In the name of strategy diversification, more apparel wholesalers are snapping up digitally-native brands in an effort to tap into consumers’ digital behavior.
And although the move comes with its own set of challenges, companies able to manage a successful acquisition stand to unlock a host of new opportunities and advantages.
“While some digital natives are moving to omnichannel independently, others are partnering or selling to wholesalers or retailers to immediately benefit from a larger platform,” said Eric Fisch, head of retail and apparel commercial banking at HSBC.
As a historical supporter of both retail and wholesale company growth, this trend is something HSBC has seen grow throughout the apparel market, including with some of its own clients. The retail sector is a focus for the company’s corporate bank, and its wide universe of clients enables it to make introductions between potential acquirers and targets in the U.S. and globally.
While perhaps more common in the beauty sector, wholesale and direct-to-consumer (DTC) marriages include Steve Madden’s purchase of Greats, Wacoal’s purchase of DTC lingerie brand Lively, and PVH’s acquisition of intimates e-tailer True&Co. Retailers have also joined the trend—see Walmart’s purchase of Bonobos and Modcloth, and Neiman Marcus’ purchase of MyTheresa.
For the wholesalers, these digitally native brands offer an opportunity to benefit from cost synergies, while retaining and growing a younger—and often very loyal—customer base. “Although the digital native benefits on the expense side, the wholesaler often also acquires a workforce with better social media knowledge and strategies,” Fisch said.
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The challenges surrounding these types of deals are varied, not the least of which include the standard risks associated with integrations, such as talent retention. Company cultures for digital natives can be vastly different than those found at traditional wholesalers, according to Fisch, and retaining the groundwork that made the brand valuable is imperative for a successful acquisition.
What’s more, some wholesalers may mistakenly enter these agreements with rose-colored glasses, envious of the gross margins DTC companies can bring. But, as Fisch warned, these margins don’t reflect the rising marketing and social media costs incurred, nor do they account for the increase wholesalers should expect in shipping and returns.
And while consumers may find their beloved digital brands attractive at the existing prices, the tide can quickly change when prices go up—as is often the case when wholesalers need them to generate sustained profitability. What’s more, consumer perception of a brand might not be quite as favorable once it falls under a new parent.
“I very often hear digital native companies tell me that they can become profitable if they just reduced marketing expenses and allowed the customer base to grow organically through word of mouth and repeat customers. I have not seen this proven out,” Fisch said. “In most cases, when marketing expense reduces, so does revenue. Consumers are bombarded with so many advertisers and move on to other brands if you are not top of mind.”
To combat the rising acquisition costs incurred through social media advertising, wholesalers collecting these digital darlings would be wise to diversify the marketing strategies for their new brands, including exploring more offline methods like direct mail, brand collaborations and retail pop-ins.
“Wholesalers considering purchasing digital native brands must have a clear and realistic plan to make the target company profitable and accretive to the parent company,” Fisch said. “An open mind for business strategies and practices is also required, especially around marketing.”
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