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Are More Specialty Retail Acquisitions on the Way?

When it’s deliver-or-die, supply chains become the lifeblood of a company. To that end, the fashion industry has embraced technology to navigate today’s hyper-complicated supply chain, with myriad solutions shaping the first, middle and last mile. Call it Sourcing 2.0.

Last week Ascena Retail Group—owner of Lane Bryant, Cacique, Justice, Maurices and other specialty apparel brands—announced it would acquire Ann Inc., whose Ann Taylor and LOFT brands have lately struggled to regain their position in the women’s specialty apparel market.

The resulting company is expected to have sales of over $7.5 billion. The announcement apparently pleased Wall Street, since stock prices of both companies rose in the week ending May 22.

Will we see more big acquisitions in the specialty retail apparel space? Hana Ben-Shabat, a partner in the retail practice at global strategy and management consulting firm A.T. Kearney, told Sourcing Journal, “Considering how fragmented the industry is, it’s not surprising that this is happening, and I think we’ll see more of it.”

Many of the specialty retail companies in the U.S., like Francesca’s Closet, Bebe, Christopher & Banks and NY & Co., are operating single-brand businesses with fewer than 600 stores and less than a billion in sales. Some have significant infrastructures with overhead including a suite of C-level executives making multimillion-dollar compensation packages. Now many are facing the need to invest not only in the traditional capital expenditures like new store openings, store relocations and remodels to keep up with changing consumer tastes and needs, but also technology and supply chain initiatives that will make them competitive omnichannel retailers.

“No one can survive today without e-commerce, which requires a major investment in technology infrastructure. Combining several brands together to share this expense gives much better synergies,” Ben-Shabat said.

When you think about it, then, it’s a no-brainer: consolidation will be the only way specialty retailers can succeed in today’s hypercompetitive marketplace.

When asked which segments were most likely to consolidate, Ben-Shabat responded unequivocally, “I actually think it’s more likely in the womenswear area, where there are many more brands.”

On whether the consolidation would occur more in public or private companies, she said, “I think it’s going to be both. Some public companies find it an attractive option to go into private hands, because it allows them to do the things that aren’t going to look good on their short-term finances. We saw that with J. Crew, who got taken private by TPG, and in the U.K., when New Look was taken over by Apax, a private equity firm. Even a public company that’s doing very well has a huge opportunity to improve value by making some investments that would make their short-term financials look less attractive.”

But Ben-Shabat feels that every brand added to a retailer’s portfolio has the potential for synergies, whether they be back-office synergies, overhead, investment in IT, supply chain or purchasing raw materials. “By consolidating, a company is at a better scale, better able to get lower prices from suppliers due to improved negotiating leverage. So bringing together more than one brand under one umbrella makes a lot of sense.”

Which retailers will be the next to consolidate? Although no announcements have been made since the Ascena report, there are many retailers no doubt open to possibilities. Specialty store brands like Bebe, J. Jill, Express, New York & Co., Francesca’s Closet, Charlotte Russe, Lands’ End and others, many of whom have found sales and earnings growth elusive over the past few years, may be attractive candidates.

Although this will present challenges to fabric suppliers, factories and other members of the apparel supply chain, Ben-Shabat feels in the long run, “These will be healthy moves for the industry to make companies stronger.”

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