Question

A large, U.S. based supermarket chain wants to purchase a medium-sized European supermarket chain based in London. The U.S. supermarket has reached a point of saturation in the United States and they are looking for ways to grow. The U.S. based supermarket chain pursues a cost-leadership strategy in the United States and offers customers value through low prices and a vast variety of products. The U.S. based supermarket currently has a global market share of 2% and earns approximately 1.78% in operating income. All 32,500 stores are located in the United States. The company has core competencies in supply chain management and store operations. The leadership team is comprised of executives that worked a Walmart and K-Mart. The London based supermarket has grown year-over-year at a steady rate of 9% for the last 10 years. The chain has 11,500 stores in the U.K., France, Spain, Germany, and Italy. Yet, 10,000 of the stores are in the U.K. The company pursues a focused differentiation across its footprint. The London based supermarket has a global market share of 1.5% and earns approximately 6.2% in operating income. The company has strong capabilities and competencies in follow-up services, which allows the company to adjust its product and service offerings based on local preferences and tastes. This allows the company to charge premium prices that customers are happy to pay. The leadership team at the London based supermarket has core competencies in logistics and distribution that has translated well in sourcing items locally.

Utilizing the information in the question, address the following:

a) Why would U.S. based supermarket want to acquire the London based supermarket chain. Provide at least two points of support.

b) given your limited understanding of the potential transaction (the acquisition), what are some potential issues/challenges that may exist? Provide at least two issues/challenges

Answer 1

a) US based supermarket would want to acquire the London based supermarket chain because of the following reasons :

(i) Cost Effective : Buying an already established and running business saves the cost that a company would have to incur in building a new company from scratch and that too in a new country altogether.

(ii) Increased Market Share : The US based company already has a market share of 2% and the company they wish to buy has a global market share of 1.5%. This means that the overall market share could be as much as 3.5% if not more.

(iii) Increased Operating Income : The US based company is earning 1.78% in operating income whereas the London based company is currently earning 6.25 in operating income which is much more than the US one. Hence, there is scope of earning larger profits.

(iv) Massive Local and Global Presence : The London based company has massive local and global presence which is a plus point in purchasing the same. Everything is just table-ready and very little efforts are to be made in earning and building a name.

b) Some of the potential issues and/or challenges that exist in the acquisition of the company are as follows :

(i) Inflating value : The London based company might want a large sum of money in return, which could be much more than the budgeted purchase price.

(ii) Liabilities : It is important to go through all the documents pertaining to information regarding the contracts, employment obligations, pending cases, receivables and payables, and much more.

(iii) Financial Statements : It would be advisable to take an external opinion from auditors as well as financial experts in order to know the authenticity of the statements of the business.