Costco’s Acquisition of Hain Celestial:
Financial Analyses & Strategic Discussion
Fozeya Almarzouqi, Alex Garza, Dustin Lynn, Mengting Ren,
Carlee Smith, Cassie Vergel
Table of Contents
TABLE OF CONTENTS ..........................................................................................................................1
EXECUTIVE SUMMARY .......................................................................................................................2
COSTCO’S ACQUISITION OF HAIN .......................................................................................................3
STRATEGIC & CULTURAL FIT ...............................................................................................................4
BUSINESS OPERATIONS ................................................................................................................................... 4
INDUSTRY & MARKET..................................................................................................................................... 5
CULTURE & VALUES ....................................................................................................................................... 5
LEADERSHIP & STRUCTURE.............................................................................................................................. 6
BRAND AWARENESS ....................................................................................................................................... 8
SWOT ANALYSIS ........................................................................................................................................... 9
CONCLUSION ................................................................................................................................................ 9
VALUE-ENHANCEMENT STRATEGIES ................................................................................................. 10
ACCESS TO ORGANICS: REVENUE GENERATING STRATEGY .................................................................................. 10
DISTRIBUTION EFFICIENCY: COST CUTTING STRATEGY ........................................................................................ 13
EMPLOYEE RETENTION: COST CUTTING STRATEGY ............................................................................................ 16
POST-ACQUISITION VALUE OF HAIN AS PART OF COST ...................................................................... 19
ORIGINAL VALUATIONS FOR 2012.................................................................................................................. 19
POST-ACQUISITION: ORGANIC STRATEGY ........................................................................................................ 20
POST-ACQUISITION: DISTRIBUTION STRATEGY .................................................................................................. 21
POST-ACQUISITION: EMPLOYEE TURNOVER STRATEGY ....................................................................................... 23
POST-ACQUISITION .......................................................................................................................... 25
FINAL OFFER TO HAIN................................................................................................................................... 25
SUMMARY OF STRATEGY ............................................................................................................................... 25
1
Executive Summary
With over six hundred warehouses in eight different countries, Costco continues to grow as a global
wholesale powerhouse. As an innovative company, Costco is constantly looking for new ways to satiate
the entrepreneurial spirit and to stay ahead of the trend. One way Costco can stay true to their drive is
by acquiring Hain Celestial, valued at $2.75 billion. From here on, “Costco-Hain” will refer to the
organization post-acquisition.
Strategic and Cultural Fit
Costco’s acquisition of Hain allows for Hain to reach out to a wider customer segment that they may not
have reached previously as well as allows Costco to tap into a growing organic market. Furthermore,
Hain has much to gain through the acquisition such as Costco’s strong company values manifested
through their company culture as well as brand awareness. Furthermore, we envision an organizational
structure that allows Hain a certain amount of autonomy to continue their operations where it is most
productive while incorporating their weaker operations into our own. Although our hope is that the key
executives of Hain will remain after the acquisition, we predict that a 58% pay cut will cause most
executives to leave. Finally, as a company that boasts a reputable brand with a loyal following, Kirkland
Signature, the adjacent acquisition will allow both Costco and Hain brands to keep their loyal customers
while also meet the growing demand of new and old customers.
Value Enhancement Strategies
In acquiring Hain, we propose three main strategies that will enhance Hain’s value within Costco. First,
we identify the Access to Organics strategy that aims to increase revenue for Costco-Hain by meeting
customer demands for more organic foods through the already established Hain brand products. Having
Hain products on Costco shelves will allow Costco customers to buy from a trusted organics brand while
also provide a new customer base for Hain. Through these trends, we predict a 10% increase in organics
revenue and thus a value of 2.2 billion added to Hain.
The second strategy is Distribution Efficiency that will decrease expenses by 5% per year, adding a value
of $365 million to Hain. Hain currently manufactures their products but relies on third party distributors,
a risky distribution system that allows for little control for Hain. As Costco already has an incredibly
efficient distribution system, we can reduce Hain’s operating costs by ridding of smaller, third party
distributors that provide a risk for Hain and using Costco depots and distribution channels.
