Corporate ventures can deliver the goods but are high risk and should not be undertaken lightly, says Glynn Davis
Last year Wal-Mart announced that it was to enter private equity for the first time with a $25m fund to invest in companies owned by women and minorities.
As a move to improve its public relations,the Erasmus Minority Supplier Development Fund was impressive. But it also highlighted the potential of “corporate venturing” - investing in or partnering with others in ventures outside the multiple grocer’s core business.
The Wal-Mart fund is set to invest in businesses that have the capacity to distribute products and services to large retailers, not necessarily just to Wal-Mart. As such, it may well represent the future of venturing where the focus is in largely unrelated spheres of activity.
However, most ventures embarked on to date have been formal joint ventures or revenue sharing arrangements reaping benefits rather closer to home. And there are likely to be more to come, suggests Chris Robson, chief executive of Edengene, a revenue growth consultancy.
He says: “Not since the first wave of internet fever in 2000 has there been such a focus on the need to deliver consistent revenue growth - rather than simply earnings growth - to compete in a rapidly changing global marketplace.” An Edengene survey found that 98% of FTSE-100 companies rate organic revenue growth as a key issue this year. And one method of achieving this is through corporate venturing. The supermarkets, in particular, have
taken the bull by the horns.
Russell Morris, general manager of customer business development at Sainsbury, has responsibility for ventures with Scottish Power and The Carphone Warehouse. Under the former agreement, Sainsbury provides all the customer services including billing and Scottish Power supplies customers’ gas and electricity.
Under the latter, The Carphone Warehouse is responsible for all aspects of customer management, including credit checking, network connection, logistics, billing, collection and customer care, while Sainsbury is responsible for generating the footfall of the buying public.
Morris says: “Through joint ventures we are able to offer an ever-widening portfolio of high-quality, great value services.”
Although offering these products and services without a partner would generate bigger margins, retailers reason that they are not expert in these fields and that joint ventures allow them to offset both the risk and costs entailed.
Not that this guarantees success. Take the joint venture between c-store group, Costcutter and pharmacy Numark, which despite plans to roll the concept out to as many as 20 outlets, was recently abandoned after just one outlet had been co-branded, in Liverpool. Another co-branded casualty was the Martin’s/Somerfield joint venture that involved introducing a CTN offer into Somerfield stores. A partnership between Spar and Woolworths went the same way - although to many people it seemed like a sensible idea at the time as Woolworths was seen as needing a food offering.
Sarah Wilson, director at Egremont, which advises a number of major food retailers on strategy, still believes it had potential. “In theory it was sensible. The main problem was that their systems weren’t compatible. As with many ventures, the ideas are sound but the implementation is the problem.”
One issue is that there is often one dominant partner and this can make the relationship even more lopsided if the strategies of the two parties are not aligned, she says. Conversely, she says, those with properly aligned strategies tend to be successful. She points to Ocado and Waitrose: “They may have different end goals but they have a growth agenda and an aim of servicing the customer.”
Neil Jewsbury, head of trading and marketing at Ocado, says the dedication that the Waitrose team puts into its products is matched by the latest technology that Ocado uses to deliver a high-quality service.
The combined buying power of Ocado and Waitrose provides both parties with greater scale and efficiencies than they would enjoy as individual businesses.
Selecting the right partners has also underpinned Tesco’s success with joint ventures. Its largest partnerships are with Royal Bank of Scotland, which created Tesco Personal Finance, and with O2, which created Tesco Mobile allowing the multiple to offer an own brand network, piggybacking O2’s infrastructure.
Jonathan Church, media director at Tesco, says: “We research carefully to choose the right partner and have teams of people looking into it. They need to have a similar outlook on their customers and their business as we do - the brands have to fit. With Tesco Mobile the customer sees it as Tesco but there will be recognition of it as a joint venture with O2.”
The 50:50 joint venture has been structured so that Tesco Mobile has its own board of directors comprising Tesco and O2 personnel, which meets every month. He says that each party has to be clear about their specific roles and responsibilities.
Church says: “We bring to the deal our knowledge of customers, we use our stores and access to our customers, and they bring their expertise in an area that we know our customers want to get into.”
Contributing to these successes is the fact that they are run as true joint ventures. Each party has around a 50% share of the business, profits are evenly split and their boards have representatives from each company. Tesco is however also involved in two other ventures where its involvement is little more than a stake. For a number of years it has held a 50% share or more in customer insight specialist Dunnhumby and more recently it took a stake in bio-fuels business Greenergy.
Despite Tesco not taking a strategic role in these ventures, they still provide obvious direct benefits for the multiple. The benefit for Tesco from its involvement with Dunnhumby, for instance, is that it provides the grocer with masses of data on its customer buying habits (through Tesco Clubcard) that highlight any areas where it may be possible to engage in venturing. It was this that identified the mobile phone market as a good opportunity.
But Tesco has also been very good at recognising opportunities through what could be classified as more ‘in-company’-type ventures. A separate company outside its core business has not been set up, but third parties have still been used to bring in expertise in specific non-food categories.
This has allowed it to move into DVD rentals with Video Island and enter the travel market with Lastminute.com. Church regards these as straightforward ‘white label’ arrangements, where the service or product is Tesco-branded but the revenue split between the retailer and the third party.
Robson says this sort of initiative highlights the opportunities retailers should look at closer to home before they consider corporate joint venturing, which he says can be risky. “It is not a silver bullet answer to every company’s prayers. It is high risk and should not be undertaken lightly, or without specialist advice.”
That said, there could well be more ventures such as Wal-Mart’s, which in the short term have more PR than revenue- generating potential. Closer to home, that means Tesco’s Greenergy venture is unlikely to be the last of its kind.
