Interviews, insight & analysis on Ecommerce

Glynn Davis: Retail brands must be valued on all their channels not just digital

Glynn Davis is one of the UK’s most knowledgeable and experienced retail journalists, founder of Retail Insider, and Ecommerce Age’s monthly columnist.

In the early days of the internet there were question marks over the long-term potential for the online channel for retail and how it would sit alongside the stores. There was a worry that this upstart channel would cannibalise revenues from the physical outlets.

Perceived wisdom therefore was to keep the internet division very much at arms-length from the existing business and run them as completely separate businesses with very little overlap. This meant different offices, separate teams, and individual dedicated warehouses etcetera.

Tesco.com was run from a different part of Hertfordshire from the core supermarkets business while in the US the retail giant Walmart went one stage further and let a third-party co-own and help run its online operation.

In what was seen as a smart move at the time in January 2000 the US retailer effectively outsourced the running of much of Walmart.com to Silicon Valley-based venture capital firm Accel Partners who became a partner in the online company. The internet had been developed in Silicon Valley so why not let some smart guys from that part of California run the grocery company’s online business was the thinking of the day.

By 2001 Walmart had quickly recognised its mistake and bought out the stake held by Accel and began to work on bringing the channels much closer together and building an integrated multi-channel operation. Having a closely intertwined structure has proven to be the most successful way to run a business comprising physical stores and an online presence.

It is rather odd therefore to find an emerging trend that is upending this thinking. Ahead of the recently announced sale of Selfridges to Thailand-based Central Group there were rumours swirling around of the department store group offloading its online operations. This would have involved its digital arm being run completely separately to the stores business.

This follows a growing amount of such activity in the US involving some of the country’s best known retailers. It began with Hudson Bay Company, the owner of Saks Fifth Avenue, splitting off the web operations of the luxury department store business. This has prompted a flurry of activity from activist investors who are pushing for similar changes at other major retailers.

They’ve spotted an opportunity to make a quick buck. Among them is Jana Partners, which has taken a stake in Macy’s, and is arguing the case for a split on the basis of the online business alone being potentially worth double the value of the combined organisation – such are the lowly valuations attached to traditional retailers at present.

It’s exactly the same argument being put forward by activist investment firm Engine Capital to the management of Kohl’s. It has suggested that the online business could be worth as much as $12.4 billion compared with the $7 billion that is currently attributed to the whole of Kohl’s.

Such activity reminds me of the deals many banks undertook after the financial crisis in 2008 where they split out the bad debts and toxic assets into the so-called ‘bad’ banks to keep them well away from the valuable elements in these businesses.

The problem with all these manoeuvres in the retail sector is that splitting off the digital assets no doubt earns the activist shareholders a good return on their investments but there are serious question marks over the longer term value of the overall arrangement and the worth of the entity left holding the physical assets/liabilities.

There is also the massive issue of actually separating the two entities. They are so tightly integrated in terms of their marketing, infrastructures including logistics, their people who operate across all the channels, and many other elements that straddle the channels because that is the most productive and cost efficient way to do things.

The two businesses are absolutely reliant on each other so let’s hope some sense prevails and the valuations of retail businesses begin to more fairly reflect the value of multi-channel structures and we no longer assign all the worth to digital.

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