Internet of Things (IoT) enabled consumer home automation devices in 2014.

Consumer BusinessSector

Telecom

Real Estate

Finance

Health

Media

Technology

American ExpressBoxed.com

SimonDIRTY LEMON

SingtelShopSpot

BupaFoodSwitch

The Walt DisneyCompany

Sphero

GoogleNest Labs

Manufacturing

ApolloReifen.com

Figure 7. Others targeting consumer business sector*

Source: M&A Index Predictions 2017 – Deloitte

*Deal descriptions in endnotes

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Fitbit, the connected consumer device company, acquired Coin, a fintech company specialising in wearable payment technology and products.Figure 8. Consumer business sector targeting other sectors*

Consumer BusinessSector

Life SciencesCampbell Soup Company

HabitSample6

Finance

FitbitCoin

Energy

UnileverVoltea

TelecomAmazon

Twilio

ManufacturingNike

GrabIt

SocialAdidas

Runtastic

TechnologyWilliams Sonoma

Outward

Source: M&A Index Predictions 2017 – Deloitte

*Deal descriptions in endnotes

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Align strategies to maximise impactIt is crucial companies develop clarity on the role that external innovation can play in helping them achieve their strategic ambitions. Disruptive M&A and corporate venture strategies should closely mirror the long-term strategic goals, so that there is clarity of purpose and sharing of objectives on both sides.

“Own the consumer experience” Disruptive technologies are set to change fundamentally how companies build enduring and multi-dimensional relationships with customers. This is not so much about new products and channels to engage with the consumer, rather it is about enjoying a position of trust, where the consumer is willing to share information with a company in return for highly customised products and services.

Amazon is one such digitally native challenger that started off as a digital commerce platform, but over time through significant investments in disruptive technologies, analytics and supply-chain optimisation, has become a highly customer-centric brand. It has multiple direct digital touch-points with the consumer – such as IoT based Dash buttons or AI based Amazon Echo for voice ordering. It uses its significant scale to develop Amazon Marketplace, the fulfilment channel between small-scale producers and the end consumer. It has managed to achieve the rarefied status of a brand that is trusted by consumers to make recommendations on a suite of consumer product categories. The unique combination of a deep and trusted relationship together with significant scale allows Amazon the brand permission to enter new market segments – from staging music concerts to food delivery.

Consumer-product companies aspiring to build similar such close trusted relationships with their customers should consider using

M&A as the enabler and deals should be done with the aim of positioning for the role they want to play in the future. Disruptive M&A is no longer just about acquiring a brand or product category, but instead is about orchestrating a number of transactions and partnerships, all driving towards a specific strategic goal – which is to have a significant stake in every experience a customer has with their product.

Making disruptive M&A acquisitions a success is hard. Most companies do not have experience in identifying, acquiring and integrating these new technologies and capabilities, which makes these deals inherently complex. More importantly, there is increased competition from not just immediate competitors but also in non-traditional market entrants from adjacent sectors. This demands a rethink of the M&A strategy and capabilities required to harness these new market opportunities.

Develop a competency to monitor signals Corporate development teams need to become adept in monitoring signals coming from the marketplace. This is a crucial step in understanding the future potential of challenger businesses and the potential business threat – or opportunity.

Consumer-product companies need to assess which of their core markets or products are more likely to fragment and choose where to focus in the future. Keeping track of technological advances and adoption will help companies to understand the opportunities and threats to their existing products. Analysing consumer behaviour will help to anticipate significant shifts in consumer preferences. Observing movements in adjacent industries can help to anticipate potential disruption in one’s own.

Firms will need to consider what stage of company they want to deal with – and be prepared to pay much higher multiples for relatively less mature businesses in order to get in front of the right development opportunities.

Become the dealmaker of the future In the future we can expect M&A teams to require sophisticated skills and capabilities that go well beyond the traditional domain of corporate development. This may involve the recruitment of new talent from a wide range of backgrounds, including data scientists, deep technology experts, social scientists and design thinkers, to understand the potential of new acquisitions and partnerships more comprehensively.

To realise the full value of the disruptive play, companies should be prepared to work with the external ecosystem to nurture new partners and acquisitions.