Third, we plan to reduce costs through the Employee Retention strategy. Through research, we have
concluded that Hain can only gain from Costco’s strong, positive company culture. Further research has
shown that a positive work culture garners increased productivity, which can lead to increase revenue.
In addition, happier employees lead to higher employee retention and thus lower expenses. Through
this strategy, we add another 11 million to Hain’s value through an assumed 5% increase in employee
retention.
Post Acquisition Value for Hain
Given our strategies and the valuations for each, we conclude that Hain’s added value is $2.6 billion.
Hain’s original value of $2.75 billion combined with our added value of $2.6 billion leads us to suggest
that Costco offer $5.35 billion for Hain’s acquisition.
2
Costco’s Acquisition of Hain
“Costco Wholesale’s entrepreneurial ability to continuously reinvent itself has given it a powerful worldwide competitive advantage.” - Forbes
With 50 million members around the world with a 90% renewal rate in the US and Canada (86%
worldwide), Costco’s strength is largely due to its loyal membership and consumer base. Costco
currently boasts 612 warehouses in eight different countries and continues to grow with the addition of
17 warehouses in fiscal 2012. Costco ensures quality products to their consumers at a low, wholesale
cost while maintaining efficient operating costs through its rapid inventory turnover and world class
distribution system. While Costco is widely successful as it is, as an innovative company with an
entrepreneurial drive to stay ahead of the curve they are constantly looking for new ways to reach and
satisfy consumer needs.
One-way we believe we can be a leader in our industry is through acquiring organics and health
products company, Hain Celestial.
There are three main strategies identified that would enhance the value of Hain-Celestial as well as
Costco’s value through the acquisition.
Organics
Distribution
Employee
Retention
Costco-Hain
3
Strategic & Cultural Fit
Business Operations
Costco
Popular worldwide, Costco is the leading retail warehouse in the US. Based out of Issaquah, WA, Costco
is known for its efficiency in distribution and happy employees, and businesses look to Costco for “best
practices” in its industry. Our business operates around “simplicity,” a “no-frills” operation with giant
undecorated warehouses, and simply offering our consumers, or members, the lowest price possible.
Seemingly simple, there are many elements behind the scenes that drive Costco’s operations.
Hain Celestial
Hain Celestial has experienced many acquisitions in its company lifespan, as it has merged and acquired
dozens of brands globally. The brands it acquires are all well-known natural and organic brands and
products that have loyal followers in the communities where available. With an expanding line of glutenfree products, they are one of the main food processors behind not only the gluten-free movement but
also the organics and health food movements.
Costco-Hain
Strategic advice from the Harvard Business Review (HBS) states that when acquiring, “bet on portfolio
performance.” In other words, a sound approach is to make multiple small acquisitions.1 As Costco looks
to acquire and expand business production in an expanding organic market, Hain is a good business
choice as it is an established, reputable company in the organics market. With this in mind, it is
important for us, as Costco, to ensure a smooth integration of Costco’s number one focus, talent and
employee retention as well as IT systems, HR policies, financials, management reporting, and more.
According to Nolop, there are “bolt-on” and “platform” acquisitions. With bolt-on acquisitions like Hain,
our focus is on probable business synergies and how they will affect revenues and expenses. Particularly
with bolt-on acquisitions of independent dealers or distributors like Hain, we seek opportunities to
strengthen our presence in attractive markets. We know that with Hain on board, their brands will
improve our natural and organic product selection. We seek complementary technology that can help us
gain a competitive advantage, and for Hain, we plan to implement our effective and efficient cross-dock
depot distribution system to Hain’s distribution centers.
Both Costco and Hain have food manufacturing and processing plants as well as distribution centers.
Although labeled differently within each company - Costco “labs” & “depots” and Hain’s combined
manufacturing and distribution centers - both companies have similar functions.
Within Costco-Hain, we hope to sit down with food processing managers from similar departments to
discuss standard operating procedures, machinery, and ultimately, learn from each other to find a
common process. Each department and product may be different, but this way, by having a discussion
about this at the beginning, we can attempt to streamline food production, have a better understanding
of each company, and implement changes we see necessary.
