Denim-centric companies have gone on a bit of a shopping spree over the past month. Levi Strauss & Co. made its grand entrance into the activewear category by acquiring Beyond Yoga, while American Eagle Outfitters nabbed logistics-minded AirTerra and Drapr, a virtual try-on e-commerce startup, is now part of Gap Inc.
This trio of deals illustrates that capital-flush brands are more than willing to bring aboard critical categories and capabilities.
In the case of all three retailers, each has abundant cash on hand to fund its purchase. As of their second quarter earnings reported last month, Gap Inc. $2.4 billion in cash and cash equivalents, while AEO had $774 million in the bank. And when Levi Strauss & Co. reported in July, the denim brand was sitting pretty with $1.2 billion in firepower.
All are operating from a position of strength, since they not only have considerable cash on hand but can take advantage of the uptick in consumer spending this year relative to a covid-crimped 2020.
Although little by way of numbers has been disclosed for these denim deals, they likely were a drop in the bucket in the grand scheme of things, especially if each player can generate significant ROI in the short term and recoup its outlay several times over.
“These types of acquisitions are usually because the price was very affordable,” said Sucharita Kodali, vice president and principal analyst at Forrester Research. “Retailers are notoriously frugal and slow. These deals wouldn’t have happened otherwise. The benefit is that you acquire talent and some IP very inexpensively.”
Levi’s pounces on hot markets
Levi Strauss, already a household name, is expanding into new territory The denim icon wants to raise its growing women’s category from approximately one-third to more than half of total sales. Given that the global activewear market topped $200 billion in 2020, according to Euromonitor International, and saw major growth during the Covid-19 pandemic, acquiring Beyond Yoga could offer a quick way for Levi’s to capitalize on that goal, as opposed to dedicating new resources and employees to building a new category from scratch.
“I have noticed that if a brand rushes to get into a market they know nothing about, they can easily get it wrong if they build their own without the right skillsets and product experts in place,” said Liza Amlani, principal and founder, Retail Strategy Group. “A denim brand is an expert in denim, not in performance and athletic apparel or footwear. They can easily miss the mark and the customer will notice. Customers have access to more information than ever before and can easily spot if a brand is inauthentic.”
That’s not to say building isn’t a viable alternative—Target generated $1 billion through its private label All In Motion activewear brand only a year after initially launching. Although the brand benefitted from the tailwinds of pandemic-driven shopping habits, Target’s savvy team capitalized on other burgeoning trends such as size inclusivity and sustainable sourcing.
When retailers want tech, they want the talent
Of course, not all acquisitions are created alike. The Beyond Yoga deal, and Levi’s capitalization on a hot category, holds a much different purpose than the technology plays from AEO and Gap, both of which have sought to reinvent themselves with smaller, more agile physical operations.
“Acquiring a consumer facing brand is about the full package—their products, the shopper list, the supply chain etc.,” Kodali said. “For tech acquisitions, it’s IP and talent.”
For now, AEO says AirTerra will operate independently while supporting the supply chains of American Eagle and its additional retail clients. The firm augments the clothing company’s ongoing supply chain transformation efforts, underscoring its willingness to both build and buy. As of June, the retailer reported fulfilling purchases with fewer shipments per order, and delivered to consumers 1.5 days faster than the first quarter of 2019. And despite recent supply chain disruptions, AEO has sped up its domestic supply chain by almost 1.5 weeks versus last year.
“[Airterra is] really a relatively small purchase that has huge potential for us. It’s a company that’s focused on middle mile,” Michael Rempell, AEO executive vice president and chief operating officer, said on a second-quarter earnings call. “And it’s really focused on bringing economies of scale and the benefits of speed and costing and diversity to shippers of all sizes. Previously, these benefits were only available to the largest shippers, to the Amazons or Targets or Walmarts.”
Rempell said the acquisition “completely fits” with AEO’s strategy of leveraging scale and innovation to help manage costs and improve service, indicating the company believes bringing in a separate logistics provider will enhance the bottom line.
American Eagle may not be finished adding new companies to its logistics ecosystem, according to CEO Jay Schottenstein. He confirmed in the call that more acquisitions could lie ahead, probably in the “next couple of months.”
And while Gap Inc.’s Drapr acquisition looks like a customer-facing buy at first glance, the deal was only mentioned once in passing during the specialty retailer’s second-quarter earnings call, with CEO Sonia Syngal saying the investment was made for “minimizing returns.” Drapr says its fit technology, which enables customers to create 3D avatars and virtually try on clothing, helps brands achieve a 26 percent returns reduction on average by getting more shoppers in the right size on the first try.
Apparel has yet to crack the code on returns, and the pandemic drove hordes of new shoppers to the web, further exacerbating the industry’s biggest pain point. Given the volume of third-party service providers like Returnly, Narvar and Happy Returns that emerged to attack this problem, it appears that going the external route through acquisitions or partnerships might continue to be the standard for the near term.
When building in-house, top retailers prioritize data-driven employees
Although Amlani said that brands have awakened to the need to do more outside their own capabilities and category skillsets, she noted that the acquisition path has its own drawbacks when it comes to fitting talent together.
“The route could lead to the ‘leaning out’ of teams, which could cause a lot of friction in the business, impacting [the] team’s morale, product creation and end-to-end processes,” Amlani said.
For the apparel retailers that are looking to build a brand in house or further invest in their own supply chains and technologies across channels, they would be best to follow the leaders, who are focusing on hiring data-driven professionals.
Top fashion companies hired 40.3 percent more data-related employees than in 2020, according to a recent report from algorithmic merchandising firm Nextail. These include positions with titles in artificial intelligence, data science and machine learning.
Levi Strauss & Co. is the most “retail data-forward” of the 22 leading fashion companies researched, meaning that it has the highest number of data-related workers divided by total revenue. This also shows that while Levi made a big splash with its Beyond Yoga scoop, it also fosters its own talent for the modern retail environment.
Today’s market is acquisition-friendly
Current market conditions have altered the approach to this “buy vs. build” quandary, similar to how the pandemic forced retailers to adopt drastic changes they would have been slow to make before 2020, including contactless BOPIS and curbside pickup. Now, cash-flush companies could be looking to gain a strategic advantage by buying their way ahead of the competition,
“E-commerce is more important than ever so there is an openness to taking meetings with smart startup founders who may have something you don’t,” Kodali said. “For every acquisition that happens, there are 1,000 meetings that end in nothing.”