What can you do? Making disruptive M&A a success

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Often collaboration offers win-win opportunities as many innovative start-ups are more receptive to co-development of new products and market categories. For example, a recent personal care joint venture that has electrified the premium cosmetics market is Charlotte Tilbury’s Magic Mirror, an in-store virtual reality experience delivered through a joint venture with the virtual reality studio Holition which has stolen a march on competitors’ app-based digital try-out approaches.13

Elsewhere, Local Motors is a US-based start-up that created an innovative platform in which designers and hobbyists interact to bring to market low-volume 3D-printed vehicles at a fraction of the cost of a traditional Original Equipment Manufacturer. Local Motors, as well as other companies on the platform, can crowdsource vehicle design and leverage 3D-printing technology and a network of miniature factories. Airbus has made an investment in Local Motors and also announced a partnership to co-create the next generation of commercial drones. Shoprite, a retail giant in South Africa, has partnered with Standard Bank, Google and tech company, Celbux, to launch a mobile money platform. This new service allows customers to deposit, withdraw or send money as well as buy groceries at all Shoprite stores. This partnership has granted Shoprite the opportunity to create a new customer offering, in the Financial Services sector.

To realise the full value of the disruptive play, companies should be prepared to work with the external ecosystem to nurture new partners and acquisitions.

We also expect M&A professionals will need to deploy advanced analytical tools to drive decision-making in all phases of the M&A transaction from deal sourcing and valuation all the way to integration. This is a must in order to handle the complexities of such deals and prepare organisations to adapt to such disruptions.12

The core M&A team will work much more closely with the product lines, CIOs, CSO, R&D function etc., and will recast their roles as change agents in order to bridge the gap between the vastly different sensibilities of the innovative acquisitions they pursue and the highly experienced and well-oiled machinery of the corporate set-up.

Change also starts at the top. Corporate leaders need to be fully committed to accepting external innovation. The typical barrier to introducing external innovation into a company is the so-called ‘not invented here syndrome’. One way to counter this tendency is to give more internal recognition to those who collaborate with and nurture newly acquired companies.

Integrate external innovation Integrating external innovation into company culture is perhaps the most challenging aspect of innovating for growth. Most companies struggle with this aspect, particularly when they do not have experience of acquiring digital, technology-enabled and social businesses.

While the traditional M&A approach is to integrate quickly the acquisition’s capabilities and customers, the temptation to integrate innovative start-ups in the traditional way must be resisted.

In some instances, when the newly acquired company is engaged in an adjacent or niche product category, it might be better for a period of time to ‘park’ such acquisitions outside the corporate structure and let them operate as stand-alone businesses. This provides valuable time for each business to understand the other.

Global consumer-product companies have significant scale and scope advantages in areas such as supply-chain networks, high-end manufacturing, digital channels and customer analytics platforms, often coupled with cash investment reserves and low-cost access to capital. Integration in these areas can provide these start-ups with affordable access to services and physical networks that can only be operated cost- effectively at scale. On the other hand, the start-up should be allowed to retain autonomy in areas such as marketing, product design, consumer experience and talent.

Extract value through ecosystem partnerships To realise the full value of the disruptive play, companies should be prepared to work with the external ecosystem to nurture new partners and acquisitions. From our experience, many innovative companies do not want to be acquired by large consumer-product companies because of strong cultural differences across multiple fronts.

Partnerships or minority stake investments should also be considered. Innovation partnerships strengthen relationships with non-traditional trading partners, allow for ideas to flow both ways and, more importantly, lay the groundwork to build a culture of innovation and agile thinking across the whole company.

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Mon

itor

mar

ket d

istr

upti

on

Technology shifts

Invest Collaborate

Buy

Consumer behaviour shifts Convergence across sectors

IOT Robotics

Digital Fintech Future of manufacturing

Future of health

Big data

Artificialintelligence

Peers over corporate

Access over ownership

Collaborationover competition

Future of consumer

Future of mobilty

Future of finance

Strategicchoices to capture

innovation led growth

Consider close collaboration with a range of partners – ranging from innovation players such as start-ups and accelerators to cross-sector partnerships to co-innovate and develop new market offerings. Collaboration allows for pooling of costs and skills, exchange of ideas and the fostering of a culture of innovation.

