Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Speculation that Saks Fifth Avenue would buy rival Neiman Marcus has been rife ever since the latter filed for bankruptcy during the pandemic. The deal to bring together North America’s two leading luxury department stores finally happened this month. But help came from an unexpected source: Amazon.
The ecommerce giant is among those backing the acquisition of Neiman Marcus Group by Saks’s parent company HBC for $2.65bn, including debt. Amazon and cloud-based software company Salesforce will be taking minority stakes in the newly formed business, to be called Saks Global.
It is far from clear whether having two tech heavyweights on board will be enough to revive the ailing department store business model. Amazon’s role, initially at least, would most likely be to provide tech and logistics expertise.
Before that, US regulators would have to allow the deal to go through. They are already suing to block the $8.5bn tie-up between Coach owner Tapestry and Michael Kors’ parent Capri Holdings.
On paper, combining Saks and Neiman makes sense. Both cater to a similar high-end clientele and have many overlapping locations. Merging their warehouses, offices and back-end operations should yield quick savings. There are also benefits of scale. The new company, which is expected to generate $10bn in annual sales, would have 75 main stores as well as 100 off-price outlets. That should give it more negotiating power with brands and vendors.
Still, department stores are a tough business. Sears, JCPenney, Barneys New York, Lord & Taylor and Century 21 have also filed for bankruptcy in recent years.
Those that are still standing are struggling. At the remaining publicly listed department stores, credit cards — rather than retail sales — now generate a surprisingly large chunk of profits. Credit income accounted for about 47 per cent and 66 per cent, respectively, of Nordstrom’s and Kohl’s operating income last year, according to Bank of America Global Research. At Macy’s, the figure was about 55 per cent in 2022, said Citigroup.
Selling luxury goods to big spenders does offer some protection from the pullback in spending among lower- and middle-class consumers. But top luxury goods makers such as LVMH, Kering and Prada want to sell more directly to consumers. Shoppers now have multiple ways to buy directly from their favourite luxury labels, including through the brands’ own stores or websites.
The department store business model desperately needs a makeover. Even with Amazon’s backing, Saks and Neiman have their work cut out.
Read the full article here
