Why do retail mergers always fail?

Image: www.axial.net

To merge or not merge, that is the question!

There was a recent announcement here on Inside Retail that Terry White and Chemmart hope to merge. Before I comment, a few salient points by way of qualification:

There has been some chatter here on a post by Dave Farrell on the topic of consultants. I too, have a particular view about the consulting industry. I am not a practising consultant.

Free advice is worth what you pay for it, and I am not in the business of working for free. I offer my view here because I am in the education business and this development is something we can learn from. And you can learn from it, even if you disagree with me. I base my views on what I have read in the press, the experience that I have gained and knowledge that I have, and I specifically don’t have any inside knowledge of the proposed deal.

Back to the merger:

There are two typical objectives for mergers:

  • improving current performance (or economies of scale)
  • reinventing a business model (e.g. when an established business buys an upstart to acquire new technology or market)

In this particular instance the declared strategy is:

“The merged group will leverage scale and combined capabilities to increase the competitiveness and marketing strength of the pharmacies and to improve service levels and health delivery to customers.”

The rationale for the merger is:

“We have a substantial array of core retail capabilities and support platforms which are scalable to handle this growth and support future network expansion. Significant investment in our Enterprise Resource Planning system is already driving efficiencies and improved operations, allowing pharmacists to raise customer service levels and drive strong retail sales growth.”

In short, they are pursuing economies of scale.

Yet, Harvard Business review cites that study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. 

When you quote the opportunity to invest in ERP as a primary motivator for a merger, all signs suggest the priorities are backwards.

Or maybe it really is about an IPO, and not about raising customer service levels and building a business. Hello Dick Smith.

I base my scepticism on the following thoughts:

1.       When you already have 200+ pharmacies in a country the size of Australia, then scale is not your issue. And besides, when your key suppliers are GLOBAL pharma companies, 500 stores do not buy you more clout than 300 stores. Where else are you going to buy your Nurofen after all? (And remember, the supermarkets already sell most of your product lines and they have many more stores than you do or will ever have.)

2.       The behemoth they are creating will simply be a bigger version of what they already have, crippled by additional layers of bureaucracy and systems, and confounded by incompatible cultures.

3.       The merger does not solve the ACTUAL PROBLEM that exists in the pharmacy channel; which is shite customer service. Cheaper prices, cheaper SMS marketing and the like are not examples of better customer service.

You may still want to argue points one and two, but not many people will argue point three. I have worked with a few pharmacies before, and I have asked individuals the same question:

What do MOST OF your customers have in common?

Not once did I get the reply I was hoping for: Most pharmacy customers are patients; and if not an actual patient, certainly seeking a treatment. And this category of consumer has very specific needs, which all but a few old-school, mavericks are brave to enough to meet.

And what consumers don’t need is the ability to walk into an even bigger warehouse filled floor to ceiling with cheap crap. That is what supermarkets are for.

I would suggest that one operator in that high-volume, low-margin space will do just fine, and that the real opportunity is to differentiate on patient (customer) care, and not the desire to screw down your suppliers another few cents.

As stated at the outset, I am not offering this as advice to TWC or Chemmart – I simply don’t have all the facts to do so. I am suggesting that we can learn something from their plans and how that compares to best practice, common sense and past experience.

I suppose there is 10%- 30% chance that they can pull this off successfully, but I won’t bet on it. I wonder if the shareholders will?