A week ago, Belk Stores (BLKIA:OTC) announced it was considering strategic alternatives (We’re for sale) and had hired a banker.
Whether the outcome is a strategic acquisition by another retailer in the department store or adjacent business, a financial buyer, or no-sale, the data room inquiries are all running to Belk Stores customer data, because aside from the financial engineering that is a stock in trade for M&A professionals, customer analytics are where any remaining deal leverage resides.
For either type of buyer, the future value of the investment has to exceed the value paid. In retail terms, this means an increase in average annual transaction size, and/or an increase in the frequency of transactions (whether brick and mortar or online), a longer customer lifetime (retaining customer purchasing over time) and/or the ability to generate new customers at a favorable price point. To be successful, they have to do these better than Belk could themselves. For a strategic buyer it’s a tall order. For a financial buyer it requires an awful lot of acumen.
While the underlying value of the real estate (of Belk’s retail locations) will be of significant interest (look at the bounce Dillard’s got a couple of years ago when they announced a never completed REIT) the big leverage is in their customer purchase history.
Here are the essential questions to the Belk transaction:
For Strategic Buyers:
- If the acquirer doesn’t share a lot of markets with Belk, they’re asking “if we convert Belk to our nameplate (think “Macy’s” for instance) in markets where we don’t have a presence today, can we expect Belk sales from the most recent 12 months to stay the same, shrink or grow? This involves market definitions down to virtually the household level and a detailed examination of buying patterns by price point per merchandise category. Then those households are re-aggregated to create accurate market measurements . A couple of years ago, without current data analytic capabilities, you really couldn’t even consider doing it.
- Where there are shared markets, how many of our customers actually also shop Belk? Which of the two do they spend more with? By price point by sku at the household level. How has this changed in the last year?
- In each market, how many households have purchased from us in the last ten years? From them? (Net of moves in and out) By lifestyle, including age, what is our untapped potential, if any, in each market based on our best market experience? What was the customer acquisition cost in each market by lifestyle in the last twelve months? Has this grown or shrunk?
- Where penetration is low, is it a mismatch to consumer type, an assortment problem, presence of competition, or other facts? If so what are they?
- When thinking about CAC, how many transactions does each customer have to make before the gross margin generated produces a breakeven result against the incremental acquisition cost?
- For existing Belk customers how much spending has shifted, at the household level, to e commerce? Has this increased or decreased each household’s annual spending by market? Lifetime value? By demographic segment at the household level? Let’s be sure ecommerce sales aren’t mixed into store sales and therefore distort store sales data.
- How much showrooming is going on at Belk stores? (Compare foot traffic counts to same day in store transactions on an historic basis.) Is this showrooming going to Belk online or to others? At what mix?
For Private Equity Buyers:
- What are the trend lines in customer acquisition cost, and the components of lifetime value analyzed separately (annual size of transactions, number and lifetime length) by lifestyle and segment? What will we do to improve these?
- Is there enough cost take out to improve EBITDA without significant customer change?
- What are benchmark comparables for the whole company and the industry for both for brick and mortar penetration in each existing market and ecommerce?
- Is there freestanding ecommerce business not associated with stores? Can this profitably be increased?
- Any way to catch up on ecommerce with the industry? Encourage or discourage showrooming?
Same store sales don’t directly translate into customer metrics and can mask either problems or opportunities. What are the trend lines in each category?
All of the answers to these questions now exist in the Belk customer data. They can provide a very good snapshot of Belk as it stands today. For strategic buyers, the combination of their customer data with Belk’s reveals a detailed picture. For the financial buyer, comparing Belk actuals to available comparables describes the probability of a good outcome.
Every business should know the cost – in time and money – to acquire a customer, how much that customer will produce in revenue, and for how long. This gives them the ability to identify customer segments and target acquisition cost, budget for results, and measure performance.
Unfortunately most don’t know the cost of customer acquisition, but we do.
When you partner with Keane Consultants, you get a proven track record of success in bringing costs down and driving win rates up.