A Leaner Gift Industry
The population of both retailers and vendors is dropping. What effect will mergers and closings have on the players left standing, and how long will the consolidation continue?
By Meredith Schwartz -- Gifts and Dec, 12/1/2008 12:00:00 AM
In an industry as hard to define as the gift business, no one seems to agree on how many vendors, or retailers, there are. But that doesn't mean we can't spot what direction those numbers are moving.
Doug Cofiell, vice president of the Gift & Home Trade Association, told Gifts & Decorative Accessories, “We are seeing consolidation, definitely, both mergers and straight out purchases or going out of business. [While it] slants slightly toward 'out of business' among vendors, it is pretty close to even. There are probably a lot of vendors who would have gone out of business if they had not merged or been acquired. Among retailers it definitely slants toward out of business. The pace of retail consolidation has approximately doubled. So normally if you got 6 percent attrition, now you have 12.”
Vendor Buyouts & Bankruptcies
If you've been following the news via the e-newsletter, Gifts & Dec Direct, and on www.giftsanddec.com, the past year has seen a steady stream of store closures, businesses for sale, Chapter 11 filings, mergers and acquisitions.
On the wholesale side, Enesco acquired Gund and took over manufacturing Boyds products, though the latter was structured as a licensing deal rather than as an acquisition. Russ Berrie bought up two juvenile products companies, LaJobi Industries Inc., and CoCaLo Inc. Honey and Me bought Downeast Candlemakers.
In tabletop, Lifetime Brands bought Mikasa; The Gerson Companies purchased Gracious Goods; Susquahanna Glass acquired Townshend Glass; Applejack Art Marketing bought Boehm Porcelain, and Corning sold Steuben to a newly formed affiliate of Schottenstein Stores.
In stationery, C.M. Paula bought GeoCentral; C.R. Gibson bought Iota, and Random House acquired Watson Guptill. Pinx, A Card Co. closed outright.
In addition, several other companies put themselves on the market this year without, as of press time, having found a taker. THT and Figi's Gifts catalog were put on the block in 2008, while Lenox Group, having failed to find a buyer for either the whole company or its Department 56 business, instead scaled back substantially, discontinuing many product lines and cutting 53 jobs, before eventually filing for Chapter 11 bankruptcy protection.
Of course, mergers, acquisitions and bankruptcies weren't born yesterday. What we've seen in 2008 is the continuation of the pattern that the industry saw in things like the loss of Pacific Rim and the Foreside Company, the bankruptcy of Bombay Co. and the private equity acquisition of Yankee Candle, in prior years.
It should also be noted that a merger is not necessarily proof of economic difficulties. When inspirational giftware vendors Roman Inc. and Cottage Garden Collections merged this October, Mark Timm of Cottage Garden told Gifts & Dec, “This definitely is not a merger of efficiencies, meaning we want to merge all our operations and cut jobs. Neither company is financially struggling; both are healthy businesses that don't need each other. That's probably the biggest difference here; the strategy and the proactiveness is to ensure a really awesome future together, recognizing where the industry is at, rather than either company being backed into a corner.”
Dan Loughman, Roman president and CEO, concurred. “It's a proactive approach to make sure it didn't need to happen to either one of us. This isn't a buyout or a bailout of one weaker company by another. No one is buying the assets of another and then trying to salvage something out of it.”
Said Cofiell of the deal, “That's the first one I've seen where they're both completely healthy, and I think that's a sign that there's still more to go.”
Retail Reconfigured
On the retail side, Linens 'n Things is going out of business. Lifetime Brands is closing all its remaining outlet stores. Restoration Hardware accepted a lower bid for its buyout by Equity firm Catterton Partners than was originally negotiated. Pier 1, itself suffering continuing financial woes, made an unsuccessful bid for fellow retailer Cost Plus. Fortunoff filed for Chapter 11 bankruptcy protection, and also-bankrupt Sharper Image was bought by a joint venture of investment firms.
Department store chain Mervyns LLC filed for Chapter 7 bankruptcy, closing all 175 stores, while Boscov's Department Store LLC filed for Chapter 11 bankruptcy protection. Closeout retailer Value City Department Stores filed for bankruptcy and will close its 37 remaining stores, and discount retailer National Wholesale Liquidators filed for Chapter 11.
The phenomenon is not solely limited to brick-and-mortar retailers: online gift specialist RedEnvelope went bankrupt and was auctioned off; Hallmark pulled out of selling gifts online and by mail, and Current acquired Lillian Vernon, another bankrupt online and catalog retailer.
How Many Stores Are Closing?
The International Council of Shopping Centers estimates there will be 5,770 store closings in 2008. And that number could go up: an October forecast from ICSC put the total closer to 6,100. Store closings are projected to be up 25 percent in 2008 compared to 2007, according to TNS Retail Forward, a Columbus, OH-based retail consulting firm.
Quite a few of the closing stores are in the gift and decorative accessories industry or related markets: Levitz Furniture liquidated its assets and closed all of its 76 stores; Bombay Company unveiled plans to close all 384 U.S.-based Bombay Company stores; Sharper Image announced plans to close 90 of its 184 stores. The retailer will still operate 94 stores to pay off debts, but 90 of these have performed poorly and also may close. Ethan Allen Interiors plans to close 12 stores; Macy's, nine.
