9 retail brands that are prime M&A targets in 2021, according to experts

Gap

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2020 forced many retailers to look hard at their physical store footprint and rethink e-commerce. 2021 could be the year many specialty retailers like Gamestop and Lululemon take a look at something else: being acquired.

These specialty retailers are in the middle of the spectrum of retailers. They aren’t chains like Krogers and CVS that sell essentials and have boomed during the pandemic. But they also aren’t facing the severe hardships of brands like JC Penney or Macy’s, which suffer from undifferentiated brand identity and a lack of clear focus. 

“All the guys in the middle are going to go through the holiday, try to collect as much cash as possible, but then I’m sure there’s conversations around one of two things,” Lee Peterson, an executive vice president at WD Partners, told Insider in December. 

On one hand, retailers and brands could consider selling to a private equity player, likely a good play for investors but riskier for its long-term reputation, Peterson said. On the other, they could “circle the wagons a little bit and merge with other like-minded companies,” he said.

“There are so many retailers and brands that are just hanging on by a thread and hoping that time will be on their side,” said Carol Spieckerman, a retail analyst and consultant. 

Retailers with a strong private label selection or that offer services that rivals don’t will be particularly attractive targets, Spieckerman said. Chains like Macy’s, which have their own private labels but rely heavily on branded merchandise, are unlikely to draw M&A interest, she said.

“Are you buying a viable brand, or are you buying a place with a brand that has brands?” she said. “You could argue that Macy’s still somewhat enjoys its own brand identity, but increasingly, it’s not particularly differentiated.” 

Retailers with recognizable brands but a string of poor recent results due to the pandemic are likely to make the best targets in 2021, said Bahige El-Rayes, a partner at Kearney’s consumer and retail practice. “If everything is devalued anyway, you’re not going to go for something that is distressed,” he said.

Business Insider asked retail analysts and experts which retailers and brands they think might be ripe for deals in 2021. Here are 9 companies they pointed to:

Lululemon

Lululemon has benefited from demand for workout and casual wear during the pandemic, and its most recent earnings show it: Sales were up 22% for the quarter ended November 1. 

But having so many stores in malls increasingly represents a liability for the brand, Peterson said, especially with mall anchors at risk of bankruptcy or closing stores. A buyer like VF Corporation, which already makes products under the labels like Vans, North Face, and Timberland, could give Lululemon additional cash and resources to expand its e-commerce business and find new places to sell.

“If you’re Lululemon, you’re saying ‘Oh, maybe I don’t want to have so much presence at the mall going forward,'” he said.

Abercrombie & Fitch

Analysts have been pointing to Abercrombie & Fitch as a potential deal target since before the pandemic, saying that it could give rivals like American Eagle Outfitters or even Amazon some brands popular with young adults as well as a wide sourcing network.

Now, Abercrombie might have more of a reason to sell as mall anchor stores like Macy’s appear to be on increasingly unstable footing, Peterson said. Many have to answer the question: “When all the anchors go, what’s this [place] going to be?”

That could spur consolidation with another apparel retailer or even a deal with a private equity buyer with a reputation for turning around retailers, he added.

Sales at Abercrombie fell 5% for the third quarter.

Gap has picked up the pace of store closures during the pandemic. While it started the year planning to shutter 225 locations between its Gap and Banana Republic banners, it added another 350 to the list in October.

But the chain’s group of brands, which also includes Old Navy, aren’t necessarily irrelevant to consumers and could be appealing to a buyer who could work with a smaller store base and do more online, Spieckerman said.

“A brand like Gap would offer portfolio and platform to any acquirer,” she added.

GameStop

Video game sales have shifted online over the last decade, with streaming and digital downloads capturing an increasing share of the market.

GameStop, meanwhile, still relies on physical stores for a majority of its revenue. Net sales were down more than 30% during GameStop’s most recent quarter, which ended in October.

Yet the company has made some moves into the digital realm, including an agreement with Microsoft that gives the chain a portion of every game purchase made on all Xbox consoles GameStop sells. E-commerce sales have also grown to nearly one-fifth of total revenue.

While some analysts have cautioned that GameStop risks going the way of Blockbuster if it doesn’t find its place online soon enough, Spieckerman said that the brand could have value for a larger retailer.

