Retail giant Macy's contemplates separating its online business from the brick-and-mortar stores: Is such a division prudent for any retailer?
Macy's stock surged midweek, following an activist investor's hint that the retail giant might follow Saks Fifth Avenue's lead and split its e-commerce business into a separate endeavor.
According to reports from several media outlets, Scott Ostfeld, a partner and co-portfolio manager at Jana Strategic Investments, suggested that separating Macy's e-commerce arm could double the company's share price during a speech at the 13D Monitor Active-Passive Investor Summit on Wednesday. Based on a Reuters report, Ostfeld calculated the e-commerce portion of the business alone could be worth around $14 billion, compared to Macy's current valuation of $6.9 billion.
Jana Partners is renowned for its activist investments, but the company declined to comment on its potential stake in Macy's or the proposals discussed at the conference.
In response to questions about Ostfeld's suggestions, Macy's CEO Jeff Gennette pointed to his earlier remarks during the company's Q2 earnings call. Gennette dubbed Macy's a "comprehensive retail ecosystem" with a "powerful combination" of brick-and-mortar stores and a top-notch e-commerce platform. Gennette went on to say that customers increasingly start their shopping journey online, and Macy's is geared up to meet customers based on their individual preferences and shopping habits.
Interestingly, Saks Fifth Avenue, Hudson's Bay Co., and its off-price business have already taken the path toward separating their e-commerce and physical store operations, much like what Ostfeld proposed for Macy's. This strategy has precedent in the retail landscape, as businesses operating through catalogs in the past often maintained separate business units for catalog and in-store sales.
However, Mark Cohen, director of retail studies at Columbia University’s Graduate School of Business, emphasized that this strategy was never effective from the customer's point of view. Cohen served as chairman and CEO of Sears Canada during the early 21st century and advocated for integrating the two channels so that customers could see the same products online and in-store, at the same prices, with the same delivery options.
Analysts are divided on the merits of separating e-commerce from physical stores. Brendan Witcher, Principal Analyst at Forrester, finds the idea “absolutely nonsensical” as it would create unnecessary operational complications with little financial gain. Neil Saunders, Managing Director of GlobalData, is equally skeptical, characterizing the idea as "utter madness."
On the other hand, splitting the businesses could potentially yield financial benefits, especially in the short term. Charlotte Rushton, a retail analyst, notes that such strategies could allow investors to extract quick profits through licensing fees and other financial maneuvers. However, Saunders warns that this approach can lead to the demise of a business in the long run.
As Macy's continues to lean into its turnaround strategy, industry experts will closely watch the company's response to Ostfeld's activist investment proposal. Some see an opportunity to revitalize the retailer by shaking things up, while others question the value of these financial games and the potential operational challenges they bring.
As you dive deeper into the world of retail, you might find it valuable to explore the challenges and opportunities associated with omnichannel retailing and the role that e-commerce plays in the modern retail landscape.
- Amidst the ongoing pandemic, AI is being increasingly used to predict the impact of strategic decisions like separating e-commerce businesses from physical stores, as seen in the case of Macy's and Saks Fifth Avenue.
- Some argue that AI-based research could help businesses like Macy's boost their financial performance, potentially doubling their share price, as suggested by Scott Ostfeld of Jana Strategic Investments.
- Policy-makers, financiers, and industry leaders must consider the consequences of such moves on the broader retail industry and the overall economy, given the interconnected nature of modern business models.
- The convergence of e-commerce and brick-and-mortar stores is a topic of ongoing debate, with opinions ranging from the idea being "absolutely nonsensical" to it offering short-term financial benefits that could ultimately lead to long-term demise.
- As businesses strive to capitalize on the growing importance of e-commerce, the television and internet industries have a unique opportunity to collaborate, leveraging their reach to influence consumer behavior and drive retail growth.
- Space exploration has an indirect connection to these advancements as well, with the potential for technologies developed for space applications (e.g., AI and satellite infrastructure) Eventually trickling down to enable more integrated and efficient retail ecosystems on Earth.