Develop a dedicated Innovation M&A strategy to acquire capabilities, products and technologies that can unlock new sources of growth and revenues. Cultural adoption will be a key driver for the successful integration of such deals.

Approximately 67% of respondents to Deloitte’s 2018 M&A trends survey indicated that companies are seeking transformation deals or planning to acquire new technology.

Develop corporate venturing as a core competency to allow the organisation to uncover, incubate and invest in new growth opportunities. This could also lead to financial gains and spin-off opportunities.

Bottom lineIn today’s environment companies face an equally stark choice: self-disrupt and thrive, or stay passive and self-destruct. CEOs of consumer-product companies now have the twin challenge of responding to the disruptive innovation threat in their traditional businesses and simultaneously harnessing these forces to create the businesses of tomorrow. We expect reorientation will provide a significant boost to strategic M&A acquisitions in the innovation and technology space in the coming months and years.

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Endnotes

1. Jacob Bruun Jenson, Kim Porter, Business Model Innovation in Consumer Goods, November 2015. See: https://dupress.deloitte.com/dup-us-en/topics/business-operations-transformation/business-model-transformation-consumer-goods-companies.html?id=us:2el:3pr:dup1026:eng:dup:110315:Consumer2020.

2. http://www.chroniclelive.co.uk/business/business-news/canny-milkshakes-hits-100000-crowdfund-13273942

3. For more information, please go to https://www2.deloitte.com/us/en/pages/center-for-the-edge/topics/center-for-the-edge.html” www2.deloitte.com/us/en/pages/center-for-the-edge/topics/center-for-the-edge.html, and to: www.deloitte.com/us/shiftindex.

4. For more information, please go to https://dupress.deloitte.com/dup-us-en/topics/operations/heros-journey-landscape-future.html

5. https://news.walmart.com/2016/08/08/walmart-agrees-to-acquire-jetcom-one-of-the-fastest-growing-e-commerce-companies-in-the-us

6. https://www.reuters.com/article/us-lvmh-investment/lvmh-sets-up-vehicle-to-hunt-for-emerging-luxury-brands-idUSKBN15I1QV http://newsroom.kelloggcompany.com/2016-06-20-Kellogg-Company-Establishes-Venture-Capital-Fund-To-Support-Growth http://ir.tyson.com/investor-relations/news-releases/news-releases-details/2016/Tyson-Foods-Creates-Venture-Fund-to-Fuel-the-Future-of-Food/default.aspx https://global.rakuten.com/corp/news/press/2016/0412_01.html http://www.hydra-ventures.com/about-us/index.html

7. https://www.301inc.com/”https://www.301inc.com/#partners

8. https://archiv.metrogroup.de/en/press-releases/2016/05/11/metro-group-acquires-a-stake-in-orderbird-a-leading-ipad-based-pos-system-for-restaurants

9. https://www.prnewswire.com/news-releases/boxed-adds-new-investor-to-funding-round-300274264.html http://about.americanexpress.com/news/pr/2015/amex-costco-us-agreement-to-end.aspx

10. http://www.mobihealthnews.com/content/daytwo-gets-17-million-personal-microbiome-analysis

11. http://www.georgeinstitute.org.uk/projects/foodswitch and https://www.bupa.com.au/foodswitch

12. https://www.adidas-group.com/en/media/news-archive/press-releases/2015/adidas-group-acquires-runtastic/

13. http://blog.sample6.com/news/author/sample6

14. http://money.cnn.com/2014/01/13/technology/google-nest/index.html

15. https://techcrunch.com/2016/06/01/nokia-completes-190m-acquisition-of-withings-health-gadget-maker/

16. https://www.techinasia.com/shopspot-funding-intouch

17. https://www.bupa.com.au/foodswitch

18. https://disneyaccelerator.com/2014-companies/

19. http://simonventures.co/selected-investments/

20. https://www.americanexpress.com/us/content/amexventures/

21. http://www.apollovredestein.com/nieuws/940/apollo-tyres-takes-over-reifen-com

22. https://investor.fitbit.com/press/press-releases/press-release-details/2016/Fitbit-Inc-Acquires-Wearable-Payments-Assets-From-Financial-Technology-Company-Coin/default.aspx

