Are Brands Turning Their Backs on Brick-and-Mortar Stores?

The Saks Fifth Avenue eCommerce spin-off has been shattering headlines across the apparel industry. Investors of the brand that curated its legendary reputation within upscale department stores are now seeing much greater opportunities in pure eCommerce. 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.”

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With the peak shopping season on the horizon and eCommerce growth at all-time highs, investors across the apparel industry are now seeing the potential for significant, short-term financial gains through spin-offs. This begs the question as to whether more brands will look to continue this trend, and if so, what impact will this have on the industry as a whole?

Why Would a Brand Engage in a Spin-Off?

Market valuations for eCommerce 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 eCommerce, especially for the fashion and apparel industries.

Another reason why a brand would engage in a spin-off is to relinquish an underperforming, brick-and-mortar side of operations. Brands would be able to focus their strategic efforts on their flourishing eCommerce sites that have remained safeguarded from pandemic shutdowns. Additionally, the fixed costs associated with owning and operating brick-and-mortar stores would be nonexistent, meaning more investment into efficient technologies aligned with serving eCommerce shoppers and enhancing the brand experience.

The Potential Drawbacks of an eCommerce Spin-Off

While investor sentiment around spin-offs has been optimistic, several market analysts have voiced their concerns about the idea of shattering the omnichannel experience. To their credit, separating one entity into two separate entities is not necessarily an easy task, and several potential drawbacks could arise from it:

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Resellers would need to address the likelihood of the brands they sell going D2C with their own eCommerce shops.

The brick-and-mortar brand experience may deteriorate as a result of the lack of investment in physical stores.

Reducing brick-and-mortar storefronts means eliminating key points of distribution and customer service for issues such as returns which remain a frequent problem for eCommerce. 

Marketing and shopper communication may become complicated as shoppers may not view the split entities as their own independent operations.

Differentiation against online giants like Amazon will be difficult for non-boutique brands.

How eCommerce Spin-Offs are Likely to Affect the Apparel Industry

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

eCommerce spin-offs will also highlight the areas of risk and opportunity 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 they may find that the operational complexities of the spin-off turned out to be a greater problem than anticipated, as often, the inventory of brick-and-mortar storefronts operates as a second warehouse for items in short supply on the eCommerce channel.

The Bottom Line

While investors remain resolute in their attempts to coax apparel brands 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 as to whether a short-term stock boost (among other benefits) is worth the risk.

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What moves like this will shed light on, however, are the areas of risk and opportunity within eCommerce, 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 eCommerce, the feasibility and popularity of the eCommerce spin-off will be tested, and we will soon see if this trend will solidify itself in the world of apparel eCommerce. 

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