Adjacent Market Expansion: How to Test What Actually Transfers

Why an adjacency is a claim about transfer

Every adjacency proposal says the same thing in different words: we already have the customer, the data, the distribution or the brand, so this business is ours to take. That is a claim that a strength transfers. It is testable, and it is rarely tested, because by the time the proposal reaches a board it has a sponsor, a name and a slide where two circles overlap.

The cost of skipping the test is not the purchase price. It is the second column: everything that does not transfer and has to be bought or built at entrant prices, with none of the claimed advantage, plus an exit that gets dearer every month it is not priced.

Two questions, four positions

Two questions place any proposed adjacency. Does an asset you own actually transfer? Can you do the work the new business requires? Only one of the four answers is an adjacency in the sense the proposal means.

The difference from diversification is the claim. An adjacency claims leverage; diversification claims none. If the leverage is not there, the move can still be right, but it should be judged as an ordinary investment and not carried by a synergy line.

Does the asset transfer? Name it, then look for the evidence

Amazon launched S3, its first commercial cloud-infrastructure service, on March 14, 2006. The storage and compute had been built for retail, so the asset was already paid for and already worked at scale: the marginal customer could be charged a margin on a cost Amazon was carrying anyway. That is transfer in its plainest form.

Uber shows what transfer looks like under stress. When the pandemic hit its rides business in 2020, it did not enter a new market; it moved resources to a delivery network it already ran, and exited eight unprofitable Eats markets in the same breath. Even so, Uber's Delivery segment ran a negative $873 million of Adjusted EBITDA in 2020 and turned its first positive quarter at $25 million in the fourth quarter of 2021. An asset that transfers still has a trough.

The New York Times bought Wordle on January 31, 2022 for what it described as "an undisclosed price in the low-seven figures." The asset that transferred was the subscription relationship: the game was a front door for people who would not pay for news first. By the first quarter of 2024 the Times had more single-product subscribers for non-news products than news-only subscribers. The catch is the price per head: the Games-heavy single-product cohort paid $3.36 in average revenue per user in the fourth quarter of 2025, down 6%, while bundle ARPU grew 3% to $12.92.

The claim fails when the asset is named but the customer does not move. Netflix formalized a games division in July 2021 and bundled mobile games at no charge, as "a strategy to keep subscribers engaged in between seasons of their favorite shows." By September 2023 Netflix games drew about 2.2 million average daily users, under 1% of about 247 million subscribers, and the executive who built the push left in March 2025.

Lululemon agreed in June 2020 to pay $500 million for Mirror, a wall-mounted fitness screen. Its chief executive said at the announcement, "It's not an acquisition simply to sell more apparel." The thesis was that the community would flow through the screen the way it flows through a yoga studio. In December 2021 Lululemon cut its Mirror sales guidance to $125 to $130 million, from $250 to $275 million.

Can you do the work? Price the capability gap as a purchase

Amazon tried to build care itself, through ventures such as Haven and Amazon Care, and then switched to buying. In July 2022 it agreed to acquire One Medical in an all-cash deal valued at $3.9 billion, and about a month after signing announced that Amazon Care would shut down at the end of 2022. What Amazon could not hire engineers to make was, as the case puts it, "a functioning, regulated, physician-staffed care delivery network with patient trust already baked in." The deal closed on February 22, 2023.

Best Buy bet that Geek Squad's install skill would carry it into home health. It paid $800 million in cash for GreatCall in August 2018 and added Critical Signal Technologies and Current Health, over $1.3 billion across three acquisitions. The install capability was real; getting the health system to pay was the gap. Best Buy recorded a $475 million goodwill impairment on its Best Buy Health unit in the quarter ending February 1, 2025, then $109 million of restructuring charges, and its chief executive said the at-home care business had "been harder and taken longer to develop than we initially thought."

Walgreens made the gap a one-way door. After a $1 billion first commitment in 2020, it announced on October 14, 2021 a $5.2 billion investment to raise its stake in VillageMD from 30% to 63%, targeting at least 600 co-located clinics by 2025 and 1,000 by 2027. Consolidation made every future cash need Walgreens' own. In the quarter ended February 29, 2024 it recorded a $12.369 billion goodwill impairment related to VillageMD, and it expanded planned clinic closures from 60 to 160.

Price the exit before you go in

The exit is the number least often in the paper, and it moves every month it is not priced. McDonald's priced it from the start. It bought Dynamic Yield in March 2019, a price The Wall Street Journal reported as more than $300 million, to personalize its drive-thru menus, then announced in December 2021 that it would sell the business to Mastercard. McDonald's booked a $271 million pre-tax gain when the sale closed on April 1, 2022, and kept the capability as a service. The case reads it this way: "Owning a software business is a different job than running more than 40,000 restaurants."

A profitable exit can still be the expensive one. Kodak paid about $5.1 billion for Sterling Drug in January 1988, as a white knight against Hoffmann-La Roche rather than on a thesis about pharmaceuticals, and sold its health businesses in 1994 for over $7 billion. The case's verdict is that "The company chose the deal that would make money and ignored the one that would matter." Kodak filed for Chapter 11 in January 2012.

Sears ran the same pattern for twelve years. In October 1981 it agreed to buy Dean Witter for $607 million, days after buying Coldwell Banker for about $179 million, betting that a family that trusted Sears for appliances would trust it for stocks and mortgages. Sears' retail return on sales was already 36% worse than the industry median in 1981 and averaged 49% worse while it owned the financial firms. The divestiture announced in 1992 gave shareholders a further $1.113 billion, and Sears had permanently lost its position as the world's largest retailer.

Crocs shows the price of entering at the top. It agreed in December 2021 to buy HeyDude for an announced $2.5 billion, at what management called "less than 15x EBITDA" on HeyDude's 2021 earnings, financing the cash with a new $2.0 billion term loan. HeyDude revenue fell 13.2% to $824 million in 2024, and in 2025 Crocs took $738.1 million of impairments on HeyDude trademarks and goodwill and reported a net loss of $81.2 million. An exit priced at entry would have shown how much of the price was the pandemic-era growth curve.

What these cases show

Each case is drawn from the Stratrix case library and checked against the filings and reporting listed under Sources. The last column says what each one does not establish.

Running the decision

What this method cannot tell you

Adjacency outcomes are explained after the fact by people who were not indifferent about them, and no counterfactual exists for any of the cases above. The cases support recognizing a mechanism: an asset named but not tested, a capability bought as if it were a synergy, an exit nobody priced. They cannot support a success rate, and this page does not claim one.

It also does not tell you whether the new market is attractive. It tells you whether you have an advantage in it, what the missing pieces will cost, and what leaving will cost if you are wrong.

Questions