“Right now, GameStop is still a viable brand in the gaming space,” Spieckerman said. “You could do something with that brand.”

The Children’s Place

Back-to-school time has traditionally been a key selling season for The Children’s Place. In 2020, as more kids attended school online, fewer parents needed to buy fresh outfits, leading to sales 19% lower for the quarter ending in October.

As a retailer focused narrowly on clothing for young children, the company appeals to a specific group of consumers, Spieckerman said. That makes it potentially a good fit for a buyer-focused on turnarounds, such as Retail Ecommerce Ventures, whose current portfolio includes off-price chain Stein Mart, apparel retailer Dressbarn and Modell’s Sporting Goods.

“I don’t see any reason why The Children’s Place or some of these much more specialized players wouldn’t be good targets for them, because that seems to be their strategy,” she said.

Capri Holdings

Michael Kors, Versace, and Jimmy Choo have struggled in recent months as in-person shopping and international travel has dried up. 

They also have another trait in common: All are owned by London-based Capri Holdings. 

Capri took its current form in 2018 when Michael Kors bought Italian label Versace and consolidated operations under the Capri name. Before that, Michael Kors acquired Jimmy Choo in 2017. 

While Chinese consumers, a key group for many luxury brands, have kept buying handbags, clothes, and other luxury goods in China during the pandemic, that hasn’t made up entirely for lost sales as far fewer take vacations in Europe or the Americas.

“An acquisition of one of those portfolio companies would yield access to multiple brands,” Spieckerman said. “It’s going to be interesting to see if some of those companies, particularly in the apparel space become acquisition targets for companies that want to get instant diversification.”

Ulta

“I think Amazon has always been interested in Kohl’s and, subsequently, Ulta, because they have physical spaces that are not in malls,” Peterson told Business Insider.

Ulta’s store network includes both locations near traditional malls as well as stores in strip centers, which have done better in recent years.

That diversification could be appealing to acquirers looking for a store footprint outside of shopping centers, though often still close to them. And Ulta is no stranger to working with other retailers: It recently agreed to open 100 beauty shops within Target stores in 2021. 

Sales at Ulta fell nearly 8% during the company’s third quarter.

Rite Aid

Health and wellness have long been areas where retailers are trying to do more, but the pandemic has made them even more important. 

Rite Aid has done relatively well during the pandemic: Revenue was up nearly 12% for the lasted quarter ended in August as more consumers turned to its stores, which occupy a wider range of locations than most retailers, from shopping centers to residential areas.

The company could be especially open to being bought given its history. In 2015, Walgreens announced a plan to acquire the rival drug store chain in its entirety. Over the following two years, though, regulatory concerns forced the companies to scale back their ambitions, and Walgreens ended up acquiring a fraction of Rite Aid’s network.

The result is a smaller Rite Aid that could be easier for a big box retailer to justify buying, especially at a time when wellness is getting a lot of attention. “Everybody’s trying to get a piece of the action and stretch into it,” Spieckerman said of the category.

Macy’s

In 2020, Macy’s made thousands of layoffs, and its most quarterly same-store sales declined 20% as many shoppers were reluctant to come back to stores. 

A private equity deal could be in the cards for 2021, Peterson said, if a landlord doesn’t come to the rescue as in the case of JC Penney earlier this year.

“The private equity hawks are going to swoop in and try to buy as much of this stuff as possible over the course of the next year,” he said.

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Top VCs say they want to fund startups that solve retailers' biggest problem — e-commerce logistics

