Consumer

Sarah Halzack is a Bloomberg Gadfly columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

DSW Inc. has to be experiencing a bit of buyer's remorse.  

In 2016, the big-box shoe retailer said it would plunk down $62.5 million in cash to acquire Ebuys Inc., an e-commerce footwear business that includes online marketplaces such as ShoeMetro.com. 

This week, however, DSW implicitly acknowledged it wildly overpaid. The company said it had written down the value of Ebuys Inc. by $52.7 million, and CEO Roger Rawlins told investors, "we've tempered our long-term expectations" for that segment of the business.

Waiting For The Other Shoe To Drop
DSW shares have sunk as the big-box chain has struggled to navigate a changing retail landscape
Source: Bloomberg

The idea behind the deal was that Ebuys would boost DSW's online firepower and give it more presence in overseas markets. But it sounds now as if DSW simply bought itself a big mess: Executives said in a Tuesday investor conference call that the Ebuys division took a loss in the latest quarter after resorting to huge markdowns to clear inventory. They said they're having trouble sourcing goods for it at the right price. They've appointed a new leader to try to stanch the bleeding.

You'd be forgiven for thinking this story sounds awfully familiar -- we've seen similar misfires from other major retailers.

Nordstrom Inc. was forced last year to take a $197 million write-down on Trunk Club, an e-commerce business it bought back in 2014 that lets customers order a box of clothes curated by a stylist. In April, Canadian department-store giant Hudson's Bay Co. took a C$116 million write-down related to sales weakness in the division that includes Gilt, the online flash-sale site it had acquired a little more than a year earlier.

Bed Bath & Beyond Inc. paid only about $12 million in 2016 to acquire digital home-furnishings store One Kings Lane. That's not exactly a huge investment -- but given Bed Bath & Beyond's sinking market value and weak comparable sales, I don't see clear indications the acquisition has helped the company.

Losing Ground
Bed Bath & Beyond's market capitalization has plummeted in the past several years
Source: Bloomberg

Big retailers keep buying e-commerce upstarts as a way to solve or compensate for their online inadequacies. And it keeps turning out that the shiny digital object doesn't quite have the sustainable sparkle the buyer initially thought it did.

These stumbles should act as a cautionary tale to any retailer thinking of such dealmaking as a way out the "retail apocalypse."  It appears these buyers weren't clear-eyed about the true potential of the acquired businesses, and perhaps didn't do a great job of blending their own supply-chain muscle and strategic know-how with the newcomer's model. And at least in the case of Gilt and Trunk Club, it appears the big retailers mistook gimmicky for innovative. 

It's true that, for now, there appears to be one glaring exception to this pattern: Wal-Mart Stores Inc. Along with its $3.3 billion purchase of Jet.com, Walmart has ponied up for a stable of digital brands that now includes Moosejaw, Hayneedle, Modcloth and Bonobos. While we don't have a ton of details on how those businesses are faring inside the Walmart empire, the company's turbo-charged e-commerce growth suggests things are going well.

E-commerce Surge
Walmart's e-commerce sales have been much stronger in the past three quarters
Source: Bloomberg

But perhaps there's a lesson there. Walmart has truly integrated its new additions into its wider business. Jet founder Marc Lore now leads e-commerce strategy for Walmart's U.S. business. And Walmart and its acquisitions are learning from each other. Jet is tapping Walmart's deep expertise in grocery as it works to figure out delivery of perishable goods to customers' doorsteps. Walmart will soon adopt Jet's "smart cart" model, in which customers see lower prices on online orders if they bundle more items together. 

It suggests these arrangements can work if the big retailer doesn't just annex the little guy, but really works to assimilate it. 

The DSW disaster also underscores a potentially thorny problem for online retailing startups: It could be getting tougher to find a ramp to the big leagues. Old-school retailers might finally start souring on these kinds of acquisitions, now that so many of them haven't worked out well. Walmart's success might prove too intoxicating as a counterexample, but big retailers would be smart to approach these deals with much more skepticism. 

Another option for these startups, of course, would be to go public. But that might be difficult, too, in the current environment. The Blue Apron Holdings Inc. IPO has been a serious flame-out.

Not Exactly Cooking With Gas
Blue Apron's IPO has been a flop, with shares tumbling since the stock's June debut
Source: Bloomberg

Stitch Fix Inc., a subscription clothing service, had to price shares below its target range in its IPO last week. Given that neither of these IPOs was a smash, it might be hard to find investors to get on board with another e-commerce public offering.

This may be bad news for the up-and-comers. But it's high time for investors and big retailers to get real about what these new challengers can really do. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Sarah Halzack in Washington at shalzack@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net