Should Department Stores Follow Saks’ Lead and Spin Off Their Digital Businesses?

As a protracted global health crisis rages on, unemployment stays unrelentingly high and consumer spending remains sporadic (at best), if ever there were a time for retailers to throw spaghetti at the wall to see what sticks, this might be it.

For department stores, in particular, the years that preceded the coronavirus pandemic were already marred by challenges stemming from digital disruption and a growing shift among consumers toward experiential buys. Now, as retail juggernauts like Hudson’s Bay Co. (parent to Saks Fifth Avenue and its namesake banner) chart the path forward, they’re reportedly mulling some unique strategies to make their businesses more viable.

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Last week, a report by WWD indicated that HBC has been meeting with investors to spin off its business — which is supposedly seeing greater success as the pandemic keeps people inside and away from physical stores — into a public company “sometime in the future.”

The transaction — which would reportedly precipitate a IPO in the next 12 months — would create a freestanding Saks Fifth Avenue brick-and-mortar chain of stores and a freestanding company.

Saks Fifth Avenue declined to comment for this story, and with the absence of the true puts and takes of the potential move, it’s difficult to forecast with certainty whether such a transaction could create a new blueprint for struggling department stores seeking to leverage the strength of their digital channels.

The WWD report indicates that the Saks transaction would involve an exclusive agreement that would help both entities “mimic an omnichannel world.” Nevertheless, a deal that splits the two main channels of a retailer into separate companies seems to, on its face, run counter to the “omnichannel” approach most retailers have been aiming for in recent years.

For much of retail, though, digital has proven to be a saving grace since the pandemic took hold in the U.S., as government mandates and personal apprehensions sent shoppers online in droves. (Nordstrom, for example, said in November that the pandemic turned it into a “majority-digital” business.)

For companies feeling pressure to prove value to their shareholders amid precarious times, spinning off a more-successful counterpart to underscore its strength may make sense.

“I think this is really about driving shareholder value, and I suspect that the economics of [Saks’] online business are different and much more positive than that of a brick-and-mortar storefront,” explained Kim DeCarlis, member of Forbes’ business councils and CMO of PerimeterX, a provider of application security programs. “I suspect that is what’s driving [a potential decision to separate the businesses] — that you’re going to get better economics for your online business than for your brick-and mortar-business.”

Before HBC went private last year, its final earnings report as a public company showed Saks’ third-quarter sales at $CAD799 million, or $629 million at current exchange, with revenues at Saks Off Fifth at $CAD327 million (or $258 million). The company at the time had 42 mainline stores and 115 Saks Off Fifth locations.

Jason Junge, CEO of PointerTop, a platform that converts websites into sales channels, said that he understands why some traditional retailers may yield to shareholder pressures to spin off their dot-com businesses since the channel tends to have “slightly” better margins. However, Junge added, overall, separating physical retail businesses from their digital counterparts could create more problems than it solves.

“It doesn’t make sense to me to do this because one of the key differentiators for retail is customer service,” he explained. “If you separate out your brick-and-mortar from your online completely, then you’re basically creating two different corporations, two different cultures, and eventually two different types of customer service.

That scenario, said Junge, is a recipe for customer confusion and eventually even a degradation of brand value — even if, internally, it may help to clean up some business processes.

It loses sight of the customer when you separate out businesses because of processes rather than what your end deliverable is or what your value is to the customer,” he added.

Nevertheless, as the pandemic rages on — and the vaccine rollout proves to be uneven thus far— DeCarlis said it’s probably wise for retailers to consider a full range of viable options when it comes to fortifying their businesses. (For instance, just today a report indicated that Bloomingdale’s is dabbling in smaller concept stores in a bid to forge ahead with expansion while sidestepping some of the risks associated with full-line department stores.)

“Right now, as we drive to continue on amidst the ongoing pandemic, looking at some of these strategies make sense” DeCarlis explained. “Ultimately, we’re going to return at some point to blended models [with a mix of digital and physical]. And businesses that can traverse that whole online and physical world are going to be the ones that win.”

She added, “Even as some businesses look to separate brick-and-mortar and digital, some sort of handshake and partnership is still going to be required between both [entities].”

In short, both Junge and DeCarlis indicated that the separation of digital and physical channels might only be successful if the customer doesn’t know it happened.

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