Summary List PlacementThe COVID-19 pandemic has forced all kinds of retailers to double down on e-commerce like never before. 
Even as restrictions on in-person retail have lifted across the US, many consumers are choosing to do more of their shopping online as they keep health and safety top of mind. 
eMarketer analysts have estimated that US online sales would reach $794.5 billion in 2020, a year-over-year increase of 32.4%.
But, businesses were met with some challenges while dealing with the huge influx of online shopping.
Some online retailers struggled to keep inventory in stock, particularly early on in the pandemic. Others began exploring new ways of getting goods into consumers’ hands as delivery networks filled up with packages. 
For venture capitalists looking to fund the next big thing in e-commerce, these bumps in the road spell opportunity.
Insider recently reached out to the top firms investing in e-commerce to get their take on where the sector is headed. Many said they were interested in funding startups that can solve problems for e-commerce businesses looking to scale.  
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He said that the firm is interested in startups that provide “backend logistics, analytics, and operational services such as Flieber,” which helps online retailers manage their supply chain operations. 
He’s also keeping an eye on fintech startups, such as Affirm, that are changing how we pay for goods and services, to be trends in 2021.
Gautam Gupta, a partner at M13, said the firm is “looking for critical, not just nice to have, infrastructure that drives growth for independent sellers.”
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Adina Davis, an investor at BoxGroup, added that 2020 saw an “explosion of the Shopify ecosystem,” leading to investment opportunities. 
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Everything marketers need to know about hiring an agency to grow their business on Amazon

Summary List PlacementA cottage industry of agencies want to be advertisers’ go-to Amazon expert.
Amazon is the third-biggest digital advertising company behind Google and Facebook. Amazon made $13.5 billion from advertising in the first three quarters of 2020, up from roughly $9.3 billion in the year-ago period.
As Amazon’s ad business has grown, dozens of agencies — many founded by former Amazon employees — have popped up to help advertisers buy ads and sell products on the website. Amazon itself recommends many of these agencies through an online directory.
E-commerce analytics firm Profitero estimated that there are now closer to 130 or 150 North American Amazon agencies now, up from 100 in 2019.
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TV and digital advertising is typically handled by an advertiser’s media team, but Amazon ad spend is handled by specialists who also manage retail operations. That gives Amazon-focused agencies a leg up over the large holding companies that have e-commerce advertising arms but do not handle retail areas like forecasting, replenishment and setting up product pages, said Travis Johnson, global CEO of Amazon agency Podean.
“It’s too much nitty-gritty for the big agencies to employ expertise in that space, and agencies tend to focus on the advertising side of things,” he said. “The person who owns the budget needs a lot more than advertising to be successful on Amazon.”
Amazon’s structure can also be difficult for marketers to understand without an agency to handle communication with the company. Johnson said that it’s typical for marketers to deal with separate teams within Amazon for onboarding advertisers, search advertising, display advertising, and refunds and chargebacks.
The pandemic has also sped up the pace that brands are hiring Amazon agencies as e-commerce sales and inventory management challenges have grown.
Lauren Picasso, CEO and founder of sports drink brand Cure Hydration, recently hired its first agency. Two-year-old Cure Hydration sells on Amazon, Shopify, Thrive Market, and in retail stores like Walmart and Whole Foods. 40% of Cure Hydration’s sales come from e-commerce.
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“We needed to bring on an agency with Amazon expertise — we wanted someone to help us figure out the right cadence of shipping inventory, we wanted some help building out a dedicated brand store, and wanted someone with expertise in Amazon marketing,” she said.
Picasso hired Seattle-based commerce agency The Stable to handle advertising, design work for a branded store, and operational work.
“It’s all primarily ex-Amazon employees, which I think is what differentiated them to me,” she said. “Their team is deeply familiar with Amazon, having worked there before.”
Insider spoke to a mix of agencies, brands, and tech firms to break down what brands need to know when hiring an Amazon agency.

What do Amazon agencies do?
Amazon agencies have carved out a niche by focusing on e-commerce. Most of the agencies do not help manage other digital channels, but some are expanding to marketplaces like Walmart and Instacart that are pushing into advertising.
These agencies fall into two types: Those that help brands sell their products and those that help brands run ads on the platform. Agencies also often work with adtech vendors like Teikametrics, Pacvue, and Kenshoo that sell ad optimization technology.
Agencies like Blue Wheel Media solely offers advertising services to differentiate itself and avoid services that might overlap with in-house teams.
“Our motto has always been that the biggest brands on Amazon are the best advertisers,” CEO Trevor George said.
Other firms like Amify help brands sell items on Amazon with services like strategy, operations, and advertising.
“We believe that Amazon should be an extension of your website and a direct-to-consumer channel. By cutting out the middleman, you make more money,” said Ethan McAfee, founder and CEO of Amify.
What don’t Amazon agencies do?
Many brands still handle part of their e-commerce in-house.
Brands typically handle creative for their products themselves so they can use the same product photos and videos of products outside of Amazon. Agencies then take the assets and create Amazon-specific content on product pages and brand stores.
Stock allocation and merchandising are two other areas that brands often handle in-house. Both functions help brands keep control over distribution, especially if brands sell to retailers outside of Amazon.

