Today I want to talk to you about Boohoo buying Debenhams and if it was a good idea and what will have to happen for it to succeed.
Last Monday’s announcement that fashion website Boohoo had bought the Debenhams for the price of £55m. I would like to examine what exactly is it buying and why is it buying it?
What is it Buying:
Boohoo is just buying the brand name and its website and nothing else.
Boohoo has no interest in the 124 Debenhams stores, infrastructure, stock or employees. It just wants the brand.
Because the administrators of the failed retailer have given up on selling the whole business they accepted the offer for the brand part of the company.
An Deal Unusual
Many people have lumped the Boohoo acquisition of Debenhams with the similar recent acquisition of Topshop by ASOS. But the ASOS deal is far more normal. ASOS will buy the whole company (if the deal goes through) and then ditch the bits it doesn’t want and be left with what they want to keep.
What makes the Debenhams deal unusual is that the acquirer is just buying the brand name and its website.
In many cases, If you total up all the assets that a company owns the brand equity of that company will often exceed a lot of the other company assets or possessions.
What Boohoo is doing is opening there parent company to a new customer base with the Debenhams deal. (But more on this later)
“between owning the name Coke and all our factories and trucks… I would choose the name Coke.”
— CEO Roberto Goizueta
Let’s look at Coke and talk about the Coke brand. Coke is now estimated to be worth around $33bn. Given Coca-Cola’s overall market capitalization is just over $200bn, it means that The brand its self accounts for just 15% of the company’s total value these days. That’s still sizeable when you consider that the Coca-cola company (parent company) owns and operates hundreds of other brands, like Fanta, Dr Pepper, Vitamin Water, Schweppes, Sprite, Oasis, Powerade, Costa Coffee and many more. It’s a significant drop from the old days when Coke’s brand value represented 30% or 40% of the total value of its parent company but times have changed, and they have successfully become bigger than the original coke brand was moving with the times and investing in different brands that serve different purposes.
A valuation of brand equity is useful when a company wants to either increase the price of any favoured potential acquisition or fend off an unwelcome takeover.
Appealing to Multi generational:
The deal really puts Boohoo on the map as a major retail player in the UK.
Others may argue that Boohoo’s ownership of Debenhams will taint and destroy the brand’s appeal. But I don’t think that will be boohoo’s problem. (More on this later)
Debenhams has a multi generational appeal. It is still one of the 10 most visited fashion retailers on the high street. This broad appeal will open up many new target segments that Boohoo simply could not have reached.
There is also a possibility of product diversification. If you can remember your last visit to a Debenhams you will probably recall the many floors of fashion, shoes, sports products and homeware. The idea of a Boohoo candle stick probably does not appeal to many people. But with the Debenhams brand on it, they can do it with a lot less friction.
And then there is the price sensitivity that the Debenhams brand confers. It is a brand that still carries enormous amounts of awareness among consumers. That means that consumers will expect to pay more for Debenhams gear then Boohoo.
That’s a critical attraction for Boohoo, which is cursed with a fashion brand that is popular but only profitable through squeezing costs and maximizing scale. Selling a dress for ten pounds, with a further £2.60 knocked off in the sales, it’s not a great business model to make serious profits.
Debenhams does not just bring older and richer consumers into view, it also presents a significant opportunity to charge them more too.
But Can They Manage A Different Kind of Brand:
The big question for Mahmud Kamani (Owner of Boohoo) and his teams at Boohoo is whether they will now be able to manage such a different brand, product mix and target market.
It might sound simple but too often companies get good at a certain kind of business and find it all but impossible to accommodate the changing requirements that new brands bring.
Even though Kamani’s sons made a big success of Pretty Little Thing. It’s a brand that’s identical to Boohoo. Running Debenhams will prove a much bigger challenge weather that’s strategy, target market pain points or simply product costs.
Every which way you look at the Debenhams acquisition, it looks good. A great price. A great opportunity to diversify. But time will tell if they can really make use of the Debenhams brand and not devalue the brand with a bad strategy, bad product mix or with bad quality products.
That’s all for today until next time this has been Jack Thomson