1
Nolop, Bruce (2007). “Rules to Acquire By.” Harvard Business Review. Much M&A advice reference this article.
4
Industry & Market
Nolop, in HBS, also recommends making “adjacent acquisitions” that correlate with increased
shareholder value, as opposed to diversification into nonrelated areas, which reduces shareholder value.
This is something Costco certainly takes to heart, as Costco has experimented many times with selling
very diverse (and not always successful) brands of purses, rings, and designer clothing.
Nonetheless, with the organic market growing almost 10% annually, it is evident that Costco should
enter the organic market that they have already started investing (and producing) in through their
Kirkland brand. Entry into and power in the organic market is something that Costco and its consumers
want; thus by acquiring Hain, Costco-Hain will be able to produce some of the world’s most popular
natural and organic foods “in-house,” thereby having the power to offer even lower prices than organics
retailers elsewhere.
Another Nolop piece of advice is to be clear on how acquisitions should be judged. Costco is looking to
become a leader in organic products and grow even more rapidly than their current growth rate.
Through our acquisition of Hain, Costco hopes to build on their reputation to become more
environmentally friendly, organic, and sustainable. The financial impact of this expansion into organic
markets and tapping into health-conscious consumer bases is explained in the first Value-added Strategy.
Culture & Values
Without a doubt, Costco has one of the best company cultures. Through CNBC’s recent documentary,
Costco Craze, it is no secret that Costco has been identified as one of the best business practices and
cultures in the industry. Costco resembles a family, making sure that everyone is on a first-name basis
with another. In one example, Costco published a story of how one of their employees won the lottery,
yet still decided to stay and work because they loved it so much there.2 Costco puts employees first, and
will continue to do so with Hain’s new employees.
Hain’s employees have not been as satisfied with their company culture as evident on many CareerBliss
and GlassDoor ratings. By joining Costco, however, they can look forward to joining a wonderful new
family, with subtle changes such as only including their first name on their nametag. With a stronger
culture, we hope to retain the talent amidst the acquisition, and reduce turnover over the years, as
strategized in our Value-added Strategies.
Following approval of the acquisition, Costco will develop what HBS calls a “business unit sponsor” and
core corporate development team. Costco pays the highest respect to their employees, and especially to
their newly acquired ones. Our strengths in management, costumer insight, and cultural orientation can
be applied to the new Costco-Hain. As Harding and Rouse emphasized, the cultures must “mesh
together” to become one.3 Although Costco is the cultural acquirer with its strong employee loyalty,
Costco’s corporate development team must listen and work intently on smoothing the transition to get
new Hain employees on board. Organizational attributes go a long way toward making the integration
work, and we hope that Costco’s strong culture will bond the Hain employees closer together and that
they will consider themselves part of the Costco family.
2
3
Costco Wholesale Corp, Shareholder’s Annual Meeting Slide Show, www.costco.com/investorrelations
Harding, D. and Rouse, T. (2007). “Human Due Diligence.” Harvard Business Review. Article from OAK.
5
One strong company value that we believe not only ties Costco and Hain together but also smooth the
transition is both companies’ focus on green initiatives. Both put a large emphasis on cutting down the
use of plastic and using more recyclable cardboard to hold their products. Many of Hain’s buildings are
designed for sustainability and Costco is taking considerable measures to ensure waste management
follows green initiatives (i.e. responsible disposing of rotisserie chicken oil). 4
Leadership & Structure
Costco’s leaders are known for their low salaries; yet Hain, whose sales are 1.5% of Costco’s, has top
executives earning $4 million more than Costco. Below is the salary breakdown for the top key
executives.
4
Hain Celestial, 2013. http://www.myhaincelestial.com/gg_01.html
6
In this acquisition, we hope to keep all the key executives at Hain. Unfortunately, Hain executives
staying after the acquisition entails a 58% salary cut for Hain executives; thus their staying seems
unlikely. We predict that we will lose many of the key executives at Hain, and will need to replace them
with others who are knowledgeable in natural and organic food production. New executives will take
over as President, Vice President, etc. to oversee the, hopefully seamless, transition of the Hain division.
