Why luxury retailers are spinning off e-commerce.

Earlier this year, Saks Fifth Avenue spun off its e-commerce arm. That is, its parent company, HBC, divided the online and brick-and-mortar stores into two separate, yet closely intertwined, entities.

While this move has some scratching their heads, the motivating principle is actually quite simple: the retailer’s separated parts are perceived to be greater than the whole.

So far, the gamble appears to be paying off. At the time of its founding, the online segment, called Saks, was valued at $2 billion. Roughly nine months later, rumors are swirling that the online retailer will go public next year with a valuation of $6 billion.

In light of this success, the spin-off movement has become very buzzy in luxury retail for a few reasons.

First, ecommerce sales for luxury goods boomed during the pandemic. And, now that high-end shoppers have gotten used to the medium, these sales are expected to continue to grow even as stores reopen. In fact, Bain & Company predicts that online is set to become the leading channel for luxury purchases by 2025.

Second, brick-and-mortar is on the way out. Not only are consumers increasingly moving digital, but stores are among the first things to go in the face of financial trouble. Over the last decade, Lord & Taylor, New York & Co, Belk, and Barneys all filed for bankruptcy, and shuttered over a thousand combined stores.

However, it is worth noting that we have been watching for the end of days for retail stores for years. And yet, online retailers like Amazon and Warby Parker are increasingly opening brick-and-mortar stores. So, while this is certainly a valid motivator, I have begun to take these warnings with a grain of salt.

And, finally, Wall Street loves fast growing tech stocks. By dumping their bulky stores, overhead, and operating costs, online retailers are inherently more appealing to investors.

There are, however, certain circles that view the spin off as out of touch with consumer behavior–arguing that shoppers derive the most value from an integrated shopping experience.

But, that isn’t stopping retailers in other sectors from toying with the possibility. Macy’s, for example, recently hired the firm that helped break up Saks Fifth Avenue to “​​explore a strategy to unlock value for investors.” Kohl’s is facing similar pressure to make the split.

To me, the pandemic has made one thing abundantly clear: in-store shopping is extremely fragile. In the US, 12,200 stores closed in 2020, largely due to the pandemic and a rise in e-commerce. And while we would like to believe that we are out of the COVID woods, the omicron variant is making it abundantly clear that we still have a ways to go.

As for whether spinning off is the best way to circumvent that risk and find long-term success in a changing retail environment, only time will tell.

Danilo Diazgranados is an independent investor in the global food and wine, financial services, real estate, and the hospitality sectors.

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Investor in and lover of fine wine and restaurants.

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Danilo Diazgranados: On wine and food

Danilo Diazgranados: On wine and food

Investor in and lover of fine wine and restaurants.

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