Some times investors want to understand more than a business' worth at acquisition, but what is its strategic potential.
This is why I was approached by a private-equity firm was about to acquire a local loyalty solution provider, to do a product due diligence for them.
The task was to assess the acquired technology, specifically evaluating if it could be spun from a local solution into a global product.
What is Loyalty Marketing All About?
Broadly speaking, Loaylty marketing is a marketplace, connecting consumers to vendors. Vendors offer monetary and non-monetary benefits to returning customers, hence increasing revenue and profitability.
The loaylty market is comprised of three types of competitors:
MPP (Multi Partner Platforms): These are multi partner vendors such as MasterCard, where the payment solution is the retention vehicle: Once consumers pay, they accrue benefits they can later redeem.
LMS (Loyalty Management Solutions): These loyalty platforms, made by the likes of SessionM and Clutch, are vertically integrated platforms, solving for large retailers, recording purchases and closing benefits accrual and redemption.
LMSP (Loyalty Managed Service Providers): These outsourced consultancies, such as Merkle, Epsilon, and Kobie Loyalty Cloud, provide creative services, media operations, and oftentimes include in their technology stack tools procured from the LMS tech vendors..
For the uninitiated, some of these competitorss are multi-billion giants, and the question stands: How can a locally oriented provider, such as the acquisition target, gain traction in the global market?
Job Description
At first, the job at hand was daunting. How can one gage a (very) successful local business, extract the technology part of it, and assess its potential for global expansion?
Such analysis can - and should - impact the business plan, the goals management is undertaking, the capital allocation required, and the range of forecast results. In fact, this could affect the valuation of the firm (In a separate post on this blog, I show how management's aspirations, financing strategy, and expected outcomes impact valuation).
Deep breath, and we break the problem into manageable work packages:
Market analysis: Size, structure, trends 1. Is there room to grow, in terms of global spend on loyalty technologies? Is this growing fast or slow? In which geographies? 2. What is the breakdown of this complex market? What are the value chains? 3. How does retail technology change to fend eCommerce? 4. What are the impacts of globalization and consolidation?
Existing value proposition: 5. What makes this vendor so successful locally? 6. Does technology play a critical role in this success? 7. What role does operational excellence play in this?
Global opportunity: 8. How can this company grow explosively in the global market? 9. Can it spin out its tech stack, repackaging it as a stand-alone platform for enterprise retail customers and loyalty operators?
Market analysis:
At the time, the loyalty management market was estimated by several sources at $5.57 billion, with 15.2% CAGR forecast through 2027.
The key trends we identified in this mature, yet dynamic, domain:
Internal rewards (miles, cash back etc.) are declining and are being commoditized
Customer experience becomes more personalized Fusion between loyalty programs, omni channel marketing and direct to consumer eCommerce
Feedback loops to core business through customer data platforms (“B2C CRM”)
Mobile and digital wallet integration
The retail industry is constantly changing, moving away from the traditional in-store shopping experience to an omni-channel approach that combines different touch-points such as physical stores, online platforms, e-commerce, social media, and other media channels. The goal is to provide customers with a seamless experience across all channels.
The objective is to guarantee that retail customers enjoy a seamless and unified experience across all channels, boosting customer interaction and loyalty, despite the rise of eCommerce and online risks.
Global consolidation is also happening, with multinationals such as MasterCard developing and offering loyalty solutions across increasingly diverse regions.
Success analysis:
Success factors: It clearly emerged that the business benefits from a combination of factors: On one hand, a strong multi vendor network that provided cross vendor synergies and allowed all of them to increase revenue. On the other hand, a technology stack comprised of (a) an internal information system to manage vendors, benefits, and user credits accrual and redemption; and (b) a front-end layer externalizing the value to subscribers.
Technology's role: How low are the onboarding barriers and usage friction for consumers and businesses? Is the system scalable and secure enough to become available at global scale? What changes need the system undergo to be massively multi-tenant, with assurances proprietary data do not leak between competing vendors? What regulatory barriers are there to overcome when operating in a multi geography, multi currency environment?