Structurally, there will be changes as well. Consolidation of manufacturing centers may occur (Kirkland
Brand food manufacturing alongside Hain brands) in some locations, and distribution centers will be
aligned to follow the same efficient process that Costco has perfected. Administrative tasks will be
streamlined and there will be Costco representatives and trainers going to each Hain administrative
offices to facilitate the changes. With more offices and locations combined, we hope to better serve our
employees with benefits, payroll, and other services. Otherwise, we allow Hain to run its own operations.
Board of
Directors
Kirkland
Executive Board
Quality
Assurance
Admin (Finance,
HR, IT, Legal)
Markets
Manufacturing
America
Asia
Europe
Australia
Packaging
Distribution
Distribution
Distribution
Distribution
Product
Development
Regional Depots
Regional Depots
Regional Depots
Regional Depots
Regional
Warehouses
Regional
Warehouses
Regional
Warehouses
Regional
Warehouses
7
Board of
Directors
Executive
Board
US/ Canada/ Mexico
UK
Rest of World
Admin
Admin
Admin
Manufacturing
Manufacturing
Manufacturing
Distribution
Distribution
Distribution
Costco-Hain (tentative)
Brand Awareness
Our main brand at Costco is Kirkland Signature, a brand that has met the high expectations of their loyal
followers time and time again. Kirkland sells premium products for a lower cost than the national brands,
thereby resulting in greater margins. With trusted buyers within Costco who do extensive research in
their field to bring the best products to Kirkland Signature, Costco has and will continue to differentiate
itself from other retailers
Hain speaks proudly of their dozens of well-known brands. In their annual report, they “believe that
brand awareness is a significant component in a consumer’s decision to purchase one product
8
over another in highly competitive consumer products industries.” This is part of the reason why they
have such well-known and well-loved products like Earth’s Best that is contracted with PBS Kids and
Sesame Street, and Terra Blue, the official chips for JetBlue airlines.5 Bringing their popular brands into
Costco warehouses at a cheap price would mean a large revenue jump (see revenue generating
strategies).
Adjacent acquisitions, as explained earlier, also have the advantage of being brand consistent. For a
business to succeed, it must not only be well managed, but the business must also be trusted by the
marketplace. Hain and Costco are both trusted and we are confident that Hain products certainly be
well-received on Costco shelves. After all, if Costco trusts Hain, the customers will too.
SWOT Analysis
Our business and core corporate development team have developed the following SWOT analysis of
what we see as the strengths, weaknesses, opportunities, and threats of the Costco-Hain acquisition.
Brand
Lack of experience in outside
retail
Access to products ($)
Financials
New industry
Product diversification
SWOT
Trend in Organic Industry
Trend of Organic Industry
International Market
Competition
Conclusion
As elucidated above, we at Costco have taken all of the aspects of both companies into consideration
when proposing the acquisition and valuing the strategies. To follow Bolop’s rules, we’re not “shopping
when we’re hungry.” We are an industry leader, a great company that is looking for more diversity in
the products our consumers demand. We have implemented the right analytical tools and ensure their
correct use, as evident in our Value-Added Strategies. Companies may develop “deal fever,” but we are
levelheaded when it comes to acquisition deals – as we do not need Hain, but certainly see it as a
profitable and reputable gain in our company. We plan to present this M&A plan to our business units as
well as corporate development teams to ensure smooth transitions with people and in operations.
5
Hain-Celestial Group, 2012, Annual Report & 10K
9
Value-Enhancement Strategies
Access to Organics: Revenue Generating Strategy
Currently, Hain-Celestial distributes through third party food distributors and food catalogs; thus, it is
hard to measure their direct reach to their consumer base. Nonetheless, their annual increase in sales
indicates a growing demand for natural and organic foods.
A recent consumer survey conducted by the Organic Trade Association (OTA) reported that 78% of
American families buy organic products.6
According to the OTA’s 2011 Organic Industry Survey, organic food sales grew by 7.7% (fruits and
vegetables specifically grew 11.8%), and organic non-food sales grew by 9.7%.7 Other sources reported
14% growth for organics8, and Whole Foods anticipates 15% growth in sales. The OTA also reported that
mass-market retailers sold 54% of total organic food sales and natural retailers (Whole Foods) with 39%.
