Will the e-commerce spin-off trend continue in 2022?

Bricks and clicks may be heading for divorce in a move that’s leaving some retail analysts scratching their heads.
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· 5 min read

Long a united front, bricks and clicks may be heading for divorce in a move that’s leaving some retail analysts scratching their heads.

Amid a flurry of retail IPOs and funding rounds last year, activist investors are pushing some department stores to reconsider their omnichannel strategies and make the largely unprecedented choice to spin off their online businesses from physical stores.

Saks Fifth Avenue owner HBC led the charge last March, unveiling its deal to separate the luxury retailer’s e-comm site and call it Saks, with its stores known as SFA. Venture capital firm Insight Partners took a $500 million minority stake in Saks at a $2 billion valuation, and it’s now reportedly prepping for an IPO set for this year at triple that.

  • Activist investor groups have since taken note: Jana Partners is urging Macy’s to split off its digital biz after taking a stake in the retailer in October, while Engine Capital made it known in December that it wants Kohl’s to do the same.

Wait, why? The financial motivations are clear. With spun-off e-comm sites, investors are looking to “unlock value” online and boost valuations much higher than brick-and-mortar retailers typically trade, Roxanne Meyer, director of equity research and retail and e-commerce analyst at MKM Partners, told Retail Brew.

But many think the move doesn’t serve a retailer’s—or customer’s—best interests.

A hard sell

Meyer noted that the most successful companies have made the e-commerce and in-store experiences “seamless.” With the two potentially at odds, things could get a little messy. And even thwart sales.

As the distinctions between channels have “evaporated” over time, consumers have become agnostic, explained Steve Dennis, a former retail exec and founder of SageBerry Consulting. Purchases starting in one channel are often being completed in another. (Think about the number of times you’ve second-guessed something in a store, only to add it to your online shopping cart the next day.)

“[It] sets retailers back like 20 years to think about e-commerce and physical retail as separate things,” he said.

  • Meanwhile, Draper James CEO Erin Moennich just told us that “the idea that an omni customer is more valuable still absolutely holds true.”

Still, the spin-offs may make more sense for some than others, Dennis noted. Saks is a “mature business” that has likely “run out of places to grow,” he said, adding that its e-comm business has higher margins than Macy’s or Kohl’s, who are selling lower-priced items.

  • But, luxury department stores’ sites may miss out on sales opportunities for products like Chanel handbags, which are only sold in stores, Meyer pointed out. Yet, HBC has said its businesses will work together to create a “seamless customer experience.”

The move could also pit the spun-off sites against a new competitive set of online-first retailers like Shopbop, Net-a-Porter and Revolve, Meyer noted, putting them “under the microscope” and asking: “How are they really differentiating?”

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History lessons: Breaking up a company’s assets is nothing new, Forrester principal analyst Sucharita Kodali said. In fact, she said it’s one of the oldest moves in the PE playbook (see: KKR’s RJR Nabisco buyout in 1988 that left it a “shell of its former self”). 

But nothing exactly like these spin-offs has happened in recent retail history. Quite the opposite, in fact, as brands like L.L. Bean and Coldwater Creek, who began in the catalog business and subsequently opened retail stores, worked to integrate the two to increase sales, Dennis noted.

Dennis said the recent trend of outsized e-comm valuations are a “distortion in the market” that likely won’t last as DTC retailers start to face profitability challenges.

“The market has viewed some of these newer companies that have come to market at a premium, [but] whether or not that premium is deserved is another question,” Meyer added.

  • The high valuation “magic” already seems to be wearing off for several retailers that went public in 2021, she noted. Rent the Runway and Allbirds both reported widening losses in their respective Q3 earnings calls, and RTR’s share price has been cut in half since its IPO.

Looking ahead…As for predicting if more retailers will evaluate spin-offs in 2022, Meyer said all eyes will be on Saks to see if the company can “monetize it effectively.” If not, the strategy will likely be a flash in the pan.

“I have a hard time believing that many of these companies believe it’s the right move  fundamentally,” Meyer said. “But if it’s what drives value for shareholders, that doesn’t mean they’ll make the right decision on fundamentals.”

Neiman Marcus Group has already said it won’t follow suit after a report that it was weighing a split into three separate businesses, with CEO Geoffroy Van Raemdonck telling WWD that the company favors an “integrated retailing” model.

  • He said it has found its omnichannel shoppers spend 4.5 times more in a year than those who only shop in one channel.

In fact, the strategy might not even be limited to e-comm: Nordstrom is reportedly looking into the possibility of spinning off its off-price Rack segment into a separate company.

Kodali said it wouldn’t surprise her if others hopped on the trend—but she believes PE firms and new investors could likely “take down these brands pretty quickly.”

“It takes a long time to build a brand. It doesn’t take that long to kill it,” Kodali explained. “I think that the sales will fall off a cliff in lockstep, including their e-commerce sales. And if their e-commerce sales fall off a cliff pretty quickly, this entire strategy ends up being dead on arrival.”

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