On January 25 2021, it was announced that Boohoo will buy the intellectual property of Debenhams for £55m. This was shortly followed by the announcement of Asos Plc’s agreement to purchase Arcadia Group’s Topshop, Miss Selfridge and HIIT brands for £295m, on February 1 2021. Neither Boohoo nor Asos are interested in running the physical stores of these companies. Instead, the e-commerce giants want to buy their brands. This article will look at the reasoning behind the deals and the significance of the deals for the future of the retail industry.
Why buy a brand?
Former CEO of Coca-Cola, Roberto Goizuetam, once said that “if you give me a choice between owning the name Coke and all our factories and trucks… I would choose the name Coke.” Intangible assets (e.g. brand equity, patents, copyrights and publishing rights) exist in addition to tangible assets (e.g. physical assets and property owned by a company). Intangible assets can be very valuable. For example, Coke’s brand value is approximately now 15% of the company’s total value (and reached up to 30-40% in its powerhouse days). The value of the Debenhams brand and the three Arcadia Group brands have clearly been recognised in order for Boohoo and Asos to sink millions of pounds to acquire them.
One reason why Asos and Boohoo have bought the respective brands is to expand their customer bases. Asos’ deal involves buying three brands that are largely similar to it (e.g. many Topshop products are already sold on its website). Aneesha Sherman, an analyst at Sanford C. Bernstein has suggested that “this move is a market-share land grab”. The acquisition is likely aimed to boost their existing customer base as well as to appeal to the global market (especially the US and Europe).
In contrast, the Debenhams brand appeals to older and richer customers compared with the typical Boohoo customer. John Lyttle, Booho chief executive, said that the deal “will…increase Boohoo’s audience”, something that will further strengthen the company’s position in the market as Debenhams is one of the top 10 retail websites in the UK. Not only is this a source of diversification, but it provides a customer base that could be charged more. This is especially attractive to Boohoo given that its current profitability largely relies on squeezing costs and maximising scale. The Debenhams acquisition further provides Boohoo with an opportunity to expand the type of products on offer. The deal will facilitate expansion into beauty, sportswear and homeware, amongst other categories. Customers may be sceptical about Boohoo-branded kitchen or high-quality sporting items, whereas these goods make sense with the Debenhams brand on it. Even if Debenhams is owned by Boohoo, this should not hurt the attractiveness of the Debenhams brand significantly, considering that most customers do not know which companies own which brands (e.g. people rarely link Reebok to Adidas, or VW to Bentley).
The coronavirus pandemic, which has been the final straw for Debenhams and the Arcadia Group, has resulted in these high street brands being for sale on the cheap. For example, Debenhams went into liquidation on December 1 2020, after the failed bids of both Mike Ashley (owner of House of Fraser) and JD Sports. The administrators for Debenhams gave up on selling the whole business long ago, and so were happy to accept reasonable offers for any part of the company. The current climate has provided an unmissable opportunity for Asos and Boohoo to acquire these brands.
What does this mean for the future of retail?
The move to the e-commerce universe threatens the future of physical retail stores and the jobs that accompany them. Asos chief executive Nick Beighton simply stated that “it’s not our model to operate stores”, and so it is unlikely that these jobs will survive. The Asos deal risks the redundancy of around 2,500 retail staff, with around 70 outlets set to close.
This comes at a time where the physical retail industry is struggling. Over 100,000 positions in the retail industry were lost last year. Online fashion brands instead have prospered for at least two reasons. Firstly, they have been able to pick up market share from store-based rivals that have had to close during lockdowns. Secondly, their shorter and more agile supply chains have enabled them to quickly cater to new trends, especially the ‘lockdown chic’ styles of hoodies, joggers and leggings. With the near-term nature of physical stores threatened by coronavirus, and the long-term advantages of online brands’ models, perhaps this represents the end of the high street shopping era.
But arguably consumers’ pent-up frustration of not being able to shop in physical stores will fuel demand for these when they open, with online-based brands responding by opening physical stores. Retail analyst Richard Hyman has stated that he is “confident” that “you [will] see more online retailers looking to open physical spaces because it is a wholly different experience”. There has already been a recent trend in online companies launching pop-up stores and showrooms, such as Amazon (in the UK), Hut Group and Gymshark. Perhaps the physical element of shopping is not over quite yet.
The trend of buying up struggling brands continues in earnest. Boohoo is currently nearing exclusive negotiations to buy Arcardia’s Burton, Dorothy Perkins and Wallis brands from the administrator. In the last two years, it has also bought high street brands Karen Millen, Oasis and Warehouse, shutting the stores down and making them online-only. Meanwhile, M&S announced in January that it has purchased the Jaeger fashion brand, which fell into administration last November. With coronavirus threatening the future of physical retailers, it seems that buying brands on the cheap is here to stay.