April 17, 2017 Consensus

The Weekly Consensus – April 17, 2017 (Volume 9, Number 16)

The Big Story
Trading Spaces
Betsy White

One of the more attention-grabbing retail news items last week was JC Penney’s announcement that the company would delay the closing of 138 stores due to a surge in business after the closures were announced. The reality however, was only a short delay in the start of liquidation sales. The stores will still close, just slightly later than originally contemplated, ostensibly because the company determined it would make more money (or lose less) if the liquidation sales start in May instead of April.

Reading almost daily about another retail chain closing some or all of its stores leads one to ponder what can be done with all of this retail space being vacated at lightning speed.  While painful for landlords, retailers, and often the consumer in the short term, there is a huge opportunity for property owners, along with new tenants, to remake the brick and mortar landscape.

Experiential retail may not be a panacea, but it presents a plethora of options for re-purposing space in both high traffic and destination locations.  One only needs to look at the success of more traditional retailers like Sephora and Ulta, both of which display products that can be tested with or without the help of the plentiful and accessible beauty advisors, to note that these businesses are on to something big.

There are also shops such as Eataly, with four US stores (soon to be five), nearly 30 others worldwide and at least 17 more planned, which combine a market, takeaway counters and several restaurants in a cavernous space which is nearly always crowded with locals and tourists alike.

Then there are the virtual new kids on the block.  A number of current and past presenters at our annual Next Great Consumer Brands conference (taking place on May 3 this year) started out as pure-play ecommerce concepts but have since either tested or more permanently expanded into brick and mortar as natural extensions of their personalized customer-centric business models.  This group include the following 2017 presenters: M.M. LaFleur (a women’s clothing business that is opening showrooms in several cities), Combatant Gentlemen (a men’s apparel business that Inc. calls the Warby Parker of suits), Helix Sleep (a company offering personalized mattresses) and Parachute (a bedding and home décor company), along with alumni Indochino, J. Hilburn, Ledbury and Modcloth.

Another category of businesses moving into vacant retail space are those that sell experiences.  For example, another 2017 Next Great Consumer Brands conference presenter is Escape the Room, one of the first companies in the U.S. to operate physical adventure games involving a series of puzzles.  Other experience-based businesses include specialized exercise studios (yoga, barre, climbing, Pilates, cycling, cross fit, etc.).

While it may take a while to fill up the spaces that are or will be soon vacated, I suspect that you will be seeing many banners for new retail and non-retail establishments at your local malls and shopping centers. This should help to drive traffic, which may keep the traditional retailers that have so far survived around a bit longer.

Apparel & Footwear

Walmart is in advanced talks to acquire online men’s retailer Bonobos

The world’s largest brick-and-mortar retailer is in advanced discussions to acquire Bonobos, a 10-year-old men’s fashion retailer based in New York City. Sources say the two sides have agreed on a price — which couldn’t immediately be learned — and that the deal is in its final due diligence stages. The deal would mark at least the fourth e-commerce acquisition by Walmart digital chief Marc Lore since Walmart acquired his company Jet.com seven months ago. Those include women’s online retailer ModCloth, outdoor gear seller MooseJaw and online shoe site ShoeBuy. Lore also bought online furniture retailer Hayneedle while Jet.com was still independent. The largest of the Walmart deals under Lore was $70 million, but sources say Bonobos will go for more than that. The company has between $100 million and $150 million in annual revenue and is in better financial shape than ModCloth, which sold for less than 1x revenue.

Gymboree Is Said to Prepare for Bankruptcy as Payment Looms

Gymboree Corp., the struggling children’s clothing retailer, is preparing to file for bankruptcy as it faces a June 1 interest payment on its debt, according to people with knowledge of the matter. The Bain Capital-controlled company is seeking to reorganize its debt load and may transfer control to its lenders, including Searchlight Capital, Brigade Capital Management and Oppenheimer Holdings, said the people, who asked not to be identified because the process isn’t public. Gymboree, laboring under more than $1 billion in debt from its Bain buyout in 2010, warned last month that it’s running short on cash and may not survive if it can’t persuade creditors to refinance its debt. The retailer, which operates about 1,300 stores, hasn’t posted an annual profit since 2011, with losses totaling more than $800 million.

Jaeger collapses into administration putting 680 jobs at risk

Fashion chain Jaeger has collapsed into administration, putting 680 jobs at risk.

