Rethinking Acquisitions: How Ecommerce Is Changing The Way You Gobble Up CompetitorsJanuary 26, 2018 | By: Energy Engine
Acquisitions have always been a mainstay for dealers looking to quickly expand market share. Traditionally, this strategic tool has delivered new customers and revenue without the time and uncertainties associated with organic growth.
Buying competitors allows for turnkey impacts, access to new consumers, and economies of scale when done properly. Financing these purchases could be justified by the increased cash flows and incremental profits.
But that was then…welcome to now.
The Evolving Acquisition Landscape
Acquisitions remain an important growth vehicle for those with the expertise and resources to pull them off. But an odd version of supply and demand has driven up prices to levels that can hardly be defended.
It is not that there is a shortage of good companies to acquire (although this is partly true). Inflation is being caused by CUSTOMER shortages. With the universe of fuel customers static or dropping, especially full-service heating oil, acquiring them through direct sales efforts is challenging and costly. Industry averages are hovering around $500-$600 per gain, a sales expense that will take perhaps 2-3 seasons to recoup depending on region. Early customer defections are all too common, making this strategy extremely risky.
Thus, acquiring an established base has become the path of least resistance.
The natural result of this dynamic is the price of buying another company is steadily rising and — in many cases — becoming excessive. Competition for deals is fierce. Good for the seller but bad for the buyer.
The trickle down effect is that financing these acquisitions has become more difficult and expensive. Many do not even qualify for lending. This is made worse by a steady erosion in volume and margin across the industry, leading to longer payback horizons. This makes banks nervous and makes a dealer think twice before draining their cash reserves.
A noteworthy change to this landscape is the increase in the number and value of “will call” COD companies being sold. Suddenly, full-service dealers are outbidding each other for a part of the market they once saw as second-class fuel citizens.
The reason for this is simple. On-demand (aka will call) is a fast growing part of the industry as more consumers choose to take control of their relationship with fuel dealers. The main driver of this is of course the explosion of internet shopping.
On-demand fuel customers are no longer people with 400 credit scores asking for 50 gallon drops. They are teachers, doctors, builders…and of course, Millennials. A generation of consumers hell bent on their right to self determination. Smart dealers are paying attention.
Updating The Dealer Playbook
Here is our new normal: acquisitions cannot be easily cost-justified, and they come with a ton of risks. Even COD companies are transacting at a premium. So, how do you materially grow your business if you are cut off from or unwilling to overpay for the easy road of buying customers? Let’s go back to the internet and how it is reshaping countless business practices.
How do e-commerce giants like Amazon and LL Bean conquer a specific geography? Do they buy other retailers in the area? Of course not! They use specialized web tools and marketing tactics to target zip codes, offer promotions, and enhance brand awareness. It is like opening a “virtual store.” Since today’s consumers are more interested in who you are rather than where you are, the strategy is massively effective.
Fuel dealers can use the exact same playbook. Instead of paying an exorbitant price for the competitor on the other end of the county, deploy e-commerce to target and acquire their customers at a fraction of the cost.
Sounds easy. And it is.
Take our Energy Engine client in New Jersey who lost out on the opportunity to buy a small competing dealer inside their existing service territory. “Lost out” may not be the right term — the eventual buyer paid 25% above market value, which is borderline stupid.
But our clever Engine client was not to be denied, fueled by a proud competitive spirit instilled by his grandfather, and went to battle using a new high tech weapon. He used his e-commerce website to target zip codes in the other dealer’s footprint, used Google Adwords to drive traffic, went on a social media blitz, and offered incentives on first deliveries. All while pumping up his brand.
He did this at high frequency and never let up. Thanks to his modern playbook, it was all automated and being done digitally, so he was able to just sit back and watch.
Oh, and also take a LOT of orders. At last count, he had “earned away” 1/3 of the customers from the company who had made the acquisition, with that number is steadily rising. It is an amazing story of outsmarting competition by utilizing non-traditional methods to win. Leveraging the power of the internet and e-commerce to expand your market instead of writing a huge check for an overpriced deal.
The best news? This Engine client is acquiring (wait, stealing) these new customers from his competition for $90 per gain. Compare that to the $680 PER HEAD rate he would have paid had he made the acquisition. A pretty good deal I’d say.
Pure genius on his part. Powered by technology.