Why Activist Investors Who Look To Split Up eCommerce Operations From Physical Stores Have It Absolutely Wrong

Another activist investor is advocating for the split of physical retail and eCommerce operations at a department store - this time Kohl’s where the activist sees dollar signs by estimating the eCommerce side is worth a whopping $12.4 billion. 

We couldn’t agree with Neil Saunders more who wrote, “First of all, this activist investor owns 1 percent of Kohl’s so isn’t really in a position to demand much. Second, this is another stupid attempt to extract short-term value by playing financial games. There is no way Kohl’s e-commerce business is rationally worth that much – and without stores it is worth even less. I’m afraid these people are spreadsheet gazers who don’t actually understand how retail works.”

Saks was successful in raising $465 million in a similar split, so the capital market appetite is there. But that was with 40 stores, not the 1,000 stores Kohl’s has or the nearly 800 Macy’s has. Those store footprints have big impacts to eCommerce. Macy’s online sales are 2-3x higher per capita in regions where they have stores. That’s not a coincidence. A recent study shows that 60% of digital sales like eCommerce and mobile are influenced by stores. 60%!!! Can you imagine intentionally separating a business from 60% of its influenced lead gen?

With increasing adoption of buy online pickup in-store and browse in-store purchase online, separating the businesses ignores the growing expectations of shoppers for channel agnostic “unified commerce.” And what is going to happen to eCommerce standalone valuations when revenue starts to decline because a lack of store marketing and conversion? It’s not a pretty picture.

Additionally, this strategy ignores all the cost savings from local store footprints. For example, Macy’s Polaris strategy projected a whopping $1.5 billion in annual cost reductions through the synergies of brick-and-mortar retail with e-commerce by the end of 2022. So why has it hired AlixPartners to evaluate a split?

We all know of too many stories of over leveraged debt forcing over expansion and leading to retail bankruptcies. Short-term profiteering led to long-term vulnerability. And yet, we see it with this latest trend of splitting out eCommerce from physical retail, despite physical retail’s advantages in cost of acquisition, profitability, return rates and brand impact. Just check out our webinar: eCommerce is overrated or download the slides.

Here are some quick stats that make the separation strategy more suspect:

  • 70% of DICK’s Sporting Goods eCommerce sales were fulfilled in-store in 2020

  • Target brick-and-mortar sales are growing at 5x the rate as eCommerce on a dollar basis

  • Product return rates are 70% lower in-store

  • Omnichannel customers spend 7x more than online only shoppers

  • 82% of millenials and 67% of Gen Z prefer shopping in-store

Lots of good reasons to invest in-store as part of a unified strategy and retail industry insiders seem to agree. But will Wall Street get its way? We hope not.

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