Features, Retail Insights

Tomorrow’s M&As Will Create Markets, Not Consolidate Them

RR CVS AETNAIf the CVS–Aetna deal results in CVS developing a new, unified healthcare solution that begins with lowering costs through the disintermediation of pharmacy benefit managers and builds on the walk-in clinics already operating out of some Target stores to evolve into the creation of a networked consortium of neighborhood-based general practitioners operating out of a variety of retail formats, then that would be a neumarket.

This month, I offer The Robin Report readers a thought experiment to start your year. Try a different way of thinking about how the retail and consumer goods industry approaches mergers and acquisitions.

Let’s begin by imagining how future generations will see 2017 as the milestone that marked a new era when M&A evolved from the consolidation of markets—aimed at quickly building scale, cutting costs, or buying time for troubled companies—to the creation of new consumer solutions or “neumarkets.”

The neumarket origin story traces back to June 2017 when Amazon announced it would acquire Whole Foods and its 460 brick-and-mortar stores for $13.7 billion. At the time, the move was seen in the fairly conventional terms of Amazon moving into the food arena or, depending on the analyst, scaled physical retailing. In retrospect, however, it foreshadowed a fundamental shift to a neumarket wherein a digital consultative personal food shopping service preplans your meals, physically shops for you, adds in health and wellness-inspired nonfood and general merchandise items per pre-set parameters and arranges for everything to be staged for pickup at the supermarket of your choice—all through a centralized billing and fulfillment service.

Neumarkets could be further recognized with a second example: the announcement in December 2017 of CVS Health’s $69 billion acquisition of Aetna.

So, what exactly do we mean by neumarkets and how do they differ from traditional M&As?

Neumarkets

So, what exactly do we mean by neumarkets and how do they differ from traditional M&As? Neumarkets are sustainable consumer-facing commercial positions created through the merger and acquisition of companies operating in adjacent and complementary offering and service spaces, redefining what consumers expect of the combined companies.

This redefinition is the hallmark of neumarkets. If a merger or acquisition simply results in what is basically an expanded version of business-as-usual for both companies, it is not a neumarket.

If the CVS–Aetna deal ends up as just a vertical integration scheme, built on the shoulders of the retailer’s earlier $26.5 billion acquisition of Caremark Rx completed in May 2007, it won’t represent a true neumarket, but rather just an expansion of what has already been done.

But, if the acquisition results in CVS developing a new, unified healthcare solution that begins with lowering costs through the disintermediation of pharmacy benefit managers and builds on the walk-in clinics already operating out of some Target stores to evolve into the creation of a networked consortium of neighborhood-based general practitioners operating out of a variety of retail formats, then that would be a neumarket.

Neumarket thinking expands how we look at what M&As can, or should, accomplish and significantly broadens the plausible “target” list.

A Limitless Frontier

Let’s explore some other examples of potential neumarket activity. First, a neumarket that appeals to pet lovers and investors is a hypothetical M&A of a pet supply category killer and Cryptokitties, the first global game built on the back of blockchain technology (https://www.cryptokitties.co).

For the uninitiated, CryptoKitties are what are being billed as cryptocollectibles—a game-based collectible that can be bought, sold, and traded with each transaction facilitated, logged, and securely tracked by blockchain technology. The game is pretty simple, at least in the beginning.

An initial 100 “founder kitties” were put on the market in November 2017 for direct purchase from AxiomZen, the game’s inventor. A new “Gen O” CryptoKitty is planned to be released every 15 minutes until November 2018. Gen O CryptoKitties sell for the average of the last five previous transactions on the blockchain plus 50 percent. Players can breed two of their own CryptoKitties, generating “genetically unique” CryptoKitties which can, in turn, be bought or sold by their breeders with AxiomZen taking a fee on every secondary market transaction.

If this sounds a bit like digital Beanie Babies, think again. Because it leverages a scarcity model as opposed to striving for mass market saturation, AxiomZen has created a market where, by December 2017, individual “Kitties” were selling for well over $100,000 apiece.

What would be in it for our hypothetical pet supply retailer?

Imagine a market offering that appealed to both pet lovers and financial speculators, especially if it was modified to benefit animals. Let’s say, given the numbers, that the retailer’s CryptoKitty division donated one percent of every transaction to humane societies and animal shelters while simultaneously building a virtual reality gaming market place. With one move, retail, virtual reality, and gaming have blurred in ways not previously seen, thus creating a neumarket.

What other M&As suddenly become plausible when viewed through the neumarket lens?

  • Would Google, for example, buy a department store, creating a service that combined a personal shopper program, buying and sourcing skills, merchandising flair, and physical locations with its Internet-of-Things (IoT) hardware devices, software expertise CRM analytic capabilities, and database into a neumarket offering based on a combined personal assistant and shopper, home management, and furnishing service?
  • How about a Big Farma company acquiring a supermarket or restaurant chain and creating a neumarket that let consumers select and track exactly where their food comes from, how it was raised, and how they “receive” the product—shipped to their home on a subscription basis, prepared in a restaurant near them, or purchased on demand in its raw form at a local supermarket? Suddenly, the consumer is buying the seed and expanding the definition of delivery to include the development of an end product.

Once you move to the idea that consumer and retail M&As can do something beyond creating scale in one industry, the possibilities are almost endless. So, how should you be thinking about neumarkets?

Rules of Neumarket Formation

Obviously the neumarket idea is still, at best, in its infancy and the landscape is largely uncharted. Since it doesn’t really exist outside this page yet, no strategic “best practices” have emerged. But, that shouldn’t limit our thinking about how consumer goods and retail companies should approach potential neumarkets.

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Here’s a list of questions we might ask before considering any deal:

  • Does the proposed M&A target occupy a market space that’s adjacent and complementary to your existing business?
  • Are you really acquiring new capabilities, or just adding scale?
  • Would the M&A create a definable new or significantly different approach that addresses a genuine customer need or allows you new room to compete?
  • Will the neumarket operate as an extension of your existing brand or function in its own branded space?
  • Given what you hope to do, are there better or additional potential M&A targets?
  • Are your people, culture, and organization up to the challenge of radical innovation?

And, for public companies:

  • Can you craft a story to tell analysts, who are used to evaluating companies on the basis of traditional metrics such as share of market and year-over-year performance?

Conclusion

I began by saying this article represents a thought experiment, but it isn’t intended to be a purely “blue sky” exercise. We all understand that retail and consumer goods companies face a series of unprecedented challenges—demographic, social, cultural, technological, and competitive. The answer isn’t likely to be “doing more of the same, just better.” It requires redefining not just the rules, but the game being played.

Being innovative in the present is a prerequisite to being competitive in the future. Our customers aren’t going to settle for business-as-usual offers or thinking. Neumarkets are just one approach to building a new future and not the only strategy for carving out a sustainable competitive position today and tomorrow.

At its heart, the idea of a neumarket rests on the assumption that no market offering should stagnate over time. All consumer-facing industries need to be centered on creating new forms of incremental—and, where possible, even exponential—consumer value.

You may not be ready to buy CryptoKitty quite yet, but lots of immediate opportunities exist out there today, just waiting for somebody with a little imagination.

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