In Retail Restructurings, It's All About the Brand

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By now, it has become cliché to say that mall anchors and in-line specialty stores are in a state of contraction, that the digital sales channel is cannibalizing revenue that formerly went to the brick-and-mortar channel. “Retail restructuring” has almost become an oxymoron. With rare exceptions, every retailer bankruptcy ends in a liquidation sale transaction or series of transactions. However, the impact of such a liquidation on the value and continued viability of a retailer’s brand can vary widely based on the level of analysis and planning performed before product development and sourcing have been cut off, the going-out-of-business (GOB) signs have been hung in store windows, and the shopping cart on the e-commerce site has been disabled.

Retail brands fall into two principal categories. In the first category are “nameplates,” retailers that primarily sell products bearing third-party labels. In the second are “private-label” retailers; substantially all of the products sold by these merchants bear the retailer’s brand. The brands of department stores and mass merchants such as Macy’s, JCPenney, Target, Sears, and Wal-Mart are nameplates. The brands of specialty retailers such as J. Crew, Eddie Bauer, Restoration Hardware, and Gymboree are private-label.

These private-label retailers are usually vertically integrated, controlling various levels of design, sourcing, logistics, and merchandising. They can be selling from larger box formats or in-line mall formats. Increasingly, the lines between the two categories are becoming blurred as nameplate retailers buy and develop their own private-label merchandise brands.

Different promises are made by retail brands, depending on whether they are nameplates or private labels. Nameplates often promise convenience, value, curated assortments targeted to a specific customer, and/or exclusivity. Private labels may make similar promises, but those promises are often connected to identification with key lifestyle choices and aspirations of their customers.

Brand Promises, Value Propositions

In a retail restructuring, an upfront understanding of the retail brand’s promise is a critical component of any plan to preserve brand value. It is incumbent on restructuring advisors to ask, “What is the value proposition underlying the customer’s decision to shop this brand?” A properly managed retailer restructuring remains focused on the goal of protecting brand value. Put another way, one should focus on strategies that will minimize the harm to the retailer’s brand throughout the course of the restructuring. 

Every retail brand is by definition unique. Nevertheless, common themes underlie the promises they make and how they are understood by the market. For example, some brands purport to be lifestyle brands. These are brands that offer solutions for multiple aspects of a customer’s life. From what their customers wear to how they decorate their homes and care for their pets, a lifestyle brand has the answers. Retail brands that fit this description can often be transitioned from the retail channel to licensing platforms that look to leverage the brand’s appeal across many categories into license agreements.

Other retail brands promise value and convenience. Many retail nameplates promote these messages. Private-label retail brands can as well. Customer loyalty to the brand becomes a key component of its underlying value. It is critically important that during a restructuring these retailers maintain key touchpoints of engagement with their customers and preserve customer data. Retail brands that fit this description are often valuable to competitors and suppliers who, without the retailer, are at risk of losing a key conduit to their ultimate customers.

Another category of retail brand that has made the restructuring news includes brands that promise to provide leading edge fashion and design. These brands are built around a specific aesthetic, style, or heritage. Customers view these brands as reflections of their own good taste and judgment. The restructuring process can create serious risks for brands whose customers expect content that is regularly updated. Maintaining continuity with the brand’s DNA and the message to the retailer’s customers during the course of a restructuring transaction is challenging. These brands may be valuable to existing distribution platforms looking to expand their reach into new categories and customer demographics.

Expanding Channels of Distribution

When retail brand value is protected during a restructuring, multiple distribution channels are available for the retailer’s brand. Despite the contraction in mall-related square footage, retail is far from dead. Consumers still prefer to visit stores to make consumer product purchases. Stores exist in multiple formats outside the traditional mall. Lifestyle centers, outlet malls, airport malls, and other shopping destinations continue to draw traffic.

E-commerce continues to grow as well. Multiple options exist to leverage retail brand loyalty in the e-commerce channel. With the growth of e-commerce giants, such as Amazon.com, Wal-Mart’s Jet.com,
eBay.com, Rakuten.com, etc., opportunities exist for retail brands with strong customer loyalty to carve out a niche on a larger marketing and distribution platform. Increasingly, the e-commerce channel is coupled with a mobile-enabled outlet as well.

Retail brands may also live on as licensed brands. These brands may be licensed in direct-to-retail license arrangements or allocated among multiple categories to manufacturers and wholesalers. U.S.-based retail brands also lend themselves to foreign licensing arrangements in which local or regional operators adopt the brand as a means to quickly and efficiently communicate with their customers.

Retail brands are also being deployed in increasingly creative formats designed to maximize brand awareness while minimizing capital expenditures. Variations on the theme include pop-up or temporary stores designed to capitalize on seasonal traffic and stores-within-a-store, which are designed to increase real estate productivity.

In many cases, what is old is new again. Catalog marketing continues but often with a focus on increasing brand awareness and driving traffic toward stores or e-commerce. Subscription models have been launched that harken back to the days of “8 albums for a penny,” except that the emphasis is on providing the customer a curated selection of products they will want to keep, not return. Retail brands with established affinity and loyalty can be purposed to these concepts when brand resources are preserved in a restructuring.

Liquidation Is not a Dirty Word

The repurposing of a retail brand is often accompanied by a “liquidation” transaction. To restructure, a retailer will often need to close a material number of stores and liquidate the inventory in those stores through a store closing or GOB sale. That said, if this liquidation is managed with an eye on preserving brand value, it need not foreclose the opportunity to restructure.

Several recent examples illustrate how a retail brand can be preserved and restructured in a liquidation transaction. In the apparel category, Coldwater Creek and, in the past month, The Limited have been transitioned into catalog and e-commerce retailers leveraging the Talbots sourcing and distribution platform. Aéropostale was acquired by a joint venture comprised of brand licensing companies and large mall developers and promptly split into two companies: one that owns and licenses the brand (IPCo), and another that operates the sourcing and retail distribution business (OpCo).

In consumer electronics, Sharper Image was transitioned into a product licensing brand coupled with an e-commerce distribution platform. RadioShack closed thousands of stores and terminated hundreds of dealer relationships to emerge as a co-branded outlet for the distribution of cellular plans and mobility products, with licensed operators using the RadioShack brand in Mexico, South America, Asia, and the Middle East. Last month, Direct Buy, a home furnishings retailer and buying club, was acquired by a loyalty marketing and e-commerce platform with the goal of shifting it into an e-commerce and store-within-a-store concept.

Each of these restructuring transactions followed a liquidation and a sale of assets to new operators that valued the relationship between the retail brand and its customers. These new operators are looking to leverage consumers’ affinity for the brand and its brand promise to sell their products through new channels. Whether nameplates or product brands, these retail brands will live on, generating increased and additional value for their new owners. 

David Peress

David Peress

Hilco Streambank

David Peress is executive vice president of Hilco Streambank, a specialist in the monetization and valuation of intangible assets, including trademarks, patents, and domain names. He has 20 years of experience in the corporate restructuring and distressed investing industry as both an advisor and investment professional and has structured and managed debt and equity investments in many retailers and consumer products companies. Peress has led sell-side engagements for such brands as Borders, RadioShack, Berkline, Linens ‘N Things, Brinkmann, A&P, Garden.org, and Sports Authority.

Topics: 
Retail
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