Wal-Mart Crashes the Fashion Party
By Pallavi Gogoi
It has been a turbulent few months in the world of fashion. First, Wal-Mart (WMT ) dropped a bombshell, with its eight-page ad insert in the September issue of Vogue, the fashionistas' bible. Now, the buzz is that the world's largest discount retailer is in talks to acquire fashion icon Tommy Hilfiger (TOM ).
Spokeswomen from both sides aren't denying the reports, only declaring they won't comment on rumors. Says Pam Danziger, founder of Unity Marketing and author of Why People Buy Things They Don't Need: "After proclaiming their entrance into the fashion world with the Vogue ad, this is a logical step for Wal-Mart."
Wal-Mart never does anything in a small way, and if the speculation is on target, this could be its latest step in an aggressive move to go upscale. CEO H. Lee Scott Jr. gave investors signals that a deal like this could be coming. At the annual meeting this year in Bentonville, Ark., Scott lamented that many customers shop for basic goods like food and paper towels at Wal-Mart but go elsewhere for apparel. "What we've got to do is make sure that those customers aren't bypassing [our] other departments," he said (see BW Online, 9/22/05, "Wal-Mart's Scott: "We Were Getting Nowhere").
BEEFING UP BRANDING.
Wal-Mart's ads in Vogue are slated to run for 18 months, according to Director of Corporate Communications Gail Lavielle, who says they're "designed to show that Wal-Mart is trend-right and fashion-forward." And the chain has already started targeting the higher-income demographic by selling high-end electronics like home entertainment systems and plasma TVs.
If the Hilfiger deal comes through, some wonder if it might just be the first among several high-end brands that Wal-Mart may add to its stores. "After all, Wal-Mart has already conquered the world and put the small guys out of business. Why not move upscale now?" asks Alan Siegel, chairman of brand-strategy firm Siegel & Gale.
The retail giant is already beefing up its brand and marketing departments. In April, it promoted John Fleming to chief marketing officer. Fleming had spent 19 years at cheap-chic retailer and archrival Target (TGT ), where he was responsible for the famed fashion divisions, among other things. And on Aug. 31, Wal-Mart hired away Stephen Quinn, the chief marketing officer of PepsiCo's (PEP ) Frito-Lay division, to develop Wal-Mart's marketing strategy and brand development.
Tommy Hilfiger would give Wal-Mart an entry into the rarefied world of designer chic, especially among the sought-after younger demographic. "Wal-Mart is certainly looking to hitch its wagon to a brand that can lead it to an upscale consumer base," says Robert Passikoff, president of strategic brand consulting firm Brand Keys.
Hilfiger was already on the auction block, having hired investment banks J.P. Morgan Chase (JPM ) and Goldman Sachs (GS ). It has been struggling to regain its luster as a cutting-edge preppy brand, but sales and profits have sagged.
"The Tommy brand has lost a bit of its luster," says Wendy Liebmann, president of WSL Strategic Retail, a retail consultant. For its fiscal year ended March 31, 2005, Hilfiger's sales topped $1.78 billion, down from $1.87 billion in the previous year. It reported income of $92 million, compared to $170 million in fiscal 2004.
JUST LIKE TARGET?
Yet integrating the brands could pose a challenge. After all, women's Hilfiger cardigans average $60, while the most expensive sweater at Walmart.com is $19.94. Much would depend on how the deal is put together.
It would also be interesting to see what an acquisition would mean for the Hilfiger line, which is carried by innumerable specialty stores internationally. Hilfiger might be able to retain its licensing agreements with multiple retailers if founder Tommy Hilfiger decides to design a special line for Wal-Mart and keep his current "Tommy" brand intact, much as Isaac Mizrahi and other designers have done for Target.
Some industry observers speculate that Wal-Mart might do with Hilfiger what Target did with fashion designer Mossimo Giannulli in March, 2000. Target saved Mossimo from possible bankruptcy and guaranteed $28 million in annual royalties for several years. But a Hilfiger deal would have to be more complex. Mossimo was well known mostly in the California design circle -- unlike Hilfiger, which has worldwide renown and cachet. And Hilfiger is nowhere near bankruptcy -- it raked in $74 million in royalties alone in fiscal 2005.
Investors are rooting for a Hilfiger sale. After sinking to $10.90 a share at the beginning of the year, the stock has rallied 55%, especially after reports that Hilfiger was on the auction block began to spread. It closed Sept. 27 at $17.25, up 26 cents in the last two days of trading since the reports of the Wal-Mart talks. The behemoth's shareholders seem to be blasé about the prospect of the megastore snatching up a new accessory -- its stock has barely budged from around $43 over the past few days.
It's too early to tell whether Wal-Mart can successfully bring some fashion runway pizzazz into its Main Street stores at a price that's both profitable and affordable. But Wal-Mart is clearly on the move. It teamed up with teen magazine ELLEgirl and sponsored a fashion show during New York's Fashion Week at Times Square Studios, where the runway spilled onto the street, allowing pedestrians to watch. Now the trick will be to get those pedestrians into Wal-Mart stores to shop for fashion at "everyday low prices."
Gogoi is a reporter for BusinessWeek Online in New York
Edited by Beth Belton