There is a ranking of top organic mass market retailers based on products carried, but little is known
about actual non-organic versus organic sales.9
6
OTA US Families’ Organic Attitudes Study, 2011, http://www.ota.com/pics/OTA_ConsumerSurvey_Top4Facts
OTA Industry Statistics & Projected Growth, 2011, http://www.ota.com/organic/mt/business.html
8
Motley Fool, http://beta.fool.com/joryko/2013/01/22/hain-celestials-drop-your-buying-opportunity/21868/
9
Largest Organic Retailers in North America, 2011, http://organic.about.com/od/marketingpromotion/tp/6Largest-Organic-Retailers-In-North-America-2011.htm
7
10
Largest Organic Retailers
in North America:
1. Wal-Mart
2. Costco
3. Kroger
4. Super Target
5. Safeway
Who Sells Organic Products in the US?
7%
Mass Market Retailers
Natural Retailers
39%
54%
Other (Internet, farmer's
market, catalogs, specialty
stores)
Foreign Markets
Within their own operations, Costco and Hain proportionally depend on their primary, secondary, and
other markets, including their international sales. Hain’s revenue, however, is approximately 1.5% of
Costco’s revenues. This may be representative of the size of the effect it may have on Costco postacquisition. Nonetheless, it is still important to focus on foreign organic markets. According to OTA’s
organic reports on Korea, Japan, Europe, and Canada, it appears that their markets are increasing
demand for organic products. Unfortunately, few natural and organic food production companies are
located abroad.10 11
Given the foreign market’s desire for organics, there is a large opportunity of expansion for Costco into
Hain’s European locations through Hain’s recently acquired and traditional European brands, and Hain
will be able to enter Asian markets through Costco’s warehouses and customers in Asia (Costco’s busiest
retail warehouse is actually in South Korea).
Costco 2012 Revenue Segments
Total: $99 B
Rest of World
12%
Hain 2012 Revenue Segments
Total: $1.4 B
Rest of World
14%
Canada
16%
UK
14%
US
72%
US
72%
Source: Annual Report & 10k of respective companies
10
OTA International Organic Markets, 2011, http://www.ota.com/pics/documents/koreaorganicreport.pdf
USDA, Global Food Markets, 2012, http://www.ers.usda.gov/topics/international-markets-trade/global-foodmarkets/international-consumer-retail-trends.aspx
11
11
Consumer Demand
Through meeting consumer demand and expanding organic markets together, we can confidently say
that this strategy will add the most value to both Costco-Hain. People are always seeking ways to stay
healthy. More specifically, baby boomers are increasingly focused on their health as they age and in
attempts to avoid illnesses such as diabetes and heart disease, they are focusing on what they eat and
view this as the utmost importance in how they shop. They see eating right, including organic food, as a
key to being fit.12
Even with this increase in health consciousness, however, the price of organic foods is often a deterrent
for purchasing such products. Especially in light of economic hardships, shoppers are still mindful of
price. Along with the baby boomers, the economy is also impacted by millennials and their purchasing
power where they are looking for the best deal in addition to quality products.13 This is where Costco
can leverage their low prices.
Kirkland Brand
We do not discount, however, that Costco already has many products that are natural and organic,
including those of their own Kirkland Signature brand. Currently, Costco carries about 150 organic
products available at an average store.14 Food costs have consistently made up 21% of Costco’s net sales
(excluding membership fees) according to the annual report. 10% of the products on display at a Costco
warehouse (in a total of 4000 different products) are the Costco Kirkland Signature brand, which also
has a strong and loyal following.15 Kirkland Signature has set higher standards than the industry in many
products, yet still charges a lower price than the lower-quality brand names.
Yet, even with so many Kirkland products that are organic, like the new organic animal crackers, we do
not anticipate competition on the shelves with Hain products. Rather, we hope for Costco to cut costs
on food production for those natural organic items that overlap with Hain, as well as cut off third party
brands that offer products similar to Hain. This way, we cut costs on food production as well as more
expensive products that overlap with our new acquisition.