23. http://voltea.com/investors-english/

24. https://www.twilio.com/blog/2015/07/announcing-twilio-series-e-funding.html

25. https://news.nike.com/news/nike-inc-takes-strategic-stake-in-grabit-inc-an-automation-and-materials-handling-start-up

26. https://techcrunch.com/2017/11/16/williams-sonoma-inc-acquires-ar-3d-imaging-startup-outward-for-112m/

27. https://www.adidas-group.com/en/media/news-archive/press-releases/2015/adidas-group-acquires-runtastic/

28. https://www.campbellsoupcompany.com/newsroom/news/2016/10/25/personalized-nutrition-revolution-starts-now/ and http://www.sample6.com/sample6-investors

29. For more information, please go to Transforming M&A capabilities for the unbundled ecosystem https://www2.deloitte.com/us/en/pages/consulting/articles/fintech-disruption-mergers-and-acquisitions-collection.html

30. https://holition.com/portfolio/charlotte-tilbury

31. http://additivemanufacturing.com/2016/03/17/airbus-group-teams-up-with-local-motors-to-co-create-commercial-drones/

32. https://blog.thundafund.com/how-does-thundafund-work/about/thundafund-partners-and-friends/

33. SAVCA Venture Capital Survey Report, http://www.brainstormmag.co.za/features/14274-s12j-a-win-win-for-investors-and-smes

34. https://www.moneyweb.co.za/news/companies-and-deals/makro-acquires-wumdrop-in-e-commerce-push/

35. https://www.farmersreviewafrica.com/afgri-group-holdings-creates-investment-holdings-company-agh-raises-additional-capital-fuel-growth-agriculture-food-processing-financial-services/

36. http://www.invenfin.com/investment_profiles.html

37. https://esa.un.org/unpd/wpp/

38. https://www.fin24.com/Economy/how-ecommerce-is-exploding-in-sa-20180316

39. https://qwertydigital.co.za/wp-content/uploads/2017/08/Digital-Statistics-in-South-Africa-2017-Report.pdf

40. https://www.nedbank.co.za/content/dam/nedbank/site-

41. 4http://www.internetlivestats.com/internet-users/south-africa/

42. https://www.fin24.com/Companies/Retail/sa-e-commerce-growing-by-leaps-and-bounds-20170222

43. https://www.thundafund.com/project/fokofpolisiekar

44. https://www.reuters.com/article/us-naspers-disposal-flipkart/south-africas-naspers-sells-flipkart-stake-to-walmart-for-2-2-billion-idUSKBN1IA1S6

45. https://savca.co.za/wp-content/uploads/2018/07/SAVCA-Performance-Survey-2018-Final-Print-Electronic.pdf

24


Figure 2.2 notesConsumer-product constituents: The Spar Group Ltd; Shoprite Holdings Ltd; Pick n Pay Ltd; Massmart Ltd; Dis-chem Pharmacies Pty Ltd; Clicks Group Ltd; Bid Corp Ltd; Woolworths Holding Ltd; Truworths International Ltd; The Foschini Group Ltd; Steinhoff Africa retail Ltd; Mr Price Group Ltd; Lewis Group Ltd; Italtile Ltd; Famous Brands Ltd; Caxton and Ctp Publishers Ltd; Cashbuild Ltd

Figure 3 notes International Telecommunication Union Statistics, RSAWeb.co.za, The Digital Landscape in South Africa 2017 (Qwerty)

Figure 6 notesSources: http://www.tysonfoods.com/media/news-releases/2016/12/ tyson-foods-creates-venture-fund-to-fuel-the-future-of-food,

http://fortune.com/2016/02/17/campbell-soup-vc-fund/

http://newsroom.kelloggcompany.com/ 2016-06-20-Kellogg-Company-Establishes-Venture-Capital-Fund-To-Support-Growth

http://sg.sodexo.com/home/media/press-releases/ newsListArea/press-releases/sodexo-ventures-fund-wynd.html

https://www.reuters.com/article/us-lvmh-investment/ lvmh-sets-up-vehicle-to-hunt-for-emerging-luxury-brands-idUSKBN15I1QV

Figure 7. Other targeting consumer business sector examples

TechnologyGoogle acquired Nest Labs, the manufacturer of Internet of Things (IoT) enabled consumer home automation devices in 2014.