Last year Wal-Mart announced that it was to enter private equity for the first time with a $25m fund to invest in companies owned by women and minorities.
As a move to improve its public relations,the Erasmus Minority Supplier Development Fund was impressive. But it also highlighted the potential of “corporate venturing” - investing in or partnering with others in ventures outside the multiple grocer’s core business.
The Wal-Mart fund is set to invest in businesses that have the capacity to distribute products and services to large retailers, not necessarily just to Wal-Mart. As such, it may well represent the future of venturing where the focus is in largely unrelated spheres of activity.
However, most ventures embarked on to date have been formal joint ventures or revenue sharing arrangements reaping benefits rather closer to home. And there are likely to be more to come, suggests Chris Robson, chief executive of Edengene, a revenue growth consultancy.
He says: “Not since the first wave of internet fever in 2000 has there been such a focus on the need to deliver consistent revenue growth - rather than simply earnings growth - to compete in a rapidly changing global marketplace.” An Edengene survey found that 98% of FTSE-100 companies rate organic revenue growth as a key issue this year. And one method of achieving this is through corporate venturing. The supermarkets, in particular, have
taken the bull by the horns.
Russell Morris, general manager of customer business development at Sainsbury, has responsibility for ventures with Scottish Power and The Carphone Warehouse. Under the former agreement, Sainsbury provides all the customer services including billing and Scottish Power supplies customers’ gas and electricity.
Under the latter, The Carphone Warehouse is responsible for all aspects of customer management, including credit checking, network connection, logistics, billing, collection and customer care, while Sainsbury is responsible for generating the footfall of the buying public.
Morris says: “Through joint ventures we are able to offer an ever-widening portfolio of high-quality, great value services.”
Although offering these products and services without a partner would generate bigger margins, retailers reason that they are not expert in these fields and that joint ventures allow them to offset both the risk and costs entailed.
Not that this guarantees success. Take the joint venture between c-store group, Costcutter and pharmacy Numark, which despite plans to roll the concept out to as many as 20 outlets, was recently abandoned after just one outlet had been co-branded, in Liverpool. Another co-branded casualty was the Martin’s/Somerfield joint venture that involved introducing a CTN offer into Somerfield stores. A partnership between Spar and Woolworths went the same way - although to many people it seemed like a sensible idea at the time as Woolworths was seen as needing a food offering.
Sarah Wilson, director at Egremont, which advises a number of major food retailers on strategy, still believes it had potential. “In theory it was sensible. The main problem was that their systems weren’t compatible. As with many ventures, the ideas are sound but the implementation is the problem.”
One issue is that there is often one dominant partner and this can make the relationship even more lopsided if the strategies of the two parties are not aligned, she says. Conversely, she says, those with properly aligned strategies tend to be successful. She points to Ocado and Waitrose: “They may have different end goals but they have a growth agenda and an aim of servicing the customer.”
Neil Jewsbury, head of trading and marketing at Ocado, says the dedication that the Waitrose team puts into its products is matched by the latest technology that Ocado uses to deliver a high-quality service.
The combined buying power of Ocado and Waitrose provides both parties with greater scale and efficiencies than they would enjoy as individual businesses.
Selecting the right partners has also underpinned Tesco’s success with joint ventures. Its largest partnerships are with Royal Bank of Scotland, which created Tesco Personal Finance, and with O2, which created Tesco Mobile allowing the multiple to offer an own brand network, piggybacking O2’s infrastructure.
Jonathan Church, media director at Tesco, says: “We research carefully to choose the right partner and have teams of people looking into it. They need to have a similar outlook on their customers and their business as we do - the brands have to fit. With Tesco Mobile the customer sees it as Tesco but there will be recognition of it as a joint venture with O2.”
The 50:50 joint venture has been structured so that Tesco Mobile has its own board of directors comprising Tesco and O2 personnel, which meets every month. He says that each party has to be clear about their specific roles and responsibilities.
Church says: “We bring to the deal our knowledge of customers, we use our stores and access to our customers, and they bring their expertise in an area that we know our customers want to get into.”
Contributing to these successes is the fact that they are run as true joint ventures. Each party has around a 50% share of the business, profits are evenly split and their boards have representatives from each company. Tesco is however also involved in two other ventures where its involvement is little more than a stake. For a number of years it has held a 50% share or more in customer insight specialist Dunnhumby and more recently it took a stake in bio-fuels business Greenergy.
Despite Tesco not taking a strategic role in these ventures, they still provide obvious direct benefits for the multiple. The benefit for Tesco from its involvement with Dunnhumby, for instance, is that it provides the grocer with masses of data on its customer buying habits (through Tesco Clubcard) that highlight any areas where it may be possible to engage in venturing. It was this that identified the mobile phone market as a good opportunity.
But Tesco has also been very good at recognising opportunities through what could be classified as more ‘in-company’-type ventures. A separate company outside its core business has not been set up, but third parties have still been used to bring in expertise in specific non-food categories.
This has allowed it to move into DVD rentals with Video Island and enter the travel market with Lastminute.com. Church regards these as straightforward ‘white label’ arrangements, where the service or product is Tesco-branded but the revenue split between the retailer and the third party.
Robson says this sort of initiative highlights the opportunities retailers should look at closer to home before they consider corporate joint venturing, which he says can be risky. “It is not a silver bullet answer to every company’s prayers. It is high risk and should not be undertaken lightly, or without specialist advice.”
That said, there could well be more ventures such as Wal-Mart’s, which in the short term have more PR than revenue- generating potential. Closer to home, that means Tesco’s Greenergy venture is unlikely to be the last of its kind.
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