Skip to main content

I recently read a great article by Target CIO Mike McNamara titled “Technology is too important to outsource” (CIO Magazine March 2022) where Mr. McNamara argues that technology needs to be a core competency for retailers in the age of eCommerce.

Mr. McNamara and the executives at several retailer peers are voting with their budget in terms of two things a) hiring large numbers of “engineers” (defined as software developers and IT staff) and b) increasingly making acquisitions of or investments in retail technology companies.  Just as media companies switched to digital in the 00s, retailers are increasingly becoming technology companies.

Software and IT Staff at Major Retailers
Chart: Software and IT Staff at Major Retailers

Ultimately a retailer is not a physical storefront – a retailer is a channel to sell to one or more consumer demographics and increasingly this is a game powered by technology.  A retail CIO / CTO needs to master eCommerce, website personalization, mobile advertisements and purchases, payments, demand forecasting, point-of-sale systems, associate enablement technologies, and other technology.  As we see from the chart above, large retailers have thousands of IT and software development staff, enabling them to compete directly with pureplay eCommerce companies.

When to invest

Target themselves have two disclosed investments into technology companies or consumer brands (Casper) that they leverage in some unique fashion.  At ComCap we’ve done a number of “strategic minority” investments or “joint ventures” whereby the larger party seeks to gain influence, but not control over, a smaller more innovative companies product development pipeline and priorities.

When to acquire

Target has acquired two technology companies (Shipt and Grand Junction).  The Gap acquired retail forecasting company CB4, Nike acquired Celect, Mcdonalds’ acquired (and has subsequently divested) Dynamic Yield.  

In each case the retailer saw an overwhelming benefit in shutting down the acquired company’s core business in favor of dedicating its resources toward the retailer’s own operations.  In general the synergies have been strongest in demand forecasting (significantly reducing write downs or supply chain waste) or in revenue generation (providing some personalization or incentive that seemed to be unattainable through a typical vendor relationship).

Don’t kill the golden goose – an argument for investing or commercial relationships instead of M&A.

Thirty years ago I was a young software engineer working in Silicon Valley for a series of startups.  It is immediately apparent to me why retailers are challenged in competing with technology companies and the difficulties in retaining tech staff after an acquisition.  

ComCap often advises larger clients to consider minority investments or joint ventures instead of acquisitions if the DNA, culture, and compensation policies between the buyer and target are too disparate.  The profile of a software engineer that wants to work for Target in Minneapolis is very different from one that wants to work for Grand Junction in San Francisco.  Target can certainly find a way to address cultural differences, but often a few years after the acquisition the lack of a startup style compensation model (characterized by equity upside directly tied to one’s group) results in a brain drain where the acquirer loses most of the staff that they are coveted.



Author: Aron Bohlig, Managing Partner ComCap

All securities transactions are offered by and conducted through ComCap LLC, a broker-dealer registered with the SEC, and a member of FINRA and SIPC. This communication is for information purposes only and should not be regarded as a solicitation or offer to buy or sell any security or financial instrument and any email received with instructions to purchase or sell securities will not be acted upon. Pursuant to SEC and FINRA regulations, all incoming and outgoing email of persons associated with the broker-dealer are subject to review by the firm’s compliance administrators, principals, and its regulatory agencies.

Copyright © 2022 ComCap LLC member, FINRA & SIPC, All rights reserved.


Share With

Subscribe to our newsletter

Sign Up for our monthly newsletter to get the latest news, research reports, and events delivered directly to your inbox