Private Equity Investment – a New ‘Deriver’ in Retail?
By Brian Moore, Global Retail Consultant and CEO of EMR-NAMNEWS

Given the current rate of change of ownership in the retail market, one might be forgiven for assuming that buying and selling retailers has become more important than buying and selling products. For instance, in the current issue of Namnews, there are news updates on 60 retailers, of whom 12 are either owned by, or are about to be taken over by private equity firms...

The ‘pros and cons’ of the political and social impacts are being debated elsewhere in the media. Here it is perhaps more beneficial to focus upon how suppliers can factor the private equity effect into their dealings with major customers and optimise the resulting supplier-retailer relationship, fast... 

Essentially, private equity firms derive value from inefficient firms by restructuring the organisation, selling off assets, reorganising cashflows or they add value to fast growing firms by providing them with cashflow, and then re-float at a higher valuation. (Incidentally, the Alliance Boots deal is particularly complex in that the private equity input combines treatment of the company’s inefficiencies with providing a financial platform for a move to full global coverage in wholesale and retail Health & Beauty within a seven-year time frame).

In practice, private equity firms take a pro-active approach to managing the company, its cashflows and to cutting costs on an ongoing basis. In fact the pressure on financial performance is now even greater because of the combination of competition driving up bid-prices, and rising interest rates obviously impacting a 70%+ debt-based deal. Finally, giving the management team a stake in the company can help to focus their minds on financial output...

Meanwhile, publicly-owned retailers that compete with private equity retailers also have to adopt the same measures in order to demonstrate their ability to excel without the ‘help’ of private equity funding and thus avoid being taken over. For them, this means conducting a fundamental audit to identify any vulnerable aspects of the business such as untapped potential, inefficient process, underperforming assets and investments in management ego.

In terms of impact upon your customer, following takeover, there will be a fundamentally different approach to all investments in the business, both retailer-funded and via supplier-partners. In this situation, investments that appeal are those that can demonstrate immediate returns in terms of bottom line impact. This can rule out training, long-term planning, and any other initiatives promising deferred rewards, unless funded by suppliers, perhaps?

In addition, the whole basis of the trading relationship, in terms of trade credit, margins, supply-chain, returns opportunity-cost and trade funding will be subject to re-negotiation as the retailer seeks to derive more value from its ‘supplier-assets’. Because the supplier-retailer relationship will become more focused upon financial output, there should be a greater commitment to compliance on each side. However, in order to achieve real benefits it is crucial that suppliers find ways of translating every aspect of the total offer package into a direct and demonstrable impact upon the customer’s bottom line and Return on Capital Employed, thus increasing the eventual value on re-floatation. Anything less will be deemed a distraction...

In addition, because of the increased level of exposure and the inevitability of a finance- focused customer’s instinct to pass risk back up the supply chain, it is important that suppliers cost out each aspect of the relationship and demand an adequate return on effort.

In other words, private equity funding can represent a major opportunity for good suppliers to rebuild the entire supplier-retailer relationship upon sound business principles and derive increased and predictable value from the partnership...or else!

New hands-on workshop: The New Future for Alliance Boots (full details at KamTraining).

Date article published: 06/2007