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What if HBC buys Neiman Marcus?

By Kristopher Fraser

Mar 29, 2017

Management

Hudson's Bay Co., the parent company of Lord & Taylor and Saks Fifth Avenue, is currently in talks to buy Neiman Marcus from its private equity owners. This would put two long-time direct competitors (Saks and Neiman's) in their portfolio, in addition to luxury department store Bergdorf Goodman and e-commerce site Mytheresa.com. HBC also has Gilt Groupe, the flash sales site for designer merchandise, in their portfolio.

The company also made a recent attempt to buy Macy's, which would have brought Bloomingdale's into their portfolio too.

So, what's their deal? It appears that their endgame is to bring every luxury department store under their umbrella.

Currently, they are keeping mum on the subject. When asked about the potential Neiman Marcus acquisition, a spokesperson for the company stated, "As a matter of company policy, we do not comment on rumors or market speculation. Generally speaking, as we have previously stated, we selectively evaluate opportunities to accelerate the company’s strategic growth while maintaining or enhancing its credit profile."

Had the Macy's acquisition gone through proceeded by a Neiman Marcus acquisition, that would have put the majority of America's major luxury department stores under HBC's umbrella, barring Nordstorm and several other retailers.

However, it is no secret that American department stores are having a tough time right now. They continue to offer consumers promotions with only a small portion sold at full price, which isn't good for gross profit margins. They are also losing ground to off-price retailers like TJ Maxx, Ross and Burlington Coat Factory, who continue to do well with little to no promotions.

"I believe that HBC buying Neiman Marcus would only hasten the death of the department store as we know it," said Michael Londrigan, vice president for academic affairs at LIM College in New York City. "Department stores are already struggling to attract the millennial customer and by having one owner I am not sure how they would change that direction. Aside from their private label programs department stores have been something akin to consignment shops with designers and major brands having to guarantee margins and if the goods don’t sell they go back at the end of the season."

One supposed theory is that it might make the department store supply chain function better, meaning that they would or could be more responsive to the consumer by shortening the lead time from design to consumer.

A negative factor that HBC buying Neiman Marcus could have is the loss of jobs, because if HBC controlled everything from their head office in Canada, that would mean the loss of jobs here in the U.S., primarily for those at Neiman Marcus' corporate offices.

Neiman's has also always had a unique customer base, so it would be interesting to see if HBC allowed them to function as a standalone unit.

HBC's potential acquisition of Neiman Marcus has many implications

By having Lord & Taylor, Saks Fifth Avenue, and Neiman Marcus all consolidated under one roof it could also spell trouble for competitors like Nordstrom and Dillard's. HBC's portfolio of stores would have more economies of scale in buying private label goods that they count on for margin, and they could also dictate which designers and brands they carry to the exclusion of the other department stores.

Although HBC might have a formula for acquisition, they have one looming problem above all else: declining foot traffic.

Shawn Carter, a professor of business management at the Fashion Institute of Technology, sees that as the company's biggest problem in trying to position themselves as a powerful North American retail player.

"Millennials are not shopping in malls and department stores," Carter said. "They are shopping at fast-fashion retailers like Zara and H&M. Department stores are looked at as where their mothers and grandmothers used to shop. If HBC takes over Neiman Marcus, their challenge is going to be finding out how get customers back into brick-and-mortar department stores, which no one has figured out how to do yet."

The rise of e-tailers, such as Amazon, Net-a-Porter and Alibaba, which have no physical stores, are also taking away market share from brick-and-mortar.

Carter does see one ray of hope for these department stores: mobile commerce. "Young people are not browsing six levels of department stores. If you don't have an app where they can download and shop, you can forget it," she said.

It's no secret that more shoppers are turning to online and e-commerce. Even baby boomers, who were once the core department store shoppers, have shifted more towards shopping online. BI Intelligence found that one in four people age 55 and older shop on smartphones and tablets.

The other problem with department stores is they run on delayed gratification. While designers were slowly warming up to a see-now-buy-now model for Fashion Week, the retailers just were not catching up because it did not align with their buying and shipment schedules. Hence the reason Tom Ford ended his see-now-buy-now experiment after one season. The younger generation is invested in right now and don't want to wait.

The next problem with HBC acquiring Neiman Marcus is the 5 billion dollars of their debt they will have to take on. While absorbing 41 more stores will be great for their portfolio, when the new strategy is e-commerce, adding brick-and-mortar stores doesn't help you compete against a corporation like Amazon.

Commerce is also currently entering a cyberwar with everyone trying to take their piece of the market. Everyone is trying to use the internet to sell something.

If HBC buys Neiman Marcus they have to figure out two things: first, how do you maintain market dominance to carry these luxury brands in a digital world, and second, how to master the e-commerce arena when department stores have been the masters of brick-and-mortar for decades. The solution, unfortunately, is not elementary.

photo1: via Neiman Marcus Facebook
photo 2: via Hbcheritage.ca
photo 3: via Saks Fifth Avenue Facebook
HBC
Neiman Marcus