In an intriguing piece of news I found out yesterday through J.Crew Aficionada, Urban Outfitters and Sears Holdings are currently both weighing a bid to buy the J.Crew Group (owner of J.Crew and Madewell).
For those unfamiliar with the situation, in late November J.Crew Group announced an offer from TPG Capital and Leonard Green & Partners to take the company private. J.Crew Group is currently a publicly traded company. Companies usually go private when they want to make significant behind-the-scenes changes away from the intense scrutiny of stock holders and analysts. If they stayed public and their moves were unpopular, their stock could fall and leave the company in an unhealthy financial situation. (Though conversely if the moves were popular they could receive a windfall through upward stock trajectory.) By taking the company private J.Crew would answer to fewer leaders and bankers and could make moves more quickly and decisively. If J.Crew indeed goes private all current stockholders would be paid the agreed upon per-share amount. There is much more to it than this but that is a very basic explanation.
Though J.Crew has been profitable for the last few years their stock has been stagnant and lately they’ve had larger inventory holds, which is sometimes a warning sign of trouble ahead. Increased discounting of stock and stagnant store sales have led to calls for changes. By going private, J.Crew has more authority over their changes.
Though TPG Capital’s offer came in November, buyouts are long processes that go through several phases. The current phase of the deal allows for other suitors to come in, investigate the financials and decide whether or not to make a competing offer. It’s unlikely that either Sears Holding or Urban Outfitters will actually make an offer. Both are likely taking advantage of the access to see exactly where J.Crew stands and compare that to their own financials. It’s a shrewd move that also helps J.Crew, because in the event that either Sears or Urban Outfitters does make an offer that is higher than TPG’s it gives J.Crew a better negotiating position for sale stock price. It’s a win-win.
This post will examine what an Urban Outfitters purchase might bring.
Topline Thoughts.
On the surface, Urban Outfitters’ interest in J.Crew Group makes sense. Though not every fan of one brand is a fan of the other, there is a fair amount of audience overlap between J.Crew’s Madewell brand and Urban Outfitters’ namesake brand. There’s also overlap between J.Crew and Anthropologie. So by acquiring J.Crew, Urban Outfitters strengthens its hold on the fans of both while bringing fans of J.Crew/Madewell-only into the fold. There is the off chance that UO could pull a Google-like move and buy J.Crew only to shut it down. But that is highly unlikely.
The Business Side.
The questions around a marriage between Urban Outfitters and J.Crew start right at the top. Presumably since UO would be the buying party its CEO Glen Senk would remain at the helm. But while Senk is well-regarded, J.Crew CEO Mickey Drexler is known as a wizard of sorts who is credited with some of Gap’s best years (the late 1990s) as well as the recent popularity surge of J.Crew. It’s unlikely that either of these men would want to work for the other so one of them would likely step down, and I’d lay my chips on Drexler being the one to go.
Senk’s management style is built upon letting each business unit run independently. So the main design team of J.Crew would continue to work as it has. The question is whether the design management team stays in place. Presumably this sale is at least in part about shaking things up and trying new directions. President Jenna Lyons, VP of Men’s Design Frank Muytjens and Head Women’s Designer Marissa Webb may choose to stay on and try these new directives but they may also opt out.
From a staffing perspective, J.Crew eliminated hundreds of jobs in 2010 as a cost-savings move. I did not hear this same news coming from Urban Outfitters, a company which is known for both staff loyalty and corporate loyalty to the staff. How will the corporate cultures of these disparate companies mix together?
Though each business unit of Urban Outfitters runs independently they do share much of their back-end technology. They run out of the same warehouses, their fulfillment systems are the same and they (hopefully) all use the same inventory technology. J.Crew presumably does not use this technology. Would Urban Outfitters take on the gargantuan task of integrating J.Crew’s operations into its own? What about their ecommerce systems, their customer service, their sourcing and production, etc.? These are no small tasks that often take years to change. If UO plans to keep J.Crew around for the long haul they will want their new unit to have the same infrastructure as everything currently under the umbrella.
The Production Side.
I’m not going to get too technical here, but I can’t imagine the headache merging the technologies of the two companies would be. I oversee the teams responsible for migrations and integrations of the systems side at my job and I know these are complex projects with many moving parts. The CTOs of both J.Crew and Urban Outfitters are probably wringing their hands as we speak.
