The dismal retail numbers reported this season — alleviated only by early sales — mean one thing to vendors: markdown money.
Facing these profit-eating demands come January, many midsize moderate and better manufacturers are turning to the M&A community looking for a strategic solution, including merging with other companies in similar situations with which they could share back-office costs.
"Except at the very upper tier, everything that is being sold at retail is all promotional, and those markdowns at retail revert to the vendor," said Jack L. Hendler, president of Net Worth Solutions Inc., a New York-based mergers and acquisitions firm. "Everyone is anticipating that what is asked for in January 2008, before retailers give orders, will be a substantial increase in markdown money, making a fair amount of vendors very vulnerable."
Although companies build kitties into their cost sheets that anticipate 3 to 10 percent dilution at retail, those numbers could double this year, Hendler said. "Probably only half the companies have the substantial wherewithal to withstand hits like this before considering finding a strategic partner or simply going out of business," he said.
Net Worth Solutions has seen more than a 50 percent increase in inquiries from vendors looking to be either acquired or merged, Hendler added. He said healthy companies "who want to get out while they still can with value" are looking for buyers, while more troubled companies — particularly those doing less than $50 million in volume — are looking for strategic partners with which they can grow sales while sharing costs.
For the latter category, the M&A community sees two types of partners. First, a small or midsize vendor can merge with a similar company — as long as it has either a different product category or different distribution. For example, a pants company with moderate distribution might look for either a similar company with better distribution or a top company with moderate distribution — so long as it does not cannibalize itself. The second type of merger involves a foreign investor — most often from China, India or Pakistan — with production capabilities looking for a vendor that has marketing, sales and design arms.
"We're very busy advising and consulting these under-$50 million companies," said John Henderson, a director at Net Worth Solutions, who for years worked at Kellwood Co. "Those companies always wanted to get in the major leagues so they could get protected by the strength of numbers with the retailers, but the public companies are pruning out those types of companies. They're still looking for the protection of someone, so by two coming together they can equal three."
With the traditional consolidators instead turning into liquidators, there are fewer strategic buyers — particularly for the long-suffering moderate and better vendors. While these public companies focus on top-line growth, privately held firms focus more on the bottom line, so these firms — which are becoming the primary strategic buyers in the industry — are less likely to write big premium checks. As a result, many companies whose profitability has been suffering are finding they aren't salable. But to survive in a marketplace plagued by retail consolidation and markdown money requirements, these companies must increase profitability. One way to cut costs without cutting sales is merging with another apparel firm with similar needs — warehousing, distribution, accounting, production, sourcing — to share the back-end costs.
"Underfinanced, undercapitalized companies in the moderate zone — which may be good in design and sales individually, but need to leverage on a single overhead — should be combined together, similar to what Liz and Jones had originally done or like what Li & Fung is doing now," said Andrew Jassin, managing director of the New York consulting firm Jassin-O'Rourke Group. "Most companies make their money through good sourcing more than through good design."
Allan Ellinger, senior managing director of Marketing Management Group, proposed that although the M&A game has traditionally been dominated by acquisitions, mergers may emerge as an alternate solution in today's challenging retail climate. "Mergers are another option to selling one's business outright," Ellinger said. "You can build revenue, increase profitability and create a larger company that ultimately is more marketable, plus be able to sustain itself in a marketplace where everyone is under pressure.
"But merging two companies is more difficult than an entity buying or selling a business," Ellinger continued. "The difficulty in merging is melding the two cultures with two owner-operators and who is ultimately the boss?"
But as consultant Emanuel Weintraub noted, "Merger is a stealth term for acquisition. There is rarely a merger of equals: One partner is always superior to the other."
Although perhaps in a preferable position compared with the plight of private companies considering going out of business or frantically looking for a partner, public companies will also face their own challenges come the new year. Jeffrey Knopman, principal at Profit Solutions Group Inc., an outsource accounts receivable firm or "chargeback recovery company," expects markdowns will be worse across the board this year. Profit Solutions represents vendors of $50 million in size to public companies that do billions of dollars in volume.
“My personal philosophy to beauty is paying attention to oneself. I love to be outdoors, lots of fresh air, trying to take care of yourself as best you can. I always notice that comes through,” says Felicity Jones, the global face of @shiseido-owned @cledepeaubeauteus, which launches today. Head to WWD.com to read more about the actress’ love for beauty and how she prepared for her new role in “The Basis of Sex,” playing the young Ruth Bader Ginsburg. #wwdbeauty (📷: @dandoperalski)
For men’s fall 2018, @giuseppezanotti drew on elements from streetwear, sport, biker, combat and rock ‘n’ roll. Pictured here are a pair of shoes from the collection, featuring zippers, rhinestones, and silver hardware. Head to WWD.com to see a roundup of the accessories from Milan’s men’s fall 2018 shows. #wwdfashion (📷: Andrea Delb)
To celebrate the 25th anniversary of @ralphlauren’s snowboarding collection, the brand is mining its archives. The iconic brand is reintroducing vintage styles and dropping new designs for a color capsule that will be available in Ralph Lauren stores and @openingceremony on January 25. The capsule will consist of 10 pieces, including the Snow Beach Pullover, pictured here, which is a collector’s item that rapper Raekwon wore in Wu-Tang Clan’s “Can It Be All So Simple” video. #wwdfashion (📷: Tom Gould)
For @rochasofficial’s pre-fall 2018 collection, creative director Alessandro Dell’Acqua channeled the sophisticated and intriguing Catherine Denevue in the film “Belle de Jour.” Polished collarless coats, midi skirts, suits and ’60s graphic motifs were all featured in the collection, adding a sense of discreet luxury. See the rest of the photos on WWD.com #wwdfashion
“We tried to produce clothing of that couture quality, but the most daunting part was that we only had a matter of days [to do it],” said costume designer Lou Eyrich, who recreated Gianni Versace’s iconic looks for @americancrimestoryfx. Eyrich searched online retailers and vintage shops for original pieces from the design house and for @penelopecruzoficial, who plays Donatella Versace. Head to WWD.com to read how she created the Versace world. #wwdfashion
Only three months after her stellar debut catwalk season, @kaiagerber has inked her first big design collaboration –– with @karllagerfeld. The collection blends Lagerfeld’s Parisian chic aesthetic and the model’s signature West Coast casual style via RTW, accessories, footwear and more. The #KarlLagerfeldxKaia collection will launch in September with a series of events. Get all the details on WWD.com. #wwdnews #wwdfashion
Harrods plans to remove the famous statue of Princess Diana and Dodi Al Fayed from the bottom of the Egyptian escalators and hand it back to Mohamed Al-Fayed. “We are very proud to have played our role in celebrating the lives of Diana, Princess of Wales and Dodi Al Fayed at Harrods and to have welcomed people from around the world to visit the memorial for the past 20 years,” said Michael Ward, Harrods managing director. “With the announcement of the new official memorial statue to Diana, Princess of Wales at Kensington Palace, we feel that the time is right to return this memorial to Mr. Al Fayed and for the public to be invited to pay their respects at the palace.” More on the news, with reporting by @loreleimarfil, at WWD.com. #wwdnews