Nov 29, 2005

Turkey: How a superior shopping experience increases shareholder value

Migros in Turkey has acquired Tansas, a grocery chain approximately half its size, known for providing customers a unique and attractive shopping experience. The press release announcing the deal says that Migros will continue to promote Tansas’ “way of doing business”, and, thanks to the acquisition, “Migros will be closer to the consumer”. Not only will Tansas continue providing customers the services that it has become known for, but in addition, the culture Tansas has developed could work its way back up into the larger Migros organization.

Migros paid a higher valuation than the maximum expected by some corporate finance analysts. In March 2005, CA-IB valued an acquisition of Tansas at US$ 475-535 million, already a 20% premium to the share price. Migros acquired Tansas at a US$547 million valuation. CA-IB credits the high valuation to “the new strategy initiated at end-2001” by Tansas. All Turkish retailers expanded their gross and EBITDA margins significantly in 2004 thanks to the strong economy and increasing consumer confidence. However, the improvement in Tansas was much more attractive. Tansas, which was one of the biggest loss-makers in the retail sector, is now the second most profitable retailer in Turkey on a cash-operating basis. (“A pure supermarket play for foreigners?” CA-IB Research)

What was this “new strategy initiated at end-2001”? At the time, Tansas was faced with low market share and deep losses. Tansas had tried to turn the situation around through promotions offered to their one million loyalty card members. But it was not working. Tansas found there was no difference in profitability, frequency of visit, or loyalty between those of its customers who belonged to its programme and those who did not. The loyalty card programme was having no impact on the chain’s market share and profitability.

Servet Topaloglu, CEO and Vice Chairman of Tansas, then arrived at a radical solution: get rid of the loyalty card programme and replace it with a shopping experience designed to appeal to all five of a customer’s senses. The strategy is mentioned repeatedly throughout the company’s financial reports and conference presentations, using shopping experience terms like the “New Store Concept”, “Incredible Customer Rights”, and “a comfortable and relaxing shopping experience”, all described as brand differentiation components that are hard to replicate.

The Tansas Incredible Customer Rights includes such services as a no questions asked return guarantee, an out-of-stock guarantee for promotional items, and a cash register availability guarantee with the promise that if an additional register is not immediately made available at the request of a customer waiting in a queue, the first 20 million Turkish Liras (approximately $15) of the customer’s purchase will be free.

This new shopping experience was critical in helping Tansas transform deep losses into strong growth in revenue, market share and profits, and, ultimately, a high valuation for Tansas shareholders. Now there’s a metric that is much more exciting and attractive than traditional loyalty metrics. Rather than using things like “share of wallet” to measure their customers’ loyalty, Tansas can measure customer loyalty through shareholder value creation.

I know that many retailers in more mature, slower growth grocery markets will panic at the thought of providing these services to all of their customers. Why waste valuable services on low value customers that may not even be profitable? The retailer’s bank can help by offering the ability to identify best customers at the POS, based on each customer’s cumulative spending in the current month, and printing a VIP services voucher valid for the next month, giving customers access to the types of services that played a key role in helping Tansas increase shareholder value.

No comments: