April 10, 2017 Consensus

The Weekly Consensus – April 10, 2017 (Volume 9, Number 15)

The Big Story
RetailWire BrainTrust Throwdown: Is It Inevitable That Tech Companies Will Dominate Retail?
Rick Moss, RetailWire

Commerce is the engine that has driven the global prominence of the U.S. economy. Still, the e-commerce revolution that caught on in the late 1990s is so fundamentally different, that the prior 400 years of traditional retail can be viewed as a prelude to the empowered, connected consumer age in which we exist. We’re in the midst of a hi-tech revolution with no limits in sight.

We asked two of our BrainTrust panelists, Ken Lonyai and Ryan Mathews, to argue for and against the following premise:

The new model for retail, as exemplified by Amazon, is built on mastery of data, AI and IT services. Legacy retail companies can’t possibly make a transition to this type of data-first company. Therefore, possibly within the next decade, big retail will be entirely dominated by tech companies.

Ken Lonyai

[Ken is a 15-year veteran of interactive project development including some of the industry’s most unique experiential systems.]

Amazon is the pinnacle of retail technology domination. Everything the company does is supported by data and technology and it’s working splendidly. Apple’s retail success is strongly attributed to changing the shopping experience by incorporating digital tools for checkout, fulfillment and support. Other tech-driven commerce leaders are emerging too. Jet.com uses algorithms to aggregate savings. Starbucks’ mobile apps/payments fuel its growth. Warby Parker, Bonobos, Rent the Runway, BirchBox, Casper and others leverage big data and technology to upend their respective markets.

None of these accomplishments would have come about simply with better trained sales associates on a sales floor. Even associates need to be well equipped with data and the means to access and utilize it immediately or today’s enabled consumer will walk. As important as human factors are, software and hardware drive user interactions, inventory, logistics, package tracking/returns, etc. It’s the absolute differentiator that will continue to distance retail winners from also-rans.

Ryan Mathews

[Ryan Mathews, founder and CEO of Black Monk Consulting, is a globally recognized futurist, best-selling author, speaker and storyteller.]

Arguing that tech companies are the future of retail is like saying power saws are the future of carpentry. Do they have a place in carpentry? Of course! Are they carpenters? Not even close.

We are so besotted by technology that we are blind to its essential role. At its most innovative, technology is a tool. Once it gains mass acceptance, it becomes a utility — invisible — freeing us to focus on real change drivers, like people.

Electricity allows stores to stay open later, keep products at proper temperature, illuminates the consumer’s shopping experience, fuels computing systems, etc. But it’s people that make or break retailing, not electricity or utility providers.

Technologists love process and systems. Merchants help people escape boxes. AI solves for the best choice. Retailers know the power of surprise. The future belongs to retailers that can exploit technology, not the other way around.

We asked the RetailWire BrainTrust for their impressions; which argument is most convincing?


Everyone on both sides seem to forget the “X factor” (beyond Ryan’s passing mention) — the products being sold and the skill of the merchant in selecting and/or designing the things consumers want to buy. So many specialty retailers are having trouble now because they’ve lost their merchandising touch. That’s not a technology issue.

Paula Rosenblum, Managing Partner, RSR Research

 

Ryan and Ken are both right. Both technology and data are only as good as the objective they are applied against. Amazon uses technology to capture the value of efficiency (time and money). Traditional brick-and-mortar retailers use people to capture the value of human relationships (trust and loyalty).

Susan O’Neal, CEO, Founder Adjoy

 

Read the entire RetailWire discussion here:

 

Apparel & Footwear

Ralph Lauren to close stores, offices in turnaround effort

Upscale fashion retailer Ralph Lauren announced that it would cut jobs and shutter its Polo store on Fifth Avenue in New York City as it seeks cost savings amid a sputtering turnaround effort. The company said the moves would save $140 million in annual expenses and would cost $370 million in one-time restructuring charges. The plans include an unspecified number of store closures, “a reduction in workforce” and closure of certain operations, according to a public filing. The company declined to release details, though it had already announced 50 store closures during the fiscal year ending March 31. The moves follow a turbulent period defined by falling revenue, lower profit and the announced departure of the company’s CEO, Stefan Larsson, who had creative differences with chief creative officer, executive chairman and company namesake Ralph Lauren. The retailer said that its latest moves were in addition to a plan announced in June 2016 to shed $180 million to $220 million in costs.

A new generation of even faster fashion is leaving H&M and Zara in the dust

Zara and H&M are being beat at their own game by even faster competitors. British fashion retailers ASOS and Boohoo are able to conceive, design, produce, and have clothing ready for shoppers on the sales floor quicker than Zara and H&M, according to a research note Goldman Sachs sent investors last month, and the two millennial-focused, social-media savvy brands are enjoying the rewards. On April 4, ASOS lifted its sales forecast for the year, expecting sales to grow between 30% and 35%. Boohoo also recently raised its earnings forecast, predicting sales growth of around 50% for the year.

BCBG to License Name to GBG USA

BCBG has asked a New York bankruptcy court to approve a licensing agreement with GBG USA. The agreement would cover all regions worldwide, except the Republic of Korea, and would span the manufacture, marketing and distribution of shoes, accessories, jewelry and home furnishings under the BCBG Max Azria and BCBGeneration labels. The license would also cover footwear for the BCBG Paris brand, covering Spring/Summer 2017 and Fall 2017 and terminating on Feb. 3, 2018. If the agreement is approved by the court during the April 27 hearing, GBG guarantees a minimum of $2 million in royalties, payable at signing. It will also pay BCBG 8 percent royalties of net sales on regular goods, 6 percent on off-price merchandise and 5 percent on home products. BCBG filed for bankruptcy in February. GBG USA licenses a slate of brands, including Calvin Klein, Under Armour, Frye, Cole Haan and Kenneth Cole.

Payless ShoeSource Outlines Plan to Survive Bankruptcy

Payless ShoeSource Inc., which filed for chapter 11 protection Tuesday, has said that it differs from many other recent bankrupty-seeking retailers in that it plans to survive its restructuring. The country’s largest footwear chain plans to quickly close some 400 underperforming stores in response to the growing dominance of e-commerce, a trend that has prompted other retailers to file bankruptcy and ultimately close their doors. But Payless said in new court filings that the debt-cutting and financing deals it reached this week with lenders, including Blackstone Group’s GSO Capital Partners, will help it emerge from chapter 11 as a still-operating business. Payless and top lenders began restructuring talks in February ultimately reaching a deal to slash the retailer’s $838 million debt load to about $469 million as well as to close additional stores. According to court papers filed Wednesday, lenders holding nearly two-thirds of senior and junior loan debt support the restructuring terms.

Athletic & Sporting Goods

Fanatics buys Majestic months after winning deal to replace it as MLB partner

Fanatics has reached a definitive agreement to acquire the Majestic sportswear manufacturing operation and the rest of VF Corporation’s Licensed Sports Group business. This deal brings the company that has been making Major League Baseball-licensed on-field uniforms and other apparel under the ownership of one of the brands scheduled to replace it as a key MLB partner beginning in 2020. The announcement of the acquisition comes four months after Fanatics and Under Armour teamed up to win a 10-year contract from MLB to make player uniforms and manufacture and sell licensed fan apparel, a deal which positioned those companies to replace current MLB partners Majestic and Nike.

With Reebok Expansion, Adidas Challenges Nike in China

Reebok announced plans to open 500 stores in China over the next three years. The move is part of parent company Adidas’ wider ambitions to position itself as the country’s leading fitness company in a bid to steal market share from incumbent leader Nike.  The deal will see Reebok partner with Belle International Holdings, one of China’s largest footwear retailers, who will oversee the rollout of its FitHub concept stores — seven of which have already opened in China over the past few months in Beijing, Wuhan and Qingdao. A further 50 stores are expected to open this year.

Cosmetics & Pharmacy

Walgreens Posts Surprise Sales Drop on Weakness in Europe

Drugstore chain operator Walgreens Boots Alliance Inc reported a surprise drop in quarterly sales, citing challenging market conditions in Europe and the impact of a stronger dollar.  The company also said it would repurchase up to $1 billion worth of shares until Dec. 31. Walgreens said sales from its international business fell 14.5 percent to $3.10 billion in the second quarter ended Feb. 28. Sales in its wholesale business, which also operates in Europe, fell 10.6 percent to $5.03 billion. Sales in the quarter were also hurt by a drop in front-end sales at its U.S. stores due to weak demand for consumables and personal care items.  Front-end sales, which include sales of non-prescription drugs, beauty products and toiletries, account for a third of the U.S. pharmacy business.

Fred’s Remains Committed to Rite Aid Stores Purchase

Fred’s Pharmacy reported 2016 full year and Q4 earnings last week, including Q4 charges totaling $23.4 million, or $0.49 per share.  The largest chunk of the charges was $10.2 million for “professional and legal advisory fees incurred due to the proposed acquisition of 865 Rite Aid Corp. stores and the development and implementation of the company’s growth strategy.” Fred’s is currently waiting to see if and when the Federal Trade Commission (FTC) approves the acquisition of Rite Aid Corp. by Walgreens Boots Alliance Inc. As part of that acquisition, to satisfy FTC approval, the companies agreed in December 2016 to divest 865 Rite Aid stores to Fred’s for $950 million — though those figures could increase. This would take Fred’s from a regional player to the third-largest drugstore chain in the U.S., but the Walgreens/Rite Aid deal must first be approved. During Fred’s earnings call, CEO Michael K. Bloom said the company remained committed to purchasing additional assets up to 1,200 Rite Aid stores to satisfy any FTC concerns.

Burberry Retreats on Beauty Strategy, Signs Deal with Coty

Burberry has announced a strategic partnership with Coty to help accelerate the growth and development of its beauty division, effective from October this year.  The news marks Burberry’s second major strategy reversal since it announced former Celine chief executive Marco Gobbetti as its incoming CEO last year, having tasked Christopher Bailey with the dual responsibilities of CEO and chief creative officer in 2014. The Coty deal comes just four years after Burberry ended its partnership with Interparfums and took its beauty business in-house. In that time, it has launched luxury fragrances like My Burberry and Mr Burberry and redeveloped its makeup line. The division reported £203 million ($254 million) in revenue for the previous financial year.

Discounters & Department Stores

Hudson’s Bay Soars on Heightened Urgency for Real Estate IPO

Hudson’s Bay Co. had its biggest gain in 16 months after the owner of Saks Fifth Avenue signaled it may take its real estate assets public, unlocking value for the Canadian retailer as same-store sales decline. In a call with analysts, Chairman Richard Baker showed a new sense of urgency when asked about his real-estate plans as U.S. interest rates rise. An initial public offering of a real estate investment trust has been a goal since Hudson’s Bay teamed up with REITS in the U.S. and Canada to create joint-ventures two years ago. At the time, Baker said he wanted to “fatten up the portfolio” first. “We have a tremendously valuable portfolio of real estate, which could be monetized in a variety of ways,” Baker said on a call discussing quarterly results. “What we should have done and what we should be doing as quick as possible is IPO-ing our U.S. real-estate portfolio and/or IPO-ing our Canadian real-estate portfolio.”

100 jobs at stake as Charlotte discount retailer sold to Dollar General

About 100 corporate employees at the new Charlotte discount chain Dollar Express may be losing their jobs as the company is sold to Tennessee-based Dollar General. Dollar Express employees were notified Friday morning that the company’s owners, private equity firm Sycamore Partners, had sold the chain’s approximately 330 stores to Dollar General, according to sources familiar with the deal. The transaction is not yet complete, and its terms were not available. Dollar Express sprang up quietly in a nondescript office park last year off East Independence Boulevard. To address federal anti-trust concerns in its agreement to acquire Matthews-based Family Dollar, Dollar Tree sold about 330 Family Dollar stores to Sycamore Partners, which was in the process of developing the stores into a new concept, Dollar Express.

Walmart U.S. to cut 10% of local tech division jobs, Sam’s Club also cutting staff

Retail giant Wal-Mart in its re-organization of the Walmart U.S. technology division is eliminating around 300 jobs in the Information Systems Division (ISD).  Insiders said the retailer is laying off about 10% of its ISD workforce over the next few days. The layoffs at ISD in Bentonville are expected to continue through the month. Impacted employees said they received an email to report to a training room on Tuesday (April 4) where they were told their jobs were being eliminated in the company’s efforts to restructure. The layoffs appear to be across-the-board and include officers.

Grocery & Restaurants

JAB Holding to buy Panera Bread for $7.5B

JAB Holding Co., owner of a growing cache of coffee and breakfast concepts, has added another one, agreeing to pay $7.5 billion for the bakery/café chain Panera Bread Co. The investment fund will pay $315 per share, a 30 percent premium over Panera’s 30-day trading average as of March 31, the last day of trading before reports of a Panera acquisition began circulating. JAB will also assume about $340 million in debt. The purchase price also represents a 20-percent premium over Panera’s all-time closing stock price high on that same date.

Joe’s Crab Shack, Brick House look for a buyer

Ignite Restaurant Group Inc., parent to the Joe’s Crab Shack and Brick House Tavern + Tap chains, has named a new CEO as it looks for a buyer or bankruptcy protection, the company said. The Houston-based casual-dining operator said it had hired financial advisor Piper Jaffray to pursue a sale of the business, which “could be sold as an entirety or through the separate sales of its two restaurant brands.”

Kitchen Fund invests in The Hummus & Pita Co.

Kitchen Fund, a group that makes early-stage investments in restaurant concepts, has made an investment in The Hummus & Pita Co., a four unit chain based in New York City. Kitchen Fund’s investment will help the company to build an infrastructure that will enable it to begin franchising. The Hummus & Pita Co.’s first unit opened in New York in 2012 with 2,200 square feet, 62 seats, and a menu full of Mediterranean dishes.

Home & Road

Bed Bath & Beyond Strong Earnings Beat Held Back by Weak Guidance

Bed Bath & Beyond Inc. (BBBY) reported fiscal fourth-quarter financial results of $1.84 in earnings per share (EPS) and $3.53 billion in revenue. Consensus estimates from Thomson Reuters had called for $1.77 in EPS and revenue of $3.5 billion. In the same period of last year, the retailer posted EPS of $1.91 and $3.42 billion in revenue. Comparable sales in the quarter increased by roughly 0.4%, compared with a gain of approximately 1.7% in last year’s fiscal fourth quarter. At the same time, comparable sales from customer-facing digital channels grew in excess of 20%. However, guidance was weak. EPS is expected to decline in the range of low single digits to 10%.

Former President of Kmart to Lead Texas-based Pier 1 Imports

A former president of retail chain Kmart has been named president and CEO of Pier 1 Imports.  Fort Worth-based Pier 1 on Monday announced the appointment of Alasdair James. James, who has served as Kmart president since 2014, begins his new duties May 1 with the home furnishings company. James replaces Terry London, the chairman of the board of Pier 1 who has served as interim president and CEO since January.

Conn’s Switching to Aaron’s Progressive Leasing

Conn’s has entered a three-year agreement with Aaron’s Progressive Leasing, which will provide lease-to-own financing to Conn’s customers who don’t qualify for the retailer’s own credit offering.  The move follows late last week’s announcement by Rent-A-Center that its AcceptanceNow division that would not be renewing its referral agreement with Conn’s, after determining the portfolio “consistently underperformed” the rest of ANow’s portfolio through other third party retailers. ANow said it would cease operating its kiosks in all 116 Conn’s stores by June 6.

Jewelry & Luxury

Gang of Diamond Fraudsters Arrested

New York police have arrested 10 men accused of defrauding wholesalers out of diamonds valued at more than $9 million, the US Attorney’s Office for the Southern District of New York announced. The accused wrote bad checks, forged documents and devised long stories to cheat their victims in New York, Las Vegas and Mumbai, the statement said. Police are still looking for two more men who have been charged in the scheme. “The twelve charged defendants allegedly participated in a global conspiracy to defraud diamond dealers out of more than $9 million,” acting Manhattan US attorney Joon Kim said.

Pink Star Fetches $71.2 Million, Setting New Record for Jewel at Auction

The Pink Star fetched $71.2 million (HK $553 million), the highest price ever paid for a diamond or jewel at auction, at Sotheby’s Hong Kong. The winning bidder for the 59.6 ct. fancy vivid pink internally flawless oval was Chinese jewelry retailer Chow Tai Fook, which has renamed it “The CTF Pink.” The final hammer price topped Sotheby’s estimate for the stone: $60 million. It came after five minutes of frenzied bidding between three contenders.