When should you hire an Amazon agency?
Deciding when to hire an Amazon agency depends on the scope of the work.
Advertising-only firms like Blue Wheel Media work with brands that make more than $1 million in yearly revenue, meaning that its clients need to already have an e-commerce operation and are looking to ramp up spending.
Other firms like Amify help companies build an e-commerce strategy from scratch and turn Amazon into a direct-to-consumer channel.
John Ghiorso, founder and CEO of Orca Pacific, said that the recent boom in agencies comes from Amazon getting bigger and harder to navigate. To meet the demand, agencies are also rushing to develop technology to handle tasks like media buying and optimization.
“It’s gotten far more complicated and the competition has gotten more fierce on the platform,” he said. “Five years ago, you could do it on your own as a mid market or small brand. The game has gotten much more sophisticated.”
What should you ask when hiring an Amazon agency?
Brands should ask firms specific questions about how their account will be handled, said the agencies.
“You have to be able to come up with a specific custom approach to the advertising strategy,” said Kashif Zafar, EVP of sales and marketing at Orca Pacific.
Some examples of questions are:

Which areas does your agency have demonstrable experience in?
What tools do you use to get an edge on Amazon?
How will you gauge success on Amazon?
Which products should I advertise?
What is the org structure of your agency and what are your employees’ work backgrounds?
How much control do advertisers have when an agency runs my account?
What are your other customers doing?
What is a good advertising cost of sale? (ACoS measures the ratio of ad spend to revenue.)
Can you give me references to talk with your other clients about your expertise?

How much does an agency cost?
Most agencies charge based on a percentage of a brand’s sales or advertising revenue. Blue Wheel Media and Orca Pacific said their fees start at a few thousand dollars per month and increase based on the size of the client.
Blue Wheel Media also offers brands month-to-month contracts for advertisers looking for quick help with advertising.
Ethan McAfee, founder and CEO of Amify, said the firm charges a monthly fee of $10,000 to $50,000 to its clients, most of whom have between $5 million to $50 million in annual sales on Amazon. 
How much money should you spend on advertising?
Some experts said that the rule of thumb is that brands should spend 5% to 20% of their sales on advertising — similar to the percentage that retailers have long recommended brands pay retailers in exchange for distributing products in stores.
Orca Pacific’s Ghiorso said that that rule is outdated and that with Amazon ads, brands should spend based on performance.
“If you’re doing $100,000 a year on Amazon and you spend $10,000, that’s not going to give you much [but] if you’re doing $100 million in sales and spending 10%, that’s a decent number,” he said. “There’s still a legacy mindset that’s the inverse of how brands should be looking at it.”
Amity’s McAfee recommends that brands spend 20% on advertising when launching a new product to rank higher in search results and get discovered, then drop to 10% once it’s profitable.
Cure Hydration spends about 20% of its revenue on ads, but Picasso said that it’s more important to generate reviews for products when launching a brand. She recommends that brands have at least 10 four-star reviews before starting advertising.
What kinds of ads should you buy?
Amazon has dozens of ad formats that often are mistaken for each other. Experts recommend brands start with sponsored product ads, which appear as promoted items in search results.
“If you’re in a category like makeup and people are searching for generic terms like ‘eyeshadow,’ paid search is your best initial advertising return because people already have intent, and you need to convince people that your product is the right one,” said Podean’s Johnson.
Orca Pacific’s Ghiorso recommends that brands next add display ads to help build brand awareness and loyalty. Display ads run through Amazon’s programmatic ad platform.
“Display is upper funnel, and there’s also a technical skill to running the campaigns where the upfront cost to running campaigns will not be able to justify doing it internally,” he said.Join the conversation about this story » NOW WATCH: Why electric planes haven’t taken off yet

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