It’s a seller’s market for brands. Demand for established retail names is on the rise, even when the brands are best known in the industry for sitting atop failed companies. In part, that’s because labels today can have a greater reach and more intimate connections with shoppers through Instagram, Facebook and Twitter — engines of brand awareness. But while recognition is easy to talk about, it’s expensive to build and, for a growing number of investors and operators, more attractive to buy.
Christopher Burch paid $2 million to buy the intellectual property of his C. Wonder brand during bankruptcy and then quickly sold it to Xcel for $3 million. The brand will be relaunched on QVC in the spring. Similarly, teen retailer Delia’s intellectual property was purchased by Fab/Starpoint for $2.5 million this year, with the new owner targeting sales of $40 million in 2017. Softree paid $2.2 million for the bankrupt Deb Shops name from Cerberus and just this week, Filene’s Basement, the intellectual property for which is owned by Trinity Place Holdings, revealed it will resurface as a Web site this fall.
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With more investors wanting to buy into this limited number of brands, the basic math of M&A is taking: More players chasing fewer brands equals higher prices.
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“The big change is that the number of retail store flags is shrinking and there’s not a ton of upstart retailers trying to take their place,” said Gabe Fried, chief executive officer of Hilco Streambank. “The number of consumer brands available 10 years ago was steady and increasing.”
That isn’t the case now. Many retailers are going belly-up as shoppers gravitate toward e-commerce, which according to the Commerce Department saw sales jump 14.1 percent in the second quarter as total retail sales inched up just 1 percent.
“You would think that with the number of chan- nels shrinking, that it would drive the price down, but there is lots of capital available,” said Fried, referring to troubles in the mall distribution channel. Green Street Advisors has forecast that 15 percent of U.S. malls will fail within the next 10 years.
“It’s a very liquid market with a lot of people chasing deals,” said Fried, adding that the field could become more crowded if the big online retailers such as Amazon start seeing value in owning vertically integrated brands.
Already, private equity firms such as Marquee Brands, which opened last year, and Sycamore Partners, founded in 2011, are competing with strategic licensing businesses Xcel, Sequential and Iconix.
“To start a brand from scratch is an incredible effort,” said Cory Baker, chief operating officer of Marquee Brands. “It takes a lot longer and requires a lot of money.”
Just how a buyer plans to use a brand can determine how much they’re willing to pay.
“From time to time we all look at deals and scratch our heads,” Baker said. “Some look incredibly overvalued. You know, there must be something up their sleeves, like commitments lined up that allow them to pay more.”
Brand acquirers were hard-pressed to name any brands that were too toxic to touch. The general feeling was that most consumers don’t care or aren’t aware of a retailer’s problems.
Take American Apparel: Retailers and Wall Street investors may be well aware of the negative headlines associated with the company and its former ceo Dov Charney, but the average shopper might have no clue or not be concerned. Just this past summer Sasha Obama wore an American Apparel dress and Kylie Jenner has been seen wearing several American Apparel basics over this season.
And in the comments section on the Coldwater Creek Facebook page, a loyal customer expressed skepticism that the company ever went bankrupt or has a new owner. She called it suspicious and a scam, even though the firm’s bankruptcy and acquisition was well-documented in the press.
“There’s a difference between a bankrupt situation where there were major business errors and a brand where there is something still rich or magic about it,” said Kevin Singer, senior partner at global research agency Millward Brown Vermeer.
He gave Enron as an example. “There is no desire to bring back the name Enron, but Coldwater Creek had a loyal customer base,” Singer said. “They felt good about the brand.”
Buying the name of a bankrupt company isn’t new, but the increase in brand awareness as a result of social media has been a game changer.
Brands can now more easily monetize their name by measuring e-mail lists and social media recognition. David Peress, executive vice president at Hilco, said these lists are so important that distressed retailers sometimes try to swell the ranks as they wind down. Big promotions as a company closes down brings in new shoppers and the clerks can grab those e-mail addresses for the list.
The companies buying tired brands have built up the infrastructure and relationships they need to jump on new opportunities and take advantage of a brand’s exposure and its customer list.
Xcel has a team of designers at the ready and a strong relationship with QVC that allows it to quickly ramp up a brand name.
Likewise, Iconix has a track record for acquiring brands and then licensing the names out to earn royalties. The company, though, has been criticized for trying to prop up its maturing brands with joint ventures and other tricks and has been challenged lately by the departure of ceo Neil Cole, shareholder lawsuits and a review by the Securities and Exchange Commission.
Still, Iconix’s ability to use brands to produce cash has stayed strong.
The firm’s free cash flow increased 117 percent to $75.4 million in the second quarter. Excluding tax items, it still increased 40 percent over the prior year — proof that even a troubled company can generate lots of cash with this buy-don’t-build model.