Last week’s announcement that Michael Kors would buy luxury shoe and accessories brand Jimmy Choo comes on the heels (heh, heh) of Coach’s $2.4 billion deal to acquire Kate Spade. While this particular move is not in and of itself a catalyst for more merger & acquisition activity, there is a growing sense that various forces are converging to drive an acceleration in retail industry consolidation.
The biggest driver is the harsh reality that organic growth is getting harder and harder to come by. Most sectors of the luxury market have stalled and retailers across a spectrum of formats and price points are being confronted with the need to downsize their physical store footprints amidst retail overcapacity and a fundamental shift in consumer spending behavior. Many companies–and Coach and Kors are good examples of this–have hit a wall in how far their core brands can be stretched and expanded. Strategic acquisitions offer the potential to address different price points and/or reach new demographics that are not easily accessible by their primary banners. In Kors case, it looks like the Jimmy Choo deal will not be their last.
Another driver is the underlying dynamics of operating in today’s ever shifting, fast changing retail world. The power is shifting way from brands toward the consumer, away from retailers toward product brand owners, away from physical toward e-commerce and away from traditional mass market ways of reaching consumers toward all things digital. For many brands, a fundamental reinvention of their model is required and that necessitates new skills, increased scale, more speed and greater agility.
Accordingly, some recent transactions have been motivated by a desire for the acquiring brand to inject new talent and ideas into a moribund culture. Others are driven by a classic “make vs. buy” decisions or spurred by more opportunistic situations where a struggling player runs into the arms of a cash rich suitor. Walmart’s recent activity seems to be a little bit of all the above.
The aborted discussions between HBC and Neiman Marcus might be more illustrative of what the future holds. More and more, I expect to see traditional players come to the realization that their sector must be consolidated and rationalized as top line growth opportunities evaporate and it becomes clear that meaningful earnings growth can only come from taking out capacity, mitigating competitive intensity and better leveraging scale and scope. In some cases these transactions will come together through proactive, forward thinking leadership. Others will be triggered by the opportunity to acquire assets at fire sale prices when a competitor is struggling or files for bankruptcy.
Either way, with the ripple effects of disruption only growing stronger, the pace of activity is likely to quicken considerably. And it just may turn out that store closings are not the only big retail story this year.
A version of this story recently appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.