Long a united front, bricks and clicks may be heading towards divorce in a move that has left some retail analysts scratching their heads.
Amid a flurry of IPOs and fundraisers last year, activist investors are pushing some department stores to reconsider their omnichannel strategies and make the largely unprecedented choice to build their businesses online from physical stores.
Saks Fifth Avenue owner HBC led the charge last March, unveiling his OK to separate the e-commerce site from the luxury retailer and call it Saks, with its stores known as SFA. Venture capital firm Insight Partners took a minority stake of $ 500 million in Saks at a valuation of $ 2 billion, and it is now reportedly to prepare for an IPO set for this year three times.
- Activist investor groups have since taken note: Jana Partners urges Macy’s to separate from its digital business after taking a stake in the retailer in October, while Engine Capital said in December that it wanted Kohl’s Do the same thing.
Wait, why? The financial motivations are clear. With Derivative Ecommerce Sites Investors Seek To ‘Unlock Value’ Online And Raise Valuations Much Higher Than Traditional Retailers, Roxanne Meyer, Director of Equity Research and Retail Analyst and e-commerce at MKM Partners, Retail Brew said.
But many believe this move does not serve the best interests of a retailer or customer.
A difficult sale
Meyer noted that the most successful businesses have made e-commerce and in-store experiences “seamless.” With the two potentially at odds, things could get a bit tricky. And even thwart sales.
As the distinctions between channels have “evaporated” over time, consumers have become agnostic, said Steve Dennis, former director of retail and founder of SageBerry Consulting. Purchases that start in one channel often end in another. (Think about how many times you’ve guessed something in a store, to add it to your online shopping cart the next day.)
“[It] is delaying retailers by about 20 years from seeing e-commerce and physical retail as separate things, ”he said.
- Meanwhile, Erin Moennich, CEO of Draper James, just told us that “the idea that an omni customer is more valuable is still absolutely true.”
Still, the fallout may make more sense to some than to others, Dennis noted. Saks is a “mature company” that probably “lacked places to grow,” he said, adding that its electronic communications business had higher margins than Macy’s or Kohl’s, which sell items at low prices. price.
- But luxury department store websites may miss sales opportunities for products like Chanel handbags, which are only sold in stores, Meyer said. Yet HBC said its companies will work together to create a “seamless customer experience”.
The move could also pit the derivative sites against a new competitive set of online retailers such as Shopbop, Net-a-Porter and Revolve, Meyer noted, putting them “under the microscope” and asking, “How do they really differentiate themselves. ? “
History class : Dismembering a company’s assets is nothing new, Forrester senior analyst Sucharita Kodali said. In fact, she said it’s one of the oldest moves in PE’s playbook (see: KKR’s 1988 buyout of RJR Nabisco that left her with a “shell of herself”) .
But nothing like this fallout has happened in recent retail history. Quite the contrary, in fact, as brands like LL Bean and Coldwater Creek, which started in the catalog business and subsequently opened retail stores, have worked to integrate the two to increase sales, noted Dennis.
Dennis said the recent trend of oversized electronic communications valuations is a “market distortion” that is unlikely to last as DTC retailers begin to face profitability challenges.
“The market has seen some of these new companies that have come into the market at a higher price, [but] whether or not this bonus is earned is another question, ”added Meyer.
- The “magic” of high valuation already appears to be fading for several retailers that went public in 2021, she noted. Rent the track and All birds both reported growing losses in their respective third-quarter profit calls, and RTR’s share price has been cut in half since its IPO.
Look forward …As to predicting whether more retailers will evaluate spin-offs in 2022, Meyer said all eyes will be on Saks to see if the company can “effectively monetize it.” Otherwise, the strategy will likely be a flash in the pan.
“I find it hard to believe that a lot of these companies think this is fundamentally the right decision,” Meyer said. “But if this is what generates value for shareholders, that doesn’t mean they’ll make the right decision on fundamentals.”
Neiman Marcus Group has already stated that he will not follow after a report that he weighed a split into three separate companies, with CEO Geoffroy Van Raemdonck say WWD that the company favors an “integrated distribution” model.
- He said he found that his omnichannel shoppers spend 4.5 times more in a year than those who only buy from a single channel.
In fact, the strategy might not even be limited to e-comm: Nordstrom is would have is exploring the possibility of transforming its non-price rack segment into a separate company.
Kodali said it wouldn’t surprise her if others jumped on the trend, but she believes private equity firms and new investors could likely “destroy these brands pretty quickly.”
“Building a brand takes time. It doesn’t take that long to kill him, ”Kodali explained. “I think sales will drop off a cliff at the same rate, including their e-commerce sales. And if their ecommerce sales drop fast enough, that whole strategy ends up dead on arrival. “