The brand, which dressed Audrey Hepburn and Marilyn Monroe in its heyday, had been trying to find a buyer to keep its 46 stores going, but its private equity owner threw in the towel last week and appointed administrators after being unable to find a buyer for a suggested price of £30m. The company has failed to turn a profit since private equity veteran Jon Moulton’s Better Capital bought the firm for £19.5m in 2012.

Athletic & Sporting Goods

Aspen Skico, KSL Group to Acquire Mammoth Resorts, Adding to Intrawest Deal

Aspen Skiing Co.’s second in command said Wednesday the deal to acquire Mammoth Resorts and Intrawest is a logical extension of a business strategy it has pursued for the past five winters.  Skico Chief Operating Officer David Perry said it is a growing trend in the travel and leisure industry to bundle experiences for people. Skico made a huge leap into that strategy this week, announcing that it was forming a new entity with a partner to acquire Intrawest Resort Holdings and its six ski areas, and announcing that it is buying Mammoth Resorts and its four ski areas in California.  Affiliates of Skico and Denver-based KSL Capital Partners will form a new entity to make the purchases. Both deals will be completed by the end of the third quarter this year.

Synovus Agrees to Purchase Cabela’s Credit-Card Operation Saving Merger Deal

After hitting a few snags, it appears the deal between Bass Pro Shops and Cabela’s is back on and picking up speed once again.  Synovus Financial Corp will reportedly buy the financial unit of the outdoor retailer Cabela’s Inc, sources said.  Known as the “World’s Foremost Bank,” Cabela’s credit-card operation was supposed to be bought by Capital One last year, but the deal fell through when it couldn’t get regulatory approval in a timely manner.  Cabela’s and Bass Pro Shops first announced the ground breaking news last October in a deal valued at right around $5.5 billion. Cabela’s then said it would not be able to close the deal as fast as they hoped because of approval delays.

Cosmetics & Pharmacy

L’Oreal’s Body Shop Chain Said to Attract Bids From 15 Suitors

L’Oreal SA drew bids from around 15 private equity firms and companies, including CVC Capital Partners, Carlyle Group LP and South Korea’s CJ Group, for its Body Shop division, said people familiar with the matter.  Bidders for the next round will be shortlisted this week, the people said, asking not to be identified as the details aren’t public. BC Partners, Bain Capital and Advent International Corp. were also among firms that submitted bids, they said. L’Oreal said in February it was exploring “all strategic options” for Body Shop, which was founded in 1976 by British entrepreneur Anita Roddick and spearheaded the trend for environmentally minded products. Operating profit at the firm known for its body butter and hemp creams has been falling for the past three years as it struggles to compete with newer rivals. A representative for L’Oreal declined to comment.

McKesson Canada Makes Bid to Acquire Uniprix

McKesson Canada has proposed to acquire all outstanding shares of Uniprix, pending shareholder approval and satisfaction of closing conditions. Uniprix generates annual sales of more than $1.6 billion, according to the company, and its banners – Uniprix, Uniprix Santé and Uniprix Clinique – extend across 375 pharmacies, making it the second largest retail pharmacy chain in Quebec. McKesson Canada is building a significant network of Canadian independents. The wholesaler in December closed its deal to acquire Rexall Health, through which it acquired approximately 470 retail pharmacies. That is all accretive to a network of more than 2,000 independents across five owned and operated banners, including Guardian, I.D.A., The Medicine Shoppe, RemedyRx and Proxim.

Beauty Format’s Success Behind Walgreens Expansion into 1,000 Additional Stores

Walgreens will be bolstering its beauty proposition with the addition of “Beauty Differentiation” formats across more than 1,000 additional stores this year, the company reported. The move will include the hiring of beauty consultants who add a personal customer service touch to the offering. “We think the opportunity inside of a drug store is to move toward a health and beauty convenience specialist,” noted Alex Gourlay, co-COO Walgreens Boots Alliance. “That’s where we’re seeing the investment and the growth right now,” he said. “We have now recruited beauty [consultants] across more than 1,800 stores,” George Fairweather, EVP and global CFO Walgreens Boots Alliance, told analysts. Recent success across Walgreens’ exclusive brands has set the stage for more launches, according to Fairweather. “Following the successful introduction of No7 and Soap & Glory, we’re planning to introduce another of our own brands, Botanics, into our existing ‘Beauty Differentiation’ stores in the next six months.”