Offer For Dominion Diamond Corp Puts Spotlight On Canada’s Diamond Mining Future

Dominion Diamond Corp. appears to be a cherry that several companies are keen to pick. Growing interest in the company has raised the subject of the consolidation of the Canadian diamond mining industry, which has been regarded as inevitable by industry players for a number of years. Just two weeks ago, Washington Companies informally offered $1.1 billion for Dominion. Dominion rejected the offer, saying the terms of the proposed talks were unusual and unacceptable and that the offer did not sufficiently recognize the value of the firm.

Office & Leisure

Staples in Talks with Buyout Firms

Less than a year after its deal to acquire Office Depot Inc. fell through due to antitrust concerns, Staples is in early discussions with private-equity bidders, according to The Wall Street Journal.  Staples had no comment on the report, which said that based on typical takeover premiums, the office supply chain could be valued at roughly $7 billion or more. But the news sent its stock soaring to a four-year high. Staples has reported declining sales for the past several years amid increased competition from online and the likes of Walmart and Costco. At the start of the current fiscal year, Staples had 1,255 U.S. stores and 304 Canadian locations.

Philly start-up PetCoach sold to Petco

PetCoach is being acquired by mega-pet-specialty retailer Petco. PetCoach, launched in 2014, developed an app to help pet owners better care for their pets, connecting them with veterinarians and providing personalized answers to their questions. How much Petco is paying for PetCoach was not disclosed. Talks began in January between PetCoach and Petco, making the progression of the deal much faster than the 2014 sale of Pet360.com to PetSmart for $160 million, which took nine months to close.

Technology & Internet

Samsonite buys eBags for $105 million

Luggage giant Samsonite International S.A. has acquired web-only travel bag retailer eBags Inc. for $105 million in cash. This is the second major acquisition in a little more than a year for Samsonite, which bought upscale luggage retailer Tumi Inc. for $1.8 billion in March 2016. EBags, launched in 1999, generated $158.5 million in sales last year, up 23.5% from $128.3 million the previous year, Samsonite said in announcing the deal. Samsonite cited eBags’ e-commerce success as the driving force behind the acquisition.

GameStop Continues ThinkGeek Buildout While Closing Flagship Stores

GameStop apparently hit pay dirt with its 2015 acquisition of ThinkGeek, the go-to place for sci-fi-, anime- and comic-book-themed collectibles and clothing. Amid slowing sales within its core gaming business, and plans to close as many as 225 flagship stores worldwide this year, the company is going full-bore into what some might describe as nerddom. But nerddom pays.

hhgregg To Begin Liquidating

Unable to find a buyer, hhgregg will begin liquidating its assets and expects to shut its doors for good by June. In an email to employees, CEO Bob Riesbeck said discussions were held with more than 50 private equity firms, strategic buyers and other investors. Fire sales will be conducted by Tiger Capital and Great American.

Finance & Economy

Consumer spending posts smallest gain in six months

Rising incomes and confidence haven’t accelerated consumer spending, which posted its smallest gain in six months in February, the Commerce Department said.  Personal consumption expenditures increased just 0.1 percent, below economists’ expectations and down from 0.2 percent in January.  Spending increased 0.6 percent in December.  The slower spending growth came as incomes continued to rise strongly. Personal income grew 0.4 percent in February after an upwardly revised 0.5 percent jump the previous month, the Commerce Department said.  Inflation reduced the purchasing power of extra cash.

Many states still struggling despite growing U.S. economy

Even with the U.S. economy boasting impressive job growth and domestic equity markets near record highs, a fragmented recovery has left many states struggling to close budget deficits nearly a decade after the 2008 financial crisis.  The broad recovery has benefited large, economically diverse states like California and Texas, ratings agencies say, while states heavily dependent on oil revenues, like North Dakota and Alaska, and those like Illinois that are grappling with large unfunded pension obligations, have seen budget deficits bloom.  That has left those struggling states with painful decisions over spending cuts and tax increases, and ill prepared to deal with another economic downturn or cuts to federal money tied to the Medicaid program.