The Daily Telegraph of 6 Feb 18 reported that British DIY store Homebase, which two years ago was profitable, is now expected to have an underlying loss of £97milllion for the first half of the year.
In 2016, the then-profitable Homebase was acquired by the Australian retail conglomerate Westfarmers, which is the parent group of Australian DIY chain Bunnings.
When acquired two years ago, the aim of Westfarmers was to relaunch Homebase using the business model of its successful Bunnings chain. Unfortunately, Westfarmers has now admitted that its business model did not appeal to British customers who shop differently to Australians, particularly in the winter months, and that there was a stark difference between British and Australian markets.
For the marketing manager, responsible for getting and maintaining levels of profitable income for the long-term future of the business, there are a number of lessons which can be learnt from this story.
From the Westfarmer’s statement, it would seem that the conglomerate’s management either did not undertake a proper analysis of the British market, or made the classic assumption that markets and consumers in the English speaking world act in the same way. The failure to understand the working of the British consumer DIY market and its difference from that of Australia and New Zealand was an expensive but avoidable error.
Mergers and acquisitions are never simple. At least 50% fail to meet their initial objectives and expectations – sometimes leading to expensive de-mergers. According to KPMG and Wharton studies, 83% of mergers and acquisitions failed to produce any benefits - and over half actually ended up reducing the value instead of increasing it. Businesses undertake mergers and acquisitions for a number of reasons, but all embark upon the process in the expectation of the benefits that they seek will be achieved. So why do so many fail?
The objective of every business is to continually produce and maximize profits for the long-term benefit of owners, staff and customers. For the marketing manager, the objective is to maximize profitable income, sustainable for the long term while minimizing costs and the use of assets.
A new model
As a result of a merger or acquisition, the combined business may need a new business model in order to maintain and increase their profitable income. However, it is important to understand that the way such changes are made may have far reaching and unforeseen consequences.
A study by McKinsey concluded that companies often focus too intently on integration and cost-cutting, following mergers, so that they neglect day-to-day business, prompting nervous customers to flee and causing revenues, and profits to suffer. Integration and cost cutting may not be the answer when failures in customer satisfaction, a decline in demand or increased competitor activity may be the underlying cause of reduced profits.
The success of a merger or acquisition depends largely on the reaction not only of employees but also customers who should be kept informed about how the changes will affect the continuance of the product and services on which they have come to rely.
While a merger or acquisition may provide opportunities to increase market penetration and increase income, any adverse effects on customers and their demand must be avoided or minimised. Therefore, before considering a new business model, marketing managers need to ask:
- Is there a full understanding of the current condition of the market?
- Are the buying patterns of customers fully understood?
- Is the market and customer culture understood?
- How will this business model affect the customers?
- Will the customers perceive the change as beneficial or detrimental to them?
- What will be the positive consequences of the change?
- What will be the negative consequences of the change?
- Can the results of the changes be quantified?
- If not quantifiable how are the benefits to be measured?
- How much will the changes cost in time and money?
- Who will benefit from the changes?
Copying a successful business model from another organisation, or from a different market or country is fraught with dangers, for a variety of reasons, but principle the differences lie in market conditions, as well as the market and customer culture.
Marketing managers would do well to remember that business models that work in one market do not necessarily work in another.