Discounters & Department Stores

A New Online Discount That Could Actually Spur Store Traffic

Walmart on Wednesday introduced Pickup Discount, which will give discounts to customers willing to pick up in stores some online-only items. The discounts are based on how much Walmart saves on so-called last-mile delivery costs, which it said to represent the lion’s share of shipping costs to customers’ homes. According to the head of Walmart.com, Marc Lore, it costs Walmart less to ship to stores from its fleet of 6,700 delivery trucks, which are already ferrying goods from its fulfillment centers to its 4,700 US stores. Lore said Walmart is taking a page from Jet.com’s Smart Cart program, which passes along savings when customers opt for services that reduce the retailer’s costs. These include the use of debit cards vs. credit cards, or opting out of free returns. Lore is the founder of Jet.com, which Walmart acquired last year.

Target’s Victoria Beckham line sparks strong online sales

Victoria Beckham’s line for Target went on sale to the public recently and gently spiced up the life of some shoppers. Joshua Thomas, a Target spokesman, said online sales for the collection by the former Spice Girl have already broken a company record for sales of a design partnership. That’s not too surprising because a) more people are shopping online these days and b) Target’s website has crumbled under the crushing traffic generated by some previous collections, limiting how high previous sales records could have been. Remember Lilly Pulitzer?

Kohl’s Names First CMO Since 2012

Kohl’s has added former Best Buy chief marketing officer Greg Revelle as its new CMO — the first person to hold the title at the retailer since 2012. Mr. Revelle, who was also formerly CMO of AutoNation and a VP of worldwide online marketing at Expedia, replaces Julie Gardner, who departed the company more than four years ago. Since 2013, chief merchandising and customer officer Michelle Gass has overseen marketing at the Menomonee Falls, Wisconsin-based retailer. The company also employed Will Setliff as exec VP-marketing for two years before he departed in April 2016. As CMO, Mr. Revelle will oversee the company’s marketing organization and overall marketing strategy — specifically building loyalty and personalization efforts to work toward a goal of “becoming the most engaging retailer in America.”

Grocery & Restaurants

Supervalu to buy Unified Grocers for $375M

Supervalu will acquire Unified Grocers for approximately $375 million, comprising approximately $114 million in cash for 100% of the outstanding stock of Unified Grocers plus the assumption and pay-off of Unified Grocers’ net debt at closing. According to Supervalu, this transaction will bring together two “highly complementary grocery wholesale organizations with combined sales of approximately $16 billion in 2016. Together, Supervalu and Unified operate 24 distribution centers supplying customers in 46 states and serve a combined customer base of over 3,000 stores.”

Activists take stake in Whole Foods

Activist investors led by Jana Partners on Monday revealed they had acquired nearly 9% of the stock of retailer Whole Foods Market, saying they intended to influence the company to address what they called “chronic underperformance,” through board and senior management changes, a review of strategic alternatives, among other suggestions ranging from self-distributing to addressing signage in stores.

As Soda Loses Its Sparkle, Coca-Cola Is Transforming Into a ‘Total Beverage Company’

Coca-Cola isn’t just a beverage company. It’s arguably the beverage company, a global behemoth that sells 500 brands in 200 countries. Today, Coca-Cola is undergoing a transformation. With consumers increasingly bypassing sugary soda in favor of healthier drinks, the megabrand’s incoming CEO James Quincey has mapped a new business strategy, and the company has streamlined its marketing message by adopting a global template for advertising its flagship Coca-Cola products.

Home & Road

Jo-Ann Stores acquires Creativebug to boost crafting content game

Jo-Ann Fabric and Craft Stores has acquired Creativebug, a provider of inspirational and educational videos intended to help viewers in the arts and crafts sector learn skills and develop new and trendy project ideas. Financial terms were not disclosed. Creativebug’s subscription service allows crafting enthusiasts access to more than 1,000 high-definition video classes where they can learn how to paint, draw, sew, quilt, knit, crochet, throw a DIY party and more. The classes, taught by top designers and artists, strive to capture the experience of learning alongside an expert. Under the motto “You’re more creative than you think,” Creativebug was founded in 2012 in San Francisco. Following the acquisition it will remain there as a distinct business unit within Jo-Ann Stores, with Ursula Morgan still at the helm as president and CEO.

Jewelry & Luxury

For Luxury Industry, Ecommerce Is No Longer a Luxury

A survey found that younger shoppers were far more likely to have used an online channel for their first luxury purchase than older shoppers. Among those ages 18 to 24, 14% said their first luxury purchase was made online. The survey of 2,000 US online shoppers, conducted by consultancy Bain & Co. for Farfetch, an online platform that sells goods from luxury boutiques and brands, found far lower levels among older consumers. Among those ages 25 to 35, 9% said their first luxury purchase was made online, in comparison to only 3% for those ages 45-54, the study showed. While those percentages may not look that big, it demonstrates the coming generational shift. Bain & Co. forecast online sales will take an increasingly significant share of the total luxury market. It currently makes up 8% of total luxury sales, but that will grow to 25% by 2025.

