April 1, 2005, 12:00 AM

A tale of two mergers

The Federated Department Stores Inc./May Co. merger may have gotten more ink when it was announced in March, but the smaller IAC/InterActiveCorp. acquisition of Cornerstone Brands Inc. also in March may represent better the future of retailing.

The Federated Department Stores Inc./May Co. merger may have gotten more ink when it was announced in March, but the smaller IAC/InterActiveCorp. acquisition of Cornerstone Brands Inc. also in March may represent better the future of retailing.

Noting that Internet retailing is 10 times the size of interactive TV retailing, where IAC with its Home Shopping Network has concentrated a large part of its retail efforts, Thomas J. McInerney, executive vice president and CFO of IAC and CEO of IAC Electronic Retailing, told analysts: “This arrangement enables us to immediately and significantly increase our position as one of the world’s leading interactive retailers by expanding our presence across the multiple channels of catalog, TV and online.”

Cornerstone, which is privately owned by principal shareholders Madison Dearborn Partners and JP Morgan Partners and was founded in 1995, owns e-commerce and catalog retailers Ballard Designs, Frontgate, Garnet Hill, Smith + Noble, The Territory Ahead and TravelSmith with annual revenue of over $700 million. IAC paid $720 million for the company. 37% of its sales, $266.4 million, occur online.

McInerney pointed out in a meeting with analysts the day of the announcement that TV shopping represents $7 billion a year, with expected growth of 6%-10% a year and is dominated by QVC Inc. while online retailing is $70 billion a year, growing at 25%-30% a year and is not dominated by a single retailer.

“The competition in TV shopping is very well established. It’s almost impossible to break in in any scalable way,” McInerney said. By contrast, he said, online retailing “is a very large market, with growth of two or three times in the next handful of years. It is a market that is very much up for grabs.”

At this stage, quickly taking advantage of that opportunity almost requires an acquisition, says Claire Gruppo, president and co-founder of Gruppo, Levey & Co., Cornerstone’s investment banking firm. “It’s almost impossible to build up something like this,” she says. “Cornerstone’s build-up took 10 years, they experienced their share of stumbles and it took a fair amount of capital.”

HSN operates HSN.com, but at about $250 million, the web site represents only 11% of HSN’s total revenue. IAC got its feet wet in the e-commerce/catalog world with the acquisition of Improvements web site and catalog and the Alsto’s web site and catalog last year.

Some observers say the IAC/Cornerstone acquisition is a harbinger of the shape of retailing to come that will be multi-channel with a consistent experience across channels. “Because they can be so nimble, middle market retailers will be in a good position to take a leadership role in channel transparency,” says Donny Askin, CEO of CommercialWare Inc., which provides software that allows retailers to manage retailing across channels and counts Cornerstone among its customers. “The IAC/Cornerstone acquisition speaks to that.”

IAC is not the first TV retailer to see opportunity in the online channel. Zelnick Media, which operates in the TV shopping arena, bought e-commerce/catalog merchant Lillian Vernon Corp. two years ago.

The move by TV retailers into online retailing makes sense, observers say. “We live in a time-starved society and people just don’t have the time to sit and wait for something new to come on every 10 minutes,” says Paula Rosenblum, senior retail analyst with researchers and consultants The Aberdeen Group Inc.

Meanwhile, Federated’s announcement of its acquisition of May included little about its e-commerce intentions. Federated operates the successful Macys.com but has not extended its e-commerce capabilities to its other brands and May’s e-commerce operations have been a negligible portion of its overall strategy.

Some observers believe that Federated’s long-term strategy is to turn the multitude of Federated/May department store brands into Macy’s stores. If that is the case, some say, the company may be developing Macys.com as a nationwide online retailing brand. But many also say that even if Federated does so, it doesn’t represent a strategy that can help the company revive what they consider a dying retail concept.

“Look at Macys.com and it says, ‘Sale, sale, sale,’ just like in their department stores,” Rosenblum says. “This is the identity of what is the only department store brand in the country now. They’re not going to win at that game because they are unable to be the lowest cost provider.”

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