We wrote this article for auto and heavy duty distributors, jobbers and retailers – however the basic principles are in intact:
1. Expand Your Geographic Market One of the biggest recent consolidations was the purchase of CSK by O’Reilly Auto Parts. O’Reilly added stores in Western markets and grew into a nationwide chain in months that otherwise would have required years of organic and new store growth. And they were able to leverage the asset to pay for this rapid acquisition.
2. Take Out a Competitor One compelling reason to buy a competitor is to eliminate price pressures, especially if the competitor is the low-price leader. With the competitor gone, customers have one fewer location to shop, and your opportunity to market branded and private label products increases. Eliminating a competitor may also reduce the market’s advertising clutter.
3. Increase Market Share and Reduce Costs for More Profits Most businesses organically grow revenues by perhaps 3-5% annually and market share 1-2% annually. Contrast that with a 30% annual revenue growth and 10% annual increase in market share that could be realized by buying a competitor. You also gain leverage for better prices and terms with suppliers due to your larger purchasing power. Increased margins then improve cash flow, allowing you to complete additional acquisitions.
4. Secure Valuable Supplier Contracts A competitor may have valuable, exclusive supplier relationships, including direct imports and direct from US-based suppliers. These contracts, spread across the larger footprint achieved through acquisitions, may generate substantial revenue at higher margins.
5. Gain Coveted Locations Securing ideal locations – a high-traffic corner location or one that is in the middle of an industrial or auto/truck repair district – may not happen unless you buy it and convert it to your brand. Run the financials to ensure this is smart use of your human and financial capital.
We recommend you develop an “Intelligent Strategy” about how to best grow your business. Consider all the pros and cons of acquiring a competitor. Acquisition cost and value is more than just dollars invested. It’s also long term strategic positioning as well as your own exit strategy.