The pressure’s on.
Mall traffic is down, online sales are taking market share and shoppers are more interested in the latest gadget than the latest look. The result? Retailers are no longer relying just on organic growth. They’re getting out their checkbooks and plunking down hundreds of millions of dollars to buy new businesses and quickly learn new skills or gain footholds in new areas.
Fashion companies want to not only avoid extinction, but drive their own evolutionary leap forward. Instead of an equivalent explosion of cave art or arrowheads, it’s an effort marked by digital investments and moves into new channels of distribution and new geographies.
So far this year, Under Armour Inc. said it would spend $560 million to acquire MyFitnessPal and Endomondo and build “the world’s largest digital health and fitness community.” And Macy’s Inc. revealed a $210 million deal to jump into specialty retail with beauty chain Bluemercury.
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They’re just the latest to signal retailers’ willingness to mix it up.
In September, Neiman Marcus Group secured an international foothold with its deal to acquire Munich-based luxe firm Mytheresa.com. And Nordstrom Inc. made a big digital play, buying men’s site Trunk Club last year and flash-sales brand Hautelook before that.
“A lot of the retailers are trying to figure out ways to stay relevant and differentiate,” said Lisa Clyde, managing director at Bank of America Merrill Lynch.
“In the athletic space, you will see more investment in things that relate to wearable technology,” Clyde said. “In the broader fashion landscape, we are likely to see some of these more capability-driven deals like Nordstrom has done. And I wouldn’t be surprised to see further geographic plays amongst the department stores.”
Consumers are inundated with choices and fashion companies are working to give them even more options that make sense.
“It’s all about a realization that channels can be complementary as opposed to combative,” said Mortimer Singer, chief executive officer of Marvin Traub Associates. “The right distribution is exponentially better than one channel.”
Macy’s already has its own brands, retail distribution and wholesale and concession relationships. “Now they’re going to have a complementary retail environment that’s outside of their box,” Singer said.
He also pointed to the success that Loblaw Cos. has had with Joe Fresh and noted J. Crew Group’s deal to sell Madewell styles at Nordstrom and Net-a-porter, observing that the arrangement helped the brand expand its touch points with shoppers.
“It’s all about supercharging the access to the consumer,” Singer said. “You’ll probably see some department stores trying to go own these specialty chains. You could see big acquisitions between the likes of the big specialty stores and the major [department store] retailers because they can complement each other, not only with their infrastructure and their cross-channel base, but also their customer base. There’s a lot of opportunity to this.”
For his part, Macy’s chairman and ceo Terry J. Lundgren said there were opportunities to add some of Bluemercury’s range of beauty products to Macy’s stores while expanding on the nameplate’s 60 doors.
“We think there’s a lot more potential for growing the brand as it is,” Lundgren said. “I think, over time, there will be some opportunities for Macy’s and Bluemercury to work together to do stores, as well. We’re in a brainstorming mode at this point.”
While the Bluemercury deal had some experts scratching their heads trying to completely understand Macy’s rationale for the purchase, it was a milestone for Lundgren, who’s proven to be one of retailing’s savviest operators.
“I’ve wanted to invest in another category for a long time and we’ve looked at so many opportunities,” he said. “We’ve been open to lots of different ideas, but this one was the one that made the most sense.”
Macy’s deal, while outside the traditional department store box, is still a move into relatively familiar terrain.
Under Armour’s move is into something else entirely.
Together with MapMyFitness — which Under Armour acquired in 2013 for $150 million — MyFitnessPal and Endomondo give the company control of broad swath of the connected fitness phenomenon.
Under Armour’s fitness platforms reach 120 million people.
And chairman and ceo Kevin Plank crowed to Wall Street that “one out of every five people in the United States has downloaded one of the apps in our platform. Collectively, the three sites grew 46 percent last year, adding 40 million members, and we continue to add over 100,000 registered users every day.”
The platforms help users count calories and track their nutrition as well as map, record and share updates on their workouts.
Plank said the connected fitness initiative was an “opportunity for Under Armour to build a different type of relationship with our consumer over the long term.”
Hana Ben-Shabat, a partner in A.T. Kearney’s retail practice, said Under Armour is using the deals to cast itself in a new light.
“It’s about defining themselves as a wellness retailer, so their proposition to the consumer is not only about the clothing and the footwear they sell, but it’s a more holistic approach about how you mix sports and fitness and wellness into your life.”
It’s an ambitious goal and a significant pivot for Under Armour. Just as Macy’s move toward specialty retailing could signal serious changes ahead.
But history has shown time and again that corporate honchos don’t necessarily place the right bets as they look beyond their own boarders for growth. In an historic divestment, for example, General Electric Co. is in the process of spinning off the house that Jack Welch built — its massive financial arm — and refocusing the company onto its industrial base, which is expected to produce 90 percent of its earnings by 2018.
There’s also a long history of fashion companies wanting to take on new markets via acquisition, but finding that they haven’t picked the right tools or used their new capabilities to full effect.
Sears bought catalogue company Lands’ End only to spin it off last year. Neiman Marcus owned Kate Spade, but missed out on its potential, which was realized by Liz Claiborne Inc. The former Saks Inc. bought tween concept Club Libby Lu, but shuttered the 78-door chain when the company turned its focus away from mainstream department stores and zeroed in on luxe. And Macy’s predecessor, Federated Department Stores, bought catalogue and direct-marketing specialist Fingerhut Cos. during the dot-com boom only to see the marriage go bust.
Proof, if needed, that high-minded transformations and the nitty-gritty of integrations don’t always turn out as expected. Evolution is driven by the environment. And even the quick and smart can’t see what’s coming next.
But there seems to be something poking its head around the corner.
After a very tough third quarter, Millard “Mickey” Drexler, J. Crew’s chairman and ceo, said, “Apparel spending is down across our industry. It’s common knowledge that store traffic has been down for the past couple of years. Customers are shopping online more than ever, and the promotional environment is like I have never seen before. Clearly, this is not business as usual. The world is changing, and customer behavior and expectations are changing even faster.”
Not long after that, Drexler inked the deal bringing Madewell to some Nordstrom doors.
Evolution is messy and makes for some strange bedfellows, but opens up space for the fittest.