While each arm of Urban Outfitters currently sources material, designs and inspiration individually there is overlap in production whenever possible to help keep costs down. All of Urban’s brands (Free People, Urban Outfitters and Anthropologie, plus home brand Terrain and wholesale brand Leifsdottir) have in-house design teams as well as sourced designs. Will J.Crew still use Loro Piana for their cashmere? Will their design sources change?
Most importantly I’m sure to J.Crew fans, how will the designs themselves be affected? J.Crew has recently abandoned its preppy roots in favor of ultramodern designs, which has left some of its customer base feeling ditched but also introduced a new, younger customer base to the brand. Would Urban Outfitters allow J.Crew to continue on this path? Would J.Crew need to differentiate itself more from Anthropologie? Or would they seek a return to the preppy styles that are currently a hole under the Urban Outfitters umbrella?
We can’t talk about production without mentioning quality control. Any J.Crew lover can tell you that quality has been issue for the last several years. Unfortunately I’ve recently seen this same issue creep into my Anthropologie orders. This is something that needs to be addressed and taken seriously. Is Urban Outfitters prepared to up this operational cost for J.Crew? Or will they continue to run the company as a sales & marketing force first, upscale design second and customer service last company? J.Crew’s operations don’t really match up to Urban Outfitter’s methods.
The Customer Side.
When it comes to customer service, J.Crew excels at treating its best customers well. Private shopping events, exclusive discounts and VIP access to yet-to-be-released-items are just some of the perks. They have some delineation in their support structure, with a general customer service number as well as a private personal shopping line for frequent shoppers. Their stores maintain customer lists and make efforts to retain important customers through promotions and regular contact. CEO Mickey Drexler regularly reads and responds to direct emails from customers.
But as far as their general customer service goes, J.Crew is adequate at best. Ask any customer if they’ve ever gotten a discount as a “one-time courtesy.” Frequent discount shoppers are all too familiar with J.Crew’s infamous “final sale” promotions. How many times has J.Crew’s return policy changed since 2009? More than once. They are, to put it bluntly, not customer-centric.
Contrast that with Anthropologie, one of Urban’s brands. Anthropologie is a customer-centric company first, upscale design second and sales & marketing last. Their service team is trained to err on the side of the customer. The company focuses on personal service and will have even senior management reach out to individual customers when needed. Their service chain is linked from the bottom up, meaning even C-level employees review service issues and can authorize courses of action as needed. This practice has built up a loyal, affluent customer base that stays with the brand for years.
This may just be a matter of updating the training for J.Crew’s reps, i.e. banging them over the head with a book every time they say one-time courtesy and saying, “NO! That’s not how we do things here.” But it could also represent a cultural shift in one side or the other. Personally, I would curse J.Crew to the deepest circle of hell if Urban Outfitters adopts their customer relations strategies. And then I would abandon both J.Crew and Anthro. I’m sure I would not be alone.
Final thoughts.
As I mentioned above, it’s highly unlikely that J.Crew ends up being bought by Urban Outfitters. The changes required are sure to hurt J.Crew’s stock price, and why would Urban want to inflict that pain upon themselves? Right now Urban is enjoying a nice stock bump from the news they’re looking into the acquisition. But is J.Crew the right acquisition for them? I’m not so sure. J.Crew meanwhile is hurting from the news, and is already facing lawsuits related to the offer from TPG Capital. It’s a messy situation.
Personally, I’ve liked the design changes at J.Crew (though I also like their old designs) and while I enjoy many of their customer perks I am regularly dissatisfied by their general customer service. So much so that my spend there has steadily decreased over the last couple of years. Anthropologie is currently my favorite store, though I have been frustrated with some inconsistencies in their service in the last 6 months, some odd choices in their marketing and promotions and an emerging quality issue that needs to get nipped in the bud. If Urban Outfitters and J.Crew come to be one company, I hope they will choose the best aspects of both companies to keep and cull out the negative driving forces.
What do you think of this news?
Further reading:
Sears, Urban Outfitters Said to Weigh J. Crew Bids (Bloomberg)
Drexler’s wary about 2 new J. Crew suitors (NY Post)
Contextual background:
J.Crew’s Deal to Go Private {it just got a lot more interesting} (JCA)
J.Crew’s Deal To Go Private {you’ve got some explainin’ to do} (JCA)
J.Crew To Be Taken Private (JCA)
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