Are Retailers Turning Their Backs on Physical Stores?

Shoppers walking along 5th avenue doing holiday shopping

The Saks Fifth Avenue e-commerce spin-off has been shattering headlines across the fashion industry. Investors of the brand that curated its legendary reputation within upscale department stores were now seeing much greater opportunities within pure e-commerce. Sak’s online arm is now headed for a multi-billion dollar IPO as Marc Metrick (the newly appointed CEO of Saks) applauds the move as “a pivotal beginning of Saks’ next one hundred years as a leading luxury retailer.”

With the peak holiday season on the horizon and e-commerce growth at all-time highs, investors across the industry are now seeing the potential for significant, short-term financial gains as even Macy’s shareholders have also urged the retail giant to follow suit. This begs the question as to whether more brands will look to continue this trend and if so, what impact will this have for the industry as a whole?

Why Would a Brand Engage in a Spin-Off?

Market valuations for e-commerce spin-offs have been outlandishly high. Sak’s online arm is headed for a $6 billion IPO and a potential Macy’s spin-off is projected to be valued at $14 billion which is double their current valuation. This signals just how bullish investors are in the future of e-commerce, especially for the fashion and clothing industries.

Another reason a brand would engage in a spin-off is to relinquish an underperforming retail side of operations. Both Saks and Macy’s would be able to focus on investing in their flourishing e-commerce efforts that have remained safeguarded from the pandemic. Additionally, the fixed costs associated with owning and operating physical stores transition to more efficient technologies and fulfillment investments aligned with serving e-commerce.

The Potential Drawbacks of an E-Commerce Spin-Off

While investor sentiment has been optimistic, analysts are irked by the idea of shattering the omnichannel experience with some going as far as to state the idea as “utter madness.” Separating one entity into two separate entities is not necessarily an easy task and several potential drawbacks could arise from it:

An e-commerce shopper buying clothing through an e-commerce spin-off site
  • Resellers would need to address the likelihood of the brands they sell going D2C with their own e-commerce shops.
  • The in-person customer experience may deteriorate as a result of the lack of investment in physical stores.
  • Reducing physical stores means reducing/eliminating key points of distribution and customer service for issues such as returns which remain frequent in e-commerce
  • Marketing and customer communication may become complicated as shoppers may not view the split entities as their own independent operation.
  • Differentiation against online giants like Amazon will be difficult for non-boutique brands

As we can see, the enormity of this decision is apparent and there are significant pros and cons to weigh for any retailer considering a spin-off.

How The E-Commerce Spin-Off is Likely to Affect the Fashion Industry

WAIR's  personalized sizing solutions in action

With investor money flooding into e-commerce, the online shopping experience is likely to transcend into something much more. Solutions to issues such as personalization, sizing, and customer service will need to be implemented to address the shortcomings of traditional e-commerce. We have already seen certain technologies being implemented to address these issues. Sizing apps and virtual fitting rooms (like WAIR’s Fit Advisor) ensure that shoppers obtain the best-fitting clothing while chatbots are used to guide the shopper through the buyer’s journey if they need assistance.

These spin-offs will also highlight the areas of risk and opportunity within e-commerce for brands that have only used the hybrid business model. For example, boutique brands like Saks will likely benefit from the improved geographical reach that comes with a strong online presence, but may also find that the operational complexities of the spin-off turned out to be a greater problem than anticipated as often the inventory of store-based retail environments operates as a second warehouse for items in short supply on the e-commerce channel.

The Bottom Line

While investors remain resolute in their attempts to coax retailers into spin-offs, analysts and industry figureheads remain unconvinced of the feasibility of such a decision. The fundamental changes required to execute a successful spin-off are substantial which raises the question a to whether a short-term stock boost (among other benefits) is worth the risk. What moves like this will shed light on, however, are the areas of risk and opportunity within e-commerce which may have been difficult for brands to identify before the spin-off took place. As we move into one of the most impactful peak seasons ever for e-commerce, the feasibility and popularity of e-commerce spin-offs will be tested and we will soon see if this trend will solidify itself in the world of fashion.  

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