Do department stores need to spin off e-commerce from physical stores?

It is always dangerous to go against the investor’s intentions. Failure to do so can undermine investors’ confidence in the company and cut off significant funding, but it can also be the difference between growth and stagnation.

Macy’s (NYSE: M) I’m gambling. Evergreen department store, which has been in business for over a century and a half last week Election Nevertheless, do not separate your e-commerce business from your core physical store business pressure From one of its new stakeholders Jana Partner..

Macy’s decision is in stark contrast to other department stores. Saks Fifth AvenueWhich Separation In last year’s in-store e-commerce business, we split our omni-channel strategy into online-only Saks and in-store brand SFA at the request of the parent company. Hudson’s Bay Company..

Insight PartnerVenture capital company acquires $ 500 million stake in new digital brand, Report It suggests a potential IPO that could value an e-commerce spin-off at $ 6 billion.

Coles (NYSE: KSS) Is yet another department store facing the same pressure from investors and has new stakeholder engine capital Encourage the company Follow in the footsteps of Saks Fifth Avenue. But should Kohl’s and other department stores go that way, or should they follow the path of Macy’s?

Why split?

For many companies, e-commerce was a revelation as a growth driver in the era of pandemics and quick commerce. So why disband the good things?According to David Latona, CEO of supply chain services company Tompkins SolutionIt’s all about money.

“I think they’re trying to separate the two in order for retail retailers to show higher profits on their e-commerce sites without dragging the percentage of EBITDA overall. [earnings before interest, taxes, depreciation and amortization] Latona told Modern Shipper. “I don’t see any real benefits. There are a lot of additional costs and inventory management issues. But there are no other benefits.”

For Saks, the value is clear. Mark Metrick, former CEO and President of Saks Fifth Avenue Business and now CEO of the Saks E-Commerce brand, Told the Associated Press Digital-only companies can “grow much faster” because they put their private digital assets (which generate about $ 1 billion in revenue annually) into the open market.

In the case of Macy’s, investors have the company’s e-commerce business. important At around $ 8.5 billion, it could be worth up to $ 14 billion as a standalone business.Similarly, Coles, that Overall evaluation Is about $ 7.3 billion, and investors say that the e-commerce brand could be worth about $ 12.4 billion on its own.

The cost of doing business

From Latona’s point of view, separating the e-commerce business from the physical store business would cancel the many years of work spent integrating the two.

“Everyone has worked very hard to homogenize the distribution platform to cover not only e-commerce but also physical stores. From a software perspective, a hardware or logistics perspective, everyone. We were trying to sew them together and we didn’t have much trouble balancing the needs and inventories of our customers across the country, “he explained. “Therefore, there are two separate operations because the costs associated with their separation are either separate platforms or physically separated within the distribution center.”

That doesn’t mean that everything is going well in the physical store.E-commerce sales in the second quarter of 2020, the first quarter affected by the pandemic About 16% Total retail sales in the US increased from about 11% in the previous quarter, indicating a weakening focus on physical stores.

“Physical stores are usually in a down cycle, with more overhead and debt. There are many aspects of it, from a human resource perspective to a property management perspective,” Ratna admitted. rice field.

But many department stores, Macy’s When Coles We have found a new way to get the most out of their physical store location, which is included. Because many people have additional storage, transportation, and sorting functions in their physical stores. Microfillment or distribution hub..

“You have distributed inventory across the country and in each of these stores, so if someone in Los Angeles wants a particular item at a retail store and you can’t get it, a local store You can go to to get the item and ship it directly from the store to the individual. It comes from a fulfillment center or distribution center. “

If you split your e-commerce business from physical stores, companies like Saks will not be able to process online orders using physical stores like brands like Macy’s. And that’s not the only way department stores can lose a better customer experience.

“As e-commerce has grown, many of these physical stores for large retailers have become logistics and return centers,” Latona said. “And the idea is that anything you buy online can be taken back to the store and easily returned.”

The Transformation of a physical store We’ve made it possible for brands to meet customers wherever they are and to offer products to New York customers at stores in Los Angeles. Not only that, but there is an additional benefit for retailers that customers can return merchandise anywhere and create another channel for sale.

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Hudson’s Bay, owner of Saks and SFA, states that its physical stores and e-commerce brands will continue to work together to create a “seamless customer experience.” However, the behind-the-scenes experience is not very seamless and requires managing two separate supply chains, two distribution networks, and two inventory pools.

Still, it’s not difficult to understand why separating the two businesses is attractive to investors. In recent years, large stores have closed to the left and right. This includes Macy’s. reduce At the location of your own number of department stores.

However, the idea that a physical store is dead is a myth. While many large stores are being closed, physical stores are beginning to take on new forms, replacing boutiques and other small locations with traditional anchor stores in malls and retail stores.

The new wave of stores is more than enough to offset the outflow of large locations. in fact, According to ForbesIn-store sales growth actually outpaced 2021 e-commerce sales growth. For national retailers like Macy’s and Coles, the benefits of having as many physical locations as possible are undeniable.

“There are demographics and positively deployed inventories where the population already lives,” Latona explained. “This is the biggest advantage of maintaining a physical footprint and is also the reverse logistics of return processing.”

It’s not yet clear if splitting the e-commerce business from physical stores can bring long-term benefits to the enterprise, but a Lithomas test could be done soon. With Saks aiming for an IPO in the first half of 2022, the finances of the new brand could be a bell for other retailers adopting similar strategies. But if the result is lukewarm, the company may have just canceled years of work to replace the pocket.

“Everyone has been trying for a long time to put it all together,” Ratna emphasized. “I can’t imagine they trying to pull it apart, except for financial gain.”

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