Qualitative factors will also justify the increased revenues for Costco-Hain as Hain products are being
channeled to Costco warehouses domestically and abroad. Costco’s reputation will be improved as a
natural, organic, and environmentally friendly retailer. Already an ethical company, Costco has only had
several food sourcing issues, which can be alleviated in the public eye via its acquisition of a “better for
you and the community” food production company.
Benefits for Costco
Offering cheaper Hain products to customers through Costco’s domestic and foreign warehouses will
lead to a growth in revenue. From data, we compiled that there is approximately 4% of sales that come
from organic foods, which we hope will grow at 10% (between organic industry, Whole Foods, and
financial predictions as referenced at beginning of section). In the calculation, 96% of the sales will be
increased at the predicted growth rate, and 4% will grow 10% faster. We will use 5% and 15% on the
sensitivity analysis (See chart on next page).
12
Rise in the Natural Organic Food Market, 2013, http://www.streetdirectory.com/food_editorials/health_food/
organic_food/rise_in_the_natural_organic_food_market.html
13
Top Food Trends for 2013, 2012, http://supermarketnews.com/blog/top-10-food-trend-predictions-2013
14
Organic list at Costco as compiled by writer, http://www.thethriftymama.com/costco-organic-price-list.html
15
Costco Connection, 2010, http://www.costcoconnection.com/connection/200910
12
However, we know that Hain’s food processing sector will have to produce more products to fill Costco’s
increasing demands. Nevertheless, for simplicity, we will assume that the increase in Hain’s costs will
even out with Costco’s decrease in costs from not producing similar products and not buying from other
food companies for similar products.
Access to Organics Revenue Increasing Strategy: increase Organics Revenue by 10%
(Organics is 4% of revenue)
Value added: $2.2 million
Distribution Efficiency: Cost Cutting Strategy
As stated, the acquisition of Hain will not involve a complete envelopment of Hain into Costco. Hain will
operate similarly to Kirkland in having their own brand, but will be able to reduce operating costs by
taking advantage of a highly effective distribution system already developed and perfected by Costco.
More specifically, Hain’s operating expenses will decrease by having access to Costco’s distribution
channels and cross-docking methods. Decreasing operating expenses will be especially beneficial to Hain
because of the increased operating expenses as a result of their recent acquisitions (mostly in UK and
Canada).
Costco’s current distribution system saves time and money by importing directly from the manufacturer.
After products are received and sorted at the Costco-owned depots (regional distribution centers), they
will be delivered straight to Costco warehouses (almost immediately). This way, Costco eliminates the
13
risks of a multi-step distribution system, simplifying the process and thus cutting costs. Costco currently
has 12 depots in the US, four in Canada, and five internationally (30 warehouses/depot ratio overall)16.
Costco’s efficient distribution system meets the demands of the high rate of inventory turnover in
Costco warehouses, driven by Costco’s strategy of selling from select brands and simplifying distribution
channels. Furthermore, Costco’s membership checks at warehouse entrances and their receipt check at
the end prevents inventory loss, also contributing to higher inventory turnover.
The cross-docking system at Costco depots is a system in which a large number of vehicles are delivering
and picking up goods at the cross-dock facilities at any one time.17 Perfecting this process has decreased
Costco’s depot operating hours from 16 to 9 hours (40% decrease in time), as compared to most 24hour distribution operation in the industry.18 Cross-docking research has shown that by implementing
this system across an entire company’s distribution system, it can increase decrease distribution costs by
7%. 19
Current Risks for Hain
Conversely, in 2012, 21% of Hain Celestial’s revenues were dependent on an independent distributor,
United Natural Foods, Inc.20 by depending on an independent distributor, Hain is at risk losing a major
revenue source if something were to happen to the independent distributors. Costco eliminates the risk
by supplying the distribution channels in-house as opposed to relying on a third party. Hain can rely on
Costco’s already efficient distribution system, and we can assume that whatever distribution related
revenue could be made up by high inventory turnover in Costco warehouses.