Operational excellence's role in the local success? Is this replicable? Is it scalebale? what are the barriers on growth for a manual process comprised of negotiating benefits and terms, legal and technical onboarding, reporting? How many personnel (sales and CS) are required to support the current tech stack? Can this scale, or is it inherently labor intensive?
Tech Stack Gap Analysis - Product Due Diligence
Oftentimes, home brew enterprise solutions are built from logic engine and user interfaces built on top of an mSQL data base.
In this assignment, I analyzed the gaps existing when compared to mainstream comparable solutions, in each of the functional domains of the system.
Functional area | Existing status | Scale ready | Solution / competitor | Effort |
Server architecture | Replicated servers | CI/CD docker architecture | N/A | $$$ |
Physical infrastructures | Server farm | Cloud based for multi tenant | AWS / Azure / G cloud docker | $$ |
Database architecture | MSQL standard edition | Advanced large scale DB + connectors | Informix, Oracle, MsSQL postgres… | $$ |
Payment gateway | 3rd party: Pelecard (local) | International, multi currency, multi tax, customs and shipping ready | Clutch, Exchange solutions | $$ |
Data management and analysis | SQL queries and routines, run locally / manually | CDP solutions | Emarsys, CroudTwist, Clutch… | $$$ |
Accrual/redemption rule engine | multi vendor, tiers, etc.. | Multi tenant, | MasterCard, SessionM… | $ |
Integration capabilities | N/A | N/A | Emasys, Exchange, Yotpo… | $ |
Inventory planning and management | SQL based tools (risk mgmnt) | Automated supervised systems | Streamline | $$$ |
Campaign / program mgmnt | Manual commmunications (sms) | Automated multi channel tools | Yotpo, CrowdTwist | $$ |
Advanced analytics | N/A | CDP solutions, AI | Yotpo, Optimove | $$$$ |
Tenant management | Single tenant | Multi tenant - clients, clubs, sites/apps management | White Label Loyalty | $$$ |
Localization – multi currency | N/A | Multi currency (and everything else related to international ops) | Exchange solution | $$$ |
Accounting interface | N/A |
|
| $ |
Internationalization and localization for both front and back end | partial | Language, regulatory, taxation, shipping methods… |
| $$ |
Site build/customize/onboard management system | N/A | Media rich visual mini-sites / mobile apps / Social plugins |
| $$ |
The analysis shows a significant gap in the tech stack, requiring major development effort to rewrite the system to performance scale, as well as to user interaction responsiveness, as the loads planned would increase by several orders of scale.
Crucially, the benefits secured from vendors need to be distributed via a ״Perks- store" - Where benefits could be searched and claimed. Further, a personal profile area is there for consumers to manage their purchases, benefits, and points (wherever such point system exists for rewards accumulation).
These systems should ne be localized: Multi lingual, multi currency, regulated by several and at times conflicting regimes... The gap widens.
Operational Gap Analysis
As a local player with some heft and bargaining power, the target company managed to secure favorable benefits ("deals") from the vendors included. What happens when such a competitor tries to set foot in foreign territories? They're merely a speck of dust, so to speak: Since competition does exist, they need to pull some very convincing tricks, commercially, in order to gather the momentum needed.
Retail is by definition local: How can you negotiate enough deals with vendors, so the platform is filled with goodies when you launch? By goodies I mean perks and benefits from vendors, which on their part would only care to talk to platforms with substantial amount of active users.
This chicken and egg problem is pertinent to any market place, and the question is what strategy will be used to tackle this challenge, and at what cost.
Summary
Some products and services are tight fit into an existing local context which put boundaries on global expansion - on several fronts: Technology, Distribution, Operations.
When working with market-places, these challenges are exacerbated by the chicken and egg syndrome of need to fill in simultaneously both supply and demand.
This was a tough one to crack. Company seems to be doing just fine, so it seems, despite those challenges 😊.
Are you an investor or an M&A team seeking to decipher the product value of a target acquisition? Come talk to me!
Note: This analysis was conducted alongside and with the guidance of Amir Sandel from YS Growth Strategies.
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