TelecomNokia acquired health and fitness consumer connected device manufacturer in 2016

Singtel has invested in ShopSpot, a mobile commerce platform based in Asia.

HealthFoodSwitch is an App that provides nutritional information and healthier alternatives based on a scientific algorithm developed by The George Institute for Global Health and has been licensed to Bupa Australia.

MediaDisney’s Accelerator was incubating Sphero, a connected play start-up that fuses digital and robotic play through connected toys and immersive experiences.

Real EstateSimon Ventures, the corporate venture division of Simon Group, invested in Dirty Lemon, a direct-to-consumer beverage company that uses only social media to market its product.

FinanceAmerican Express Ventures has invested in Boxed.com, an online and mobile membership-free wholesale retailer that offers direct delivery of bulk-sized packages.

ManufacturingApollo, the India based tyre manufacturer, acquired Reifen.com, the second largest online retailer of tyres in Europe.

Figure 8. Consumer business sector targeting other sectors examples Finance Fitbit, the connected consumer device company, acquired Coin, a fintech company specialising in wearable payment technology and products.

Clean EnergyUnilever Ventures has invested in Voltea, a clean technology start-up that has developed its proprietary technology to remove dissolved salts from water using electricity at a lower economic and environmental cost.

TelecomAmazon has invested in Twillo, a cloud communications platform for building SMS, Voice & Messaging applications on an API.

ManufacturingNike has taken a minority stake in Grabit, and industrial automation and materials handling solutions start-up that makes automated products for the manufacturing and logistics industries.

TechnologyWilliams Sonoma, the retailer, has acquired AR (Augmented Reality) start-up Outward to enhance it digital shopping experience.

SocialAdidas acquired the digital fitness platform, Runtastic, to develop opportunities resulting from convergence of health and lifestyle.

Nutrition and Life sciences Campbell Soup Company has invested in Habit, a digital health startup that uses data from a home test kit to make personalised food recommendations tailored to a consumer’s unique DNA. Campbell Soup Company corporate venture partner Arce Venture Partners has invested in Sample6, which has developed the first enrichment-free pathogen diagnostic system.

Additional endnotes:

Figure 2.2: Consumer-product constituents:The Spar Group Ltd; Shoprite Holdings Ltd; Pick n Pay Ltd; Massmart Ltd; Dis-chem Pharmacies Pty Ltd; Clicks Group Ltd; Bid Corp Ltd; Woolworths Holding Ltd; Truworths International Ltd; The Foschini Group Ltd; Steinhoff Africa retail Ltd; Mr Price Group Ltd; Lewis Group Ltd; Italtile Ltd; Famous Brands Ltd; Caxton and Ctp Publishers Ltd; Cashbuild Ltd

Figure3: International Telecommunication Union Statistics, RSAWeb.co.za, The Digital Landscape in South Africa 2017 (Qwerty)

Crowdfunding: https://blog.thundafund.com/how-does-thundafund-work/about/thundafund-partners-and-friends/

SA Venture Funding: SAVCA Venture Capital Survey Report, http://www.brainstormmag.co.za/features/14274-s12j-a-win-win-for-investors-and-smes https://www.moneyweb.co.za/news/companies-and-deals/makro-acquires-wumdrop-in-e-commerce-push/

https://www.farmersreviewafrica.com/afgri-group-holdings-creates-investment-holdings-company-agh-raises-additional-capital-fuel-growth-agriculture-food-processing-financial-services/ http://www.invenfin.com/investment_profiles.html

25


Notes

26


Mike Vincent Africa Consulting [email protected]

Neville HounsomAfrica DirectorConsulting: Strategy and [email protected]

Johnathan Smit Africa Business Development ManagerClients and [email protected]

Authors Contacts

Contributors

Sandeep GillEMEA M&A Leader Consumer Products

Sriram PrakashGlobal Lead M&A Insight

Ryno Holm Africa Senior ManagerConsulting: Strategy and [email protected]

Kayleigh BrownAfrica Senior ConsultantConsulting: Strategy and Operations Morne HendrikszAfrica Senior ConsultantConsulting: Strategy and Operations

Mike KrzychylkiewiczAfrica DirectorCorporate [email protected]

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This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom.

Deloitte LLP is the United Kingdom affiliate of Deloitte NWE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NWE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.

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