Another risk Hain has identified in their annual report is the increase in packaging costs. We already
have an effective packaging system that is also sustainable. Not only does Costco require products to be
protected in environmentally friendly plastic, but also structurally in a square shape whenever
possible.21 We state in our packaging specification to suppliers that “Costco’s goal is to drive out costs by
eliminating extra packaging, handling, and corrugate waste, whenever possible. However, when [square
pallets] are required to transport and protect the product from damage, it is a requirement of doing
business with Costco that the trays are useful in every way, including functional boxes for members to
16
Costco Wholesale Corp. Annual report & 10K
http://logistics.about.com/od/tacticalsupplychain/a/cross_dock.htm
18
CNBC, 2012, The Costco Craze documentary
19
Cross-docking effectiveness, http://www.distributiongroup.com/articles/070111DCMwe.pdf
20
Hain Celestial Group Annual report & 10K
21
TBL Consulting, Costco Packaging Specifications, http://www.tlbconsulting.com/Costco_Packaging_Specs___
Addendums.pdf
17
14
carry out their purchases.”
Hain claims in their annual report, “our business strategy is to integrate the brands in each of our
segments under one management team and employ uniform marketing, sales and distribution strategies
where possible.” Costco will be specifically addressing the uniformity of marketing, sales, and
distribution by consolidating much of their and Hain’s operations under Costco.
With implementation of Costco’s efficient distribution system, Costco-Hain can achieve economies of
scale in distribution. Due to lack of access to certain information, we attempted to calculate those costs
for Hain using Costco as a benchmark. We can rationalize that with Costco’s efficient cross-dock
methods, an average year over year increase of 15% in expenses is “normal.”
Thus, it may seem that Hain had a 10% “unnecessary” increase in costs. According to research (cited
earlier), cross-docking systems on average decrease costs by 7%. In our valuation, we used 5% decrease
in Cost of Goods over 5 years (3% and 7% for sensitivity analysis). We also took into consideration that
expenses may rise in the first year of Costco-Hain due to system implementation.
15
Distribution Strategy: decrease distribution expenses by 5%
(embedded within Cost of Goods for Hain)
Value added: $365 million
Employee Retention: Cost Cutting Strategy
As described in prior sections, Costco has an incredibly strong culture that has lead to happy employees.
According to its annual shareholder’s presentation, Costco’s annual employee turnover rate for its
96,000 full-time employees is 10%, with only 5.4% after the first year.22 This is extremely low compared
to 22% turnover in retail and wholesale trade.23
On the other hand, the number of full time employees at Hain Celestial is 3,720 with no reported
turnover or demographics. It is evident, however, that by Costco presenting their data to the public and
shareholders, Costco certainly has something to boast about, whereas Hain may not.
Both companies offer decent benefits, including medical, dental, vision plans, with paid holidays, 401(k),
and life insurance. The one main difference between benefits would be that Costco employees may
purchase stock in the company. When your company is doing so well, who wouldn’t want to invest? By
financially investing in their company, employees are often more dedicated, motivated, and involved,
which can also mean that employees will be less likely to leave.24
When comparing the employees’ reviews of both companies, for example through the GlassDoor
website, it appears that our employees are more satisfied with the organization than employees of Hain
Celestial. Moreover, the employee satisfaction rating for Costco was 3.7 out of 5, while the rating for
Hain Celestial was 2.3.25
22
Costco Wholesale Corp, Shareholder’s Annual Meeting Slide Show, www.costco.com/investorrelations
Society for Human Resources Management (SHRM), 2011, Employee Retention & Turnover Trends
24
http://smallbusiness.chron.com/benefits-employee-stock-options-company-2842.html
25
GlassDoor, www.glassdoor.com for both Hain and Costco
23
16
With these results, however, we must keep in mind that there is a gap in the number of employees who
have reviewed their respective companies on GlassDoor. From our research, the total number of Costco
employees who rated their company was 761 compared to 22 from Hain. At the same time, these
results might enrich our argument that Costco’s culture is more pleasant for employees than Hain, since
they were more passionate to share their feelings with others.
We compared ratings below from both GlassDoor and CareerBliss, consolidated some categories, and
then moved them to the same scale.
