Should retailers separate e-commerce from stores? A high-level debate
The separation allowed Saks to raise funds to fuel its growth as e-commerce increased during the Covid-19 pandemic. The valuations of other e-merchants like Farfetch Ltd.
have overtaken those of more traditional chains.
Saks said the split would not be noticeable to customers. They will be able to make returns and exchanges and use their Saks credit cards in stores or online.
Although the Saks and Saks.com stores operate as two separate legal entities, their relationship is governed by a master license agreement similar to the franchise agreements used by hotels and restaurant chains. The digital entity manages all product purchases and sets prices for both companies. They also share common ownership: Canadian holding company HBC is the sole owner of the stores and majority owner of Saks.com.
The split has sparked a conversation in the industry because it goes against the prevailing wisdom of integrating digital and physical operations as seamlessly as possible. The Wall Street Journal invited two retail heads to debate the issue.
Marc Metrick, CEO of Saks’s e-commerce business, explains why a spin-off is the right move. Mr. Metrick joined Saks’ executive training program in 1995 and rose through the ranks, overseeing the renovation of his Fifth Avenue store. He became CEO of the combined entity in July 2020, just under a year before it was split into two.
Hubert Joly explains why a split is not good for business. Mr. Joly presided over a renaissance at Best Buy Co.
while he was CEO from 2012 to 2019. He introduced price alignment, added services, used stores to fulfill online orders and partnered with Amazon.com Inc.
to sell smart TVs. Mr. Joly is now a lecturer at Harvard Business School.
Yes, a split emphasizes leaders and attracts digital staff
“If you’re running a business today, you have to focus on people,” Mr. Metrick said. Still, as CEO of the combined digital business and stores, he said he often feels conflicted. “I was running an ‘or’ business,” he said. “I was investing either in stores or online.
He said he can now focus on improving Saks’ digital business, and his counterpart, Larry Bruce, who oversees the stores, can do the same for physical activity.
Mr Metrick said that since the split he has upgraded Saks’ website, including improving its search capability. Boxes shipped from Saks.com now arrive in more sophisticated packaging with self-adhesive return labels. The number of styles available on the Saks website has increased by 40% and the number of brands by 20%.
For the quarter ended October 30, online sales increased 84% compared to the same period in 2019, driven by increased site traffic, sales conversion and inventory. Traffic is up 88% from 2019. Sales are measured on the basis of the gross value of goods, that is, all orders shipped excluding returns and value added tax.
Stores have made their own improvements, including adding return counters in 18 of the 41 Saks stores, which accept online and in-store returns. Comparable sales of stores open at least a year ago increased 24% in the last quarter, compared to the same quarter in 2019, said Mr. Metrick.
Mr Metrick said the split made it easier for him to recruit digitally-focused employees. “Having a pure digital game, you can attract a different kind of talent into the organization,” he said.
Stores, on the other hand, were able to focus on hiring stylists, salespeople, and people with visual merchandising skills. “That’s the beauty of the split,” he said. “We are not trying to cast that wide net.”
The digital activity always works in close collaboration with the stores. Forty-four percent of online returns were in-store and 21% of online orders were fulfilled by stores in the last quarter, Metrick said.
If an item is purchased online but returned to a store, the return is credited to the online business. If a store associate helps a customer buy something online, the associate receives a full commission, Mr. Metrick said.
The digital business manages all online and in-store purchases to ensure brand consistency and to simplify supplier relationships, Metrick said.
The interaction between the two companies is now governed by some 340 service agreements. He said the deals formalized the processes in place over the past two decades, including how in-store stylists are paid when they sell items to customers online.
“Managing between e-commerce and traditional channels has always been complex,” said Mr. Metrick. “By memorizing the processes within these agreements, we established clarity and clear ownership of decisions with common goals of putting the customer first and ensuring a unified brand experience. “
To ensure that stores remain well capitalized, they receive a percentage of digital sales up to a certain threshold. “We pay them to have access to their employees and their store network,” said Mr. Metrick.
“It’s not about [financial] engineering, ”said Mr. Metrick. “It’s a matter of state of mind. It’s about putting the customer first.
No, a split makes the company rigid and less customer friendly
Mr Joly said the separation of e-commerce will make retailers less nimble and less able to reinvent themselves as the industry changes dramatically. A bifurcated company will be “more rigid and that will make it harder to innovate and that will slow them down,” he said.
For example, Best Buy said it only took 48 hours to introduce curbside pickup in April 2020, when many people were still sheltering in their homes during the first weeks of the pandemic. Mr Joly said the chain would not have been able to move so quickly if its e-commerce and store operations were separate companies. “We should involve lawyers and create a contractual agreement,” he said.
Formal agreements should govern all aspects of the relationship between the two units, including how stores process online orders or whether store employees can assist online shoppers with virtual consultations. “It creates a degree of complication and rigidity,” he said. “It’s also a huge distraction, because it’s time you aren’t spending improving the customer experience. “
One of Mr. Joly’s main goals when he joined Best Buy was to break down barriers between its three divisions: e-commerce, stores and services. He changed the bonus plan for senior executives so that they are paid based on the performance of the entire company, not just their division. “It was a team, a dream,” said Mr. Joly. “We all had to work together.
Best Buy is increasingly using its stores, even its own employees, for same-day delivery of online orders as well as a place where shoppers can quickly pick up the items they buy online. For the quarter ended Oct. 30, online sales were $ 3.4 billion, or 31% of the company’s domestic revenue, compared to 16% of business in the same quarter of 2019.
Splitting can make sense when companies diverge, like Johnson & Johnson‘s
planned separation of its consumer and pharmaceutical units, Joly said.
This premise is not true for e-commerce and stores, which are closely linked, he said.
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Customers often start their search online, to buy from a store or vice versa. Online orders shipped from a store often reach customers faster because stores are closer than warehouses to where people live, he said. Increasingly, store associates are consulting customers online. It’s not a zero-sum game between stores and online, he said. “You have to invest in both,” he said.
“The idea of dividing doesn’t start from the customer; it starts with finances, ”said Mr. Joly. “He argues that there is a gap in the valuation of companies, and if you separate them, the market is finally going to see the value and the sum of the two coins is going to be greater than the combined entity.”
In reality, he said, that doesn’t happen.
“Over time, the value of businesses is derived from the net present value of future cash flows,” Mr. Joly said. “Splitting these companies no longer creates cash flow. Anytime you use a financial lens and think it’s too good to be true, it usually is. “
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com
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