THE FINANCE GHOST: Sorbet may be a sweet deal for Clicks

This is a classic ‘bolt-on’ acquisition that, for a pricey company that some call ex-growth, could be a really smart strategic shift

The word “platform” gets thrown around a lot these days. There are applications beyond the world of technology, though in its purest form I still think of a platform as being something like Apple’s iOS or Microsoft’s Office ecosystem.

I’ve seen investment holding companies talk about building a platform when they make an acquisition in a new sector. When you see this argument, you’ll often see it accompanied by a desire for “bolt-on” acquisitions as well. Corporates tend to use this language when entering a new market, as acquisitive strategies are by no means the exclusive realm of investment holding companies. Yet the jargon is almost impossible to understand without an analogy. I’ve recently moved house, so I’ll use furniture as an example.

When you have an empty space in your house, there’s an opportunity to fill it with something. If it’s an entirely new room, then this might be an acquisition in a new market. Once you’ve filled it with a display cabinet or shelving, you’ve executed the equivalent of a corporate acquisition. As you decorate around that piece of furniture, you’re “adding bolt-ons” to your “platform” that you’ve proudly created.

If you did this in a room that was already partially furnished, it would be referred to by many corporates as a new “vertical” — a different customer niche that can be serviced through a tweak to the existing product or service offering.

Are the risks the same? No, not at all. It’s a lot easier to make a small change to an existing room than it is to visualise the end result in a new room. The hardest part is creating the initial platform, with bolt-on decisions being much easier thereafter.

After all, which is harder — choosing the display cabinet for the wall or a pot plant to go on it? Exactly.

As part of Clicks releasing results in the past week, I was reminded of the Sorbet acquisition that is being implemented

In the listed space, value creation is often a function of how the platform and business model evolve over time. The bankers earning advisory fees don’t want you to know this, but incremental improvements tend to create more value than huge deals. Start-ups are built around a strategy of building, testing and tweaking something before giving it a full go. Corporates with large balance sheets are spoilt and don’t always need to be this patient, which can lead to some terrible deals.

Part of the challenge is the pressure to keep growing. If growth stops, a listed company will be valued like an inflation-linked bond at best. In other words, investors will value it based on a high dividend yield, which inevitably means a modest share price. Corporate executives don’t get paid to sit on their hands and watch a share price fall over. Sadly, some of them are paid to create that same outcome through strategic actions instead! Cheekiness aside, the need for constant growth is what distinguishes public companies from private companies. There are many examples of private companies that create fabulously wealthy families by just getting one thing right and then not breaking the business over a long enough period that generational wealth is created in the process. If you’re getting a R30m dividend this year from a private company, does it bother you whether it grew by 6% or 10% in the past year?

As part of Clicks releasing results in the past week, I was reminded of the Sorbet acquisition that is being implemented. I think this could be a good example of a clever acquisition that is appropriately sized and strategically interesting, though it will all come down to execution (as always).

The timing of the Clicks release was fortuitous, as I’ve recently researched Ulta Beauty in the US as well. Clicks and Ulta both make money from beauty products, but they do it very differently. The former drives foot count with in-store pharmacies, whereas the latter uses in-store salons to create engagement with customers and drive a community feeling around the brand.

Another great example of this in practice is Lululemon, the clothing brand that made athleisure popular. Through yoga classes in many of its stores, Lululemon encourages the very activity that drives demand for its products. In an omnichannel world with stores and e-commerce, the need to drive community engagement cannot be stressed enough. Clicks now has 10 million ClubCard members. It will soon own a salon and beauty chain that is a household name in South Africa. This is a golden opportunity to engage with the Clicks community and innovate with in-store salons. It’s time for Clicks to evolve once more.