Private equity’s disappointing investments in several specialty retailers have led some pundits to question whether retail “category killers” are simply a bad bet for Private Equity investors. But in a column published in the October issue of Mergers & Acquisitions magazine, branding agency CBX’s Todd Maute reframes the question to focus on whether investors pay enough attention to the customer-facing side of the retail business.
“When most private equity firms invest in retailers, they typically focus on ramping up efficiencies and reaping the benefits of scale,” Maute writes. “These backend changes hinge on taking a hard look at headcount, systems, real estate, warehouses, the supply chain—just about any process improvements that could make the company more profitable. But the customer does not usually see or feel these changes directly.”
In the piece “The Secret to Success in Retail”, the consultant points to the central importance of brand strength and customer loyalty in today’s marketplace. Retail acquisitions that build a sterling reputation for both, he notes, tend to yield a higher return.
To illustrate this point, Maute cites Oak Hill Capital’s sale of Duane Reade, which gave the PE firm a return of about 1.5 times its approximate $400 million investment in the New York City drugstore chain. Prior to the overhaul, Duane Reade had floundered, Maute notes. “In the context of the challenges Duane Reade had faced prior to Oak Hill’s stewardship, this was an impressive result,” he writes. “What was so different about this new approach? It was customer-facing.”
As Maute outlines in the piece, the customer-facing changes at Duane Reade included: reinvigorating store interiors with a host of shopper-friendly design changes, launching a suite of successful private brands, and introducing new services such as “Doctor on Premises” walk-in healthcare, along with stores-within-stores such as the “Look Boutique” beauty concept.
When Walgreen’s acquired Duane Reade from Oak Hill, Maute notes, its CEO made specific reference to the way these changes had boosted the attractiveness of the New York drugstore chain. “The Duane Reade nameplate had been transformed into an asset, and so had its private label line—a novel change for a retailer,” writes Maute, whose firm continues to work with Duane Reade on private label and store design initiatives.
Likewise, Dollar General, which was acquired by KKR for $7.3 billion in 2007, became even more of a powerhouse by elevating the look and feel of its stores, launching a rebranding initiative, adopting customer-centric store formats, and more. “Dollar General went public in November 2009—the largest retail IPO in nearly 14 years,” writes Maute, whose firm did not work with that chain.
In the conclusion to the piece, he points to the considerable room for similar improvements at other, PE-operated retail chains.
“By paying close attention to the customer-facing side of the chains they invest in, PE firms stand a much greater chance of maximizing return—even in the face of the admittedly daunting challenges arising from e-commerce,” Maute writes. “After all, high-def broadcasts haven’t killed live sporting events and TV evangelists haven’t stopped people from going to church. When retailers emphasize the point of differentiation their brands offer, and enhance the customer experience and relationship, they give people a reason to come to their stores in precisely the same way.”