As evident, Costco employees are much more satisfied with their jobs in all categories over Hain. As
people become dissatisfied, they leave their jobs. According to Jeff Kortes, who specializes in human
asset management, the best measure of employee turnover is about 25% or three months of annual
salary (the amount of time it takes to recruit, hire, and train new employee).26 If Costco’s annual
26
Kortes, Jeff, 2011, http://www.lendio.com/blog/cost-turnover/
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turnover is 10% and Hain’s is approximately the industry standard at 20%, we believe that with Costco’s
new culture and engagement of employees, we can cut Hain’s turnover by 5% (3% and 7% for sensitivity
analysis).
To calculate the value of reducing turnover by 5%, we researched Costco and Hain salaries. Costco’s selfreported average pay (from shareholder’s meeting) was $20/hour (about $40,000 a year), and Hain’s
average pay is around $25,000 per year.27 After calculating the monetary value per year, it was difficult
to apply that to the “Operating Expenses” line since it is not clear what percentage of that amount is due
to “Salaries.” Thus, we applied the monetary reductions annually with the hope that as the cultures
assimilate, turnover will be reduced even more.
Turnover Reduction Strategy: reduce turnover by 5% as calculated
(thereby reducing the Operating Expenses line on Hain’s spreadsheet)
Value added: $11 million
27
http://www.indeed.com/salary/The-Hain-Celestial-Group.html This site had similar average Costco salary as selfreported, therefore we believe this to be a “trustworthy” source of average salary over GlassDoor and CareerBliss
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Post-acquisition value of HAIN as part of COST
Original Valuations for 2012
COST DCF
Total Valuation of Costco: $42.6 B
HAIN DCF
Total Valuation of Hain: $2.75 B
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Post-Acquisition: Organic Strategy
Realistic: 10% growth
Pessimistic: 5% growth
20
Optimistic: 15% growth
Value-added for Organic Strategy:
Post-acquisition: Distribution Strategy
Realistic: decrease distribution expenses by 5%
21
Pessimistic: decrease distribution expenses by 3%
Optimistic: decrease distribution expenses by 7%
22
Value-added for distribution strategy:
Post-acquisition: Employee Turnover Strategy
Realistic: reduce turnover by 5%
Pessimistic: reduce turnover by 3%
23
Optimistic: reduce turnover by 7%
Value-added for employee turnover strategy:
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Post-acquisition
Final offer to Hain
$5.35 B
$2.75 B original + $2.6 B value-added
Payment method: $1.5 billion paid in cash, rest paid in stocks.
With only $3.5 billion in cash and $1.3 in short term investments at Costco in 2012, we wanted to make
a competitive offer with cash, but also hope to pay by stock. The seller is in no immediate need of cash,
so we believe that mostly stock payments make a reasonable form of compensation. We, as the buyer,
also expect there to be value-added strategies and synergies to improve the value of the stock.
Although our shareholders are foregoing some of the synergy gains to be achieved by giving stocks to
the seller, we want Hain to feel part of the company and believe that together, we will move forward
profitably post-acquisition.
Summary of Strategy
As an industry leader in wholesale retail, Costco knows what their employees and members’ need. In
recent years, there has been a growing demand for organics, as people become more health-conscious
and environmentally friendly. We are confident that Hain, whose consumers have the same values as
ours, will strategically and culturally fit into our organization. We have a tremendous respect for Hain’s
brands and products, which is why we hope to diversify our products to include Hain and bring its
employees and consumers into our family.
Offering a variety of trusted natural and organic products, Costco hopes to increase its organic revenues
by 10% in the 5-year post-acquisition strategy, bringing in an additional $2.2 billion. By merging
distribution operations with Hain’s and implementing a more efficient cross-docking system, we hope to
reduce Hain’s distribution expenses by 5%, adding on $354 million to the company. Finally, we will
extend the way we treat our loyal employees to our new friends at Hain, and in turn hope to reduce
turnover by 5%, resulting in about $11 million more.
Together, our strategies turn into synergies, and Costco-Hain will be worth more than 1+1=2. In fact, we
will have added an additional $2.6 billion in synergies, allowing us to fairly offer Hain $5.35 billion in
cash and in stocks. We truly believe it is a fair price for Hain, and look forward to calling Hain “family.”
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