A survival strategy for British retailers
American shops are splitting off their web divisions – that could release value for British retailers too, says Matthew Lynn.
For the last 20 years just about every major retail chain has had a web presence of some sort. They have met with varying degrees of success. Some are full-scale e-commerce sites that have their own customers, brand and presence. Others are click-and-collect options for customers who don’t want to spend time browsing in the actual shop. Others are more like extended advertisements: you can see what the shop has to offer before heading off to a branch.
Now a few are starting to see those websites as separate units. US department store Saks started the trend in March this year when it announced that it planned to separate out its department stores and its web unit. In the spring Saks online was expected to be worth about $2bn. That has already tripled to closer to $6bn and it might be even more by the time the unit is floated early next year. Rival Macy’s is now expected to follow with a break-up of its own that could double the value of the business to $14bn. Over in the Netherlands, Ahold has decided to break out its Bol unit, again with a big potential uplift in value for shareholders. Many others might well decide to follow suit.
It is not hard to see what major retailers are up to. There are three big advantages to a break-up. First, it means that fast-growing web units can grow more rapidly, without being weighed down by a struggling chain of physical shops, and will therefore be more highly rated by the market. A retailer’s online business is often largely hidden, but if it was broken out it would suddenly have a lot more visibility to investors. Second, it means that management will have the autonomy to really grow the business. Internally, senior executives would probably prefer it if the online business simply sent customers to the nearest shopping centre for some proper shopping rather than serving them electronically. Freed from parent firms, web units can focus fully on growing the online business.
Finally, it means the brands, and indeed the firms, can survive in a changing market. We will see how it plays out, but it is possible Saks or Macy’s will survive as web businesses long after the physical shops have finally closed down. That is a lot better than waiting for the whole thing to collapse, which is what happened to British chains such as Top Shop – indeed, if Top Shop had spun out its web unit five years ago it would probably still be around as an independent brand.
Be brave and initiate divorce
The logic is compelling. But will any UK retailers be brave enough to follow suit? There would be issues to sort out. Brand names would have to be jointly owned by the online and physical units. There might need to be some form of cross-shareholding. But these problems need not be insuperable. Next is an obvious candidate for a split. It already has online sales of more than £2bn a year and those are growing strongly, and it has already started adding other brands, such as Victoria’s Secret. It is certainly strong enough to survive as an independent unit and although Next’s shares have done brilliantly well over the last decade, in part because of the success of its web operation, there is no question that a split would create a lot of extra value. Kingfisher’s B&Q unit would work well as an online company as well as a physical chain, delivering DIY kit to the home market. It is not as if people especially want to go to B&Q.
John Lewis is struggling because it expanded far too rapidly at a time when retailing was tipping into deep decline, but its website is still trusted. A stand-alone John Lewis web operation would provide an alternative to Amazon in markets such as home furnishings and electronics. Waitrose as a purely online operation could rival Ocado. More radically, Tesco, Sainsbury’s, or even Morrisons under its new private-equity owners, could spin out their home-delivery service