Diamond trade banking on relationships

The diamond industry and the banking sector are getting to know each other again. A recent diamond financing seminar in Mumbai underscored the two groups’ need to talk. “Unless the industry knows our problems and the lenders understand the industry’s challenges, we can’t move forward,” said Karnam Sekar, deputy managing director at the State Bank of India. Many bankers still view diamonds as a high-risk sector, but representatives from the diamond trade feel there has been significant progress in improving the industry’s level of compliance, transparency and so-called bankability. It appears that both are correct — there has been progress, but more needs to be done given the regulatory environment constraining the banks.

James Allen Owner Receives $140 Million Investment

R2Net, owner of jewelry e-tailer James Allen, has received a $140 million equity investment from Francisco Partners. The Israeli newspaper Globes reports that the investment gives Francisco Partners about 50 percent of the company, which would value R2Net at approximately $300 million. In an interview, Chief Operating Officer and Cofounder Dean Lederman declined to confirm that number, or even whether Francisco holds a minority or majority stake. Francisco bought out prior investor Israeli Growth Partners, which invested $25 million in the company in 2014. According to Globes, IGP made $50 million on its investment.

Office & Leisure

Why Toys R Us is still struggling — even as the wider toy industry booms

Last year was a good one for the toy business: with the help of tiny collectibles such as Shopkins, slapstick games such as Pie Face, and the merchandising juggernaut that is “Star Wars,” the industry saw a robust 5 percent increase in sales. And yet, big-box behemoth Toys R Us struggled to cash in on your kids’ playtime.  The company reported last week that sales sank 1.4 percent last year at its Toys R Us and Babies R Us stores open more than a year. It posted a loss of $36 million — an improvement over last year’s $130 million loss, but nonetheless a sign that the retailer still is in turnaround mode. Dave Brandon, the chief executive of Toys R Us, laid out the problems. One was video games; as gaming increasingly moves to apps, the retailer’s video games and electronics business slowed down dramatically, $200 million short of what they were in the previous year.

Technology & Internet

Amazon Tests Social Media Influencer Program

Social media stars with large followings, lots of posts, and shoppable content are the target for the new Amazon Influencer Program, which is in beta testing and being rolled out by the e-commerce company. The invitation-only plan allows influencers to earn fees for Amazon purchases they drive through their social media platforms like YouTube and Instagram. According to information supplied by Amazon on its website, “An intuitive vanity URL makes it easy for customers to find, browse and buy the products introduced to them through social media influencers.”

Apple, Samsung, Google Dominating Mobile Payments, But Look Out For PayPal

New data from Juniper Research estimates that the number of mobile payment users, including Apple Pay, Samsung Pay and Android Pay, will exceed 100 million for the first time during the first half of 2017, before surpassing 150 million by the end of this year. Juniper’s report found that Apple Pay, and the alternative wallets that have followed in its wake, are set to establish themselves as the primary contactless mechanisms of choice in the U.S. According to the new research, the combined market share of Apple, Samsung, and Google (via Android Pay), increased from 20 percent in 2015 to 41 percent in 2016, as a proportion of total mobile contactless payment users. Juniper forecasts that this will rise to 56 percent by 2021, as the trio’s combined user base exceeds 500 million.

Finance & Economy

Retail sales fell in March

Retail sales fell in March on weaker gasoline and auto sales. In addition, a core measure that excludes those volatile items rose less than expected.  Economists largely attributed sluggish sales in February to delays in tax refunds and said the arrival of those checks could bolster consumer spending in March. At the same time, analysts said harsh weather in the Midwest and Northeast could have kept shoppers at home, partly offsetting the positive effects of the refunds.  US households generally are benefiting from solid job and income growth, cheap gasoline, lofty stock and home prices, and reduced debt.

US producer prices post first drop in seven months

U.S. producer prices fell in March for the first time in seven months, weighed down by a drop in the cost of services and energy products. However, on an annual basis, prices spiked by the largest amount in five years, suggested inflation is rising.  The Labor Department said that its producer price index for final demand slipped 0.1 percent last month. That was the first decline since August and followed a 0.3 percent gain in February. Despite last month’s dip in prices, the PPI shot up 2.3 percent in the 12 months through March.