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November 8, 2018

Going Native: Is Consumer Backlash Impacting Walmart’s Newly Acquired Digitally Native Brands?

MHT Partners  | Consumer Investment Bank

As many informed consumers and investors are probably aware by now, Walmart Inc. and its subsidiary Jet.com have been on a tear acquiring specialty ecommerce marketplaces and digitally native consumer brands in recent years.  Walmart has stated that it is trying to broaden its consumer base, targeting younger, more affluent consumers that increasingly buy everything from sundries to $300 dresses online.  Furthermore, in acquiring digitally native brands such as Bonobos, an e-commerce-driven apparel company headquartered in New York City that designs and sells men’s clothing, Walmart is investing in brands that could eventually migrate to larger format stores and/or 3rd party ecommerce marketplaces.  Bonobos CEO Andy Dunn recently provided a great analogy on CNBC, “It’s kind of like what Netflix did. They started making their own content. And we’re of the belief the same thing is going to happen in commerce.”

Consider the following relevant acquisition timeline (excludes minority investments):

2015:  yhd.com (marketplace in China)

2016:  Jet.com (marketplace), Shoes.com (marketplace), Hayneedle.com (marketplace acquired by Jet in early 2016)

2017:  Bonobos.com (brand), Modcloth.com (brand), Moosejaw.com (marketplace)

2018:  Flipkart.com (marketplace in India), Eloquii.com (brand), Barenecessities.com (marketplace)

While it is difficult to know exactly how well these digitally native brands are performing under their new ownership, the hyper transparent social media world would lead us to believe consumer backlash is widespread.  The complaints and boycotts are plentiful – with a general sentiment that Walmart’s signature cost-cutting measures and employee benefits policies will dilute product quality and overall brand ethos from the inside out.  On the flip side, consumers that have no problem with the new ownership tend to keep shopping and stay quiet (it’s just not fashionable to defend Walmart at cocktail parties).  Additionally, under Walmart, these brands are no longer startups and can afford to invest in showroom growth without raising outside capital, so trying on a pair of $100 Bonobos chinos becomes much easier as the number of showrooms increases markedly.

So what do we know?  ComScore data, cited by numerous publications earlier this year, reflected Jet.com site traffic down 32% since the Walmart acquisition and traffic to Bonobos.com, ModCloth.com, and Moosejaw.com down 7-12% in the prior 12-month period.  Taken at face value, those are abysmal traffic numbers for any ecommerce business.  But, what we don’t know and will likely never know, is how website conversions, repeat purchases, and average purchase (basket) sizes have changed since the respective acquisitions.  The CEOs of ModCloth (Antonio Nieves) and Bonobos (Dunn), of course, paint a rosy picture of life with Walmart, respectively:  “Business has been awesome, we’re seeing [it] in the numbers. The business is growing in double digits every which way: overall, new customer growth, repeat customer growth.”   “What’s most exciting for us is the fact that we’re lifting up the order values not just for new customers, but more importantly, for those repeat customers. The total price of the average order on the site, he says, is the highest it’s ever been.” 

In the absence of goodwill write-downs, it is very difficult for the public to know how small business units are performing inside of large corporations, however MHT will continue to monitor this M&A trend with Walmart and other omnichannel retailers for telltale signs of success or failure.

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