And it's not just retailers who touch on the gift and home industries: other brands closing 100 or more stores include Ann Taylor, Foot Locker, Sprint Nextel, Comp USA and Zales, among many others.
Don't look for next year to be better: Retail Traffic magazine quotes Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based retail consulting and investment banking firm, as saying the industry should see a minimum of 10,000 store closings in 2009. The magazine also notes that Excess Space Retail Services Inc., a retail real estate consulting firm based in Lake Success, NY, estimates the number of store closings for 2009 could increase 100 percent, to 12,000–14,000 stores.
Who's Buying?
Considering the credit crunch and companies experiencing falling revenues, who can afford to buy the ones that are for sale? Nick Pavlidis, managing director, consumer products, investment banking, Robert W. Baird & Co., explains: “In gifts and collectibles there are a couple consolidators out there that are leading the sector consolidation. For example, Enesco went through a number of management changes and a late-2006 bankruptcy, but is now backed by Tinicum Capital Partners (a $1.3 billion private equity fund) and has a clean balance sheet. Tinicum put in its own management team headed by former Mattel executives and is highly acquisitive. [Enesco is] the main industry consolidator irrespective of the stock market because today Enesco is a business that is well-capitalized with a very big financial backer.
“Another example is CSS Industries [parent company of Berwick Offray, Cleo Wrap and Paper Magic Group], which is publicly traded out of Philadelphia. While its stock has fallen with the rest of the market (approximately 25 percent in the last year), it is extremely well capitalized with only $50 million of debt and over 500 million in revenue. So it has a very strong balance sheet and has been very actively seeking acquisitions over the last 18–24 months.”
Deals To Be Small, But Many
With credit tight, tomorrow's acquisitions are likely to be small enough for buyers to finance out of pocket, says Pavlidis. “There's a lot of smaller businesses, mom-and-pop types for lack of a better phrase, that have strength in a particular product line that would be very attractive to people like CSS or to Enesco but would not involve a transaction size that is so large that those businesses would have go out and raise debt in these difficult credit markets.
“I do think the larger transactions, such as the 2006 Yankee Candle transaction, will decline significantly in the current market. I don't think the Yankee Candle transaction could happen today, at least at that price, because Madison Dearborn used a significant amount of debt to take Yankee Candle private.
“In the near term (at least the next 3–6 months), lenders will continue to be reluctant to lend such a large amount of debt to finance a large deal in the consumer products sector, particularly if there is any customer concentration or exposure to retailers like Wal-Mart. It is going to be hard for private equity firms to borrow the debt necessary for large transactions, so what we are seeing are smaller deals where more equity is used (such as recent acquisitions by Talon Merchant Capital, Peterson Partners, Marlin Equity Partners and Cortec Group).”
While CSS and Enesco are leading the acquisition pack, they aren't the only interested buyers. Acquiring companies are as likely to come from the financial industry as the gift business. “There is also continuing private equity interest in smaller transactions,” says Pavlidis. “Gifts and collectibles is one of the categories where there is still extreme fragmentation among suppliers. When you have so many small suppliers to a large market, that attracts private equity interest.”
Pavlidis also said that in spite of retail consolidation, the audience of specialty retailers is attractive to private equity investors: “While it may be slightly contracting, it is still a large available market, with stores that really value unique product that is not sold at the big boxes.”
The Road Ahead
Don't look for consolidation to be over any time soon. “Consolidation will absolutely continue for transactions under $75 million in value because there are so many product lines out there that are very attractive to the larger consolidators,” Pavlidis predicts.
Cofiell concurs: “The vendor pace is going to pick up a little more and then subside a little bit,” he says. “A lot of consolidation is going to have to happen. I think the retailer consolidation is about at the top of the pace,” he adds.
Coping with Fewer Customers
With fewer independent retailers left to sell to, where will vendors look to make up the shortfall? Cofiell says, more often to the best of their independents and also to new channels, but not necessarily the discounters most gift stores fear.
“You definitely see some new channels that just have to be exploited,” Cofiell remarks, “these little niches. And there's some growth in the mid-tier, new channel kind of customer…like a Wegman's. Whole Foods is probably even a better example because it covers both the new channel and the mid-tier. The key customers are becoming much more important, no doubt, and I have not met a vendor recently who is not cutting costs.”
Meanwhile, one vendor, Midwest, is planning to expand and sell new product categories to its best customers. Ric Contino, president of Midwest, told Gifts & Decorative Accessories, “We will continue to sell only to premium channels. Midwest will be looking for other product avenues that are going to make sense through the independent retailer. So we'll develop more children's product under the Seasons brand.
“The lines are getting blurred to be called just a 'gift store' — so many of them now carry jewelry and soft goods. It makes the retailer's job much more difficult. They're going to be broadening their horizons in terms of the type of product that they carry.
“Midwest will be broadening the type of product that we carry: An expansion into children's product as well as a lot more holiday.”
As to how retailers will cope with fewer vendors, Contino says, “The [retailers] that remain are going to have to be even more discretionary [about] the vendors they choose, [and about] the quality of the relationship [they have] with the vendors. I think ultimately with fewer retailers and few vendors, relationships become very important.”
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