Background and challenges
A nutraceutical company was considering a strategic investment to expand into new product categories. The new product categories appealed to a younger demographic and would expand its direct-to-consumer (DTC) business, both critical strategies for the business.
L.E.K. Consulting was engaged in an operational due diligence (ODD) to develop a perspective on synergies and risk across the end-to-end supply chain. The three-week due diligence included a risk assessment, estimated synergy cost savings and a time-phased implementation plan. In parallel, we executed a commercial due diligence (CDD) to evaluate the competitive landscape and risks the company faced with a planned expansion from DTC to retail.
Approach
L.E.K. deployed its Synergy Assessment and Operational Health Check solutions to rapidly evaluate the company’s and the target’s supply chain and manufacturing capabilities.
Six synergies were developed that would generate 810 basis points of gross margin improvement for the target, as well as 30 basis points for the company:
- Consolidate the target’s manufacturing to the company’s high-performance contract manufacturers to reduce conversion costs
- Insource a set of product lines to the company’s internal manufacturing platform to take advantage of a differentiated cost structure
- Leverage packaging economies of scale with the company’s existing supply base and transition to new packaging design to reduce cost and working capital
- Capitalize on combined parcel spend and new cost optimization strategies
- Insource the target’s DTC distribution to leverage the company’s capabilities and capacity
- Change supplier ordering processes to maximize inbound truckload utilization
A phased implementation plan was developed to accelerate speed to value while balancing business and broader integration priorities.
The Operational Health Check focused on the target’s contract manufacturers, supply chain practices and key raw materials markets. No red flags were identified within the target’s operations. There were challenges with the primary ingredient used in most of the portfolio. The commodity market for this ingredient was experiencing high demand and global shortages that led to volatility in pricing and availability.
In parallel, the CDD found significant pricing headwinds with major retailers due to changing consumer expectations. The target had little pricing power relative to its peers and a volatile commodity input, neither of which were accounted for in the business case.
Results
Our team’s Synergy Assessment found a multimillion-dollar margin uplift opportunity for the target, which was nearly twice the initial company estimate. The analysis also found freight synergies for the acquiring company that had not previously been considered.
The integration of the CDD and ODD was critical to the decision-making process for management. The combination of customer pricing pressure, direct materials volatility and the company’s position in the market led to an acquisition target that was much riskier than it initially appeared. This critical insight led to further due diligence by the company and ultimately the choice not to move forward with the acquisition, potentially saving the client millions of dollars from a poor investment.
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