Industry Mergers: What They Mean for Retail

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Industry Mergers: What They Mean for Retail

By Jeremy Hanks, CEO, Dsco - 09/26/2017

The list of brand mergers and acquisitions in retail continues to expand.

Michael Kors recently announced that it’s buying luxury shoemaker Jimmy Choo for $1.2 billion, and in May, luxury handbag maker Coach dished out $2.4 billion to acquire its competitor, Kate Spade.

France’s Essilor has also indicated its intent to merge with Italy’s Luxottica Group in January in a $49-billion deal that would give industry giant Luxottica even more market share in the eyewear industry.

Most recently, on Aug. 2, Canadian shoemaker and retailer ALDO Group unveiled its partnership with Vince Camuto and its line of designer shoes, handbags and accessories.

It’s no coincidence that such mergers are increasing at the same time as the economic and structural clout of mega retailers is also spreading throughout the retail industry and supply chain.

Consolidation is one of the key strategies that brands are using to respond to and/or push back against the pressures imposed on them by the likes of Amazon and Walmart.

Mega retailers

Amazon and Walmart are continuing to grow and move into more and more areas of retail and the supply chain.

They are now directly involved in manufacturing, fulfillment, third-party logistics, shipping, last-mile delivery, advertising, cloud computing, end-customer package storage (receiving lockers), pharmaceuticals, groceries, food kits, entertainment, taxation, government assistance programs and even high fashion.

This is creating three different types of pressure on brands:

1) Direct pressure

Brands and suppliers that sell to mega retailers are being required to meet ever higher bars in terms of price, performance and customer service. Mega retailers are increasingly demanding that products be shipped faster and more efficiently while at the same time requiring extremely low margins. This is putting a squeeze on a lot of brands and suppliers.

A few of the recent demands by Walmart and Amazon include:

2) Competition

Brands and suppliers that sell on marketplaces run by Amazon and Walmart are essentially handing over their customer data to these mega retailers. This data can then be used to develop products for in-house brands such as AmazonBasics that compete with the brands and suppliers on their marketplaces.

In essence Amazon cannibalizes many of the best-selling products of its third-party sellers. As Walmart ramps up its e-commerce operations, it’s likely that it, too, will use the data from its marketplace to expand its Best Value brand of consumer products in a similar manner.

3) Indirect pressure

Amazon’s drive to continually improve the customer experience has led to huge leaps in efficiency for its supply chain and has raised overall consumer expectations in retail and ecommerce.

Before Amazon, it was not unusual for orders to take weeks before delivery. Now, two days is becoming the norm even for companies that don’t work directly with Amazon or Walmart.

Meeting such customer expectations is a tall order for smaller brands with fewer resources at their disposal. And even when they go to a 3PL, they’re hit with unfavorable terms due to their smaller size and lack of leverage.

Additionally, the huge marketplaces of eBay, Amazon, Walmart and Alibaba have led to an increase in product forgeries and a lack of brand control over which channels their products are sold in (Amazon has contributed to this through its Amazon Inventory Buying Program). Forgeries and unauthorized sales hurt brands’ images, which can be especially damaging for high-end products.

Amazon and other big marketplaces, however, have shown little willingness to deal with these issues. It’s for these reasons that brands such as Birkenstock are now refusing to sell their products on Amazon.com.

Brands are pushing back

In response to these various pressures, brands and suppliers are pushing back.

Some of the tactics they are using include refusing to sell on Amazon, imposing minimum advertised prices (which makes it more difficult for mega retailers to undercut local sellers), giving local sellers first access to new products, enforcing restrictions on where their products are sold, diverting e-commerce customers to local stores, and offering drop shipping as an option for local retailers.

Unfortunately, mega retailers have so much influence in the supply chain that such tactics can only be moderately successful for brands that are not of a certain size. After all, even Nike has had difficulties coming up with a successful strategy for avoiding Amazon and has finally begun selling its products on the e-commerce marketplace.

Due to its size, Nike was able to arrange a more favorable agreement that included requirements for Amazon to clamp down on forgeries. Smaller brands, however, simply do not have the leverage to negotiate for better terms.

In such an environment, mergers between smaller companies make a lot of sense.

Mergers are an important tactic

Mergers and consolidations provide a slew of benefits for brands that allow them to meet the heightened performance and customer experience standards of the new economy:

  • Consolidated overhead and administrative costs

  • Better pricing on materials and expanded profit margins

  • Factory consolidation

  • Greater geographic reach

  • Better coordination with retailers

  • Shared real estate footprint

  • Reduced competition, with less price wars and shared customer bases

  • Shared revenue and capital for reinvestment in tech and logistics to increase efficiency, lower costs, and improve customer experience

Most important for our discussion, however, mergers give brands the leverage they need for negotiating favorable wholesale and drop-ship terms with retail partners. For this reason, they are an important growth tactic that an increasing number of brands are turning to.

More mergers on the horizon

As e-commerce continues to expand further and mega retailers dominate more of the landscape, the various pressures on brands are only going to increase.

We should therefore expect to see many more mergers on the horizon as the entire retail industry shifts towards later stages of the consolidation cycle.

So what’s the endgame?

If other industries such as airlines and hotels are any indication, retail will eventually come to be dominated by a few extremely large brands and retailers.

 

Jeremy Hanks is CEO of Dsco, a provider of drop-shipping services and solutions.