Don’t Mess with Marcus
By George Anderson
A number of years back, the Texas Department of Transportation came up with an anti-littering campaign for the state’s highways that used the slogan: “Don’t Mess with Texas.”
Now that Texas Pacific Group and Warburg Pincus have officially gained control of luxury retailer Neiman Marcus, the two private equity firms are promising not to mess with the iconic Texas retailer.
Kewsong Lee, a managing director and leader of Warburg Pincus’ global LBO group, told The Dallas Morning News: “We haven’t changed one thing (referring to the retailer’s business plan). We don’t see a need to put a ‘stamp’ on the company other than to let management keep doing what it’s doing. If you’ve got a good thing going, why mess with it?”
Jonathan Coslet, a partner at Texas Pacific Group echoed Mr. Lee’s confidence in a released statement. “We’re delighted to be investing with the Neiman Marcus management team. Their success and leadership in the luxury retail sector is unmatched. Under their direction and through the efforts of more than 15,000 associates, Neiman Marcus continually offers an unparalleled shopping experience.”
Burt Tansky, president and CEO of The Neiman Marcus Group, signed a new five-year deal to continue leading the company.
“Our new partners share our vision of serving the luxury consumer with distinctive merchandise and outstanding customer service, continuing the nearly 100-year tradition of Neiman Marcus,” said Mr. Tansky. “We are pleased with the successful outcome of this transaction.”
Moderator’s Comment: Is Neiman Marcus essentially recession or other economic calamity proof? What challenges and opportunities are there before Neiman
Marcus? Where do you expect the company to go under private ownership?
The deal for Neiman Marcus involves the owners taking on a heavy debt load. It’s logical to think that a sale of some assets might be in the offing but
when asked that question, Kewsong Lee said, “We will de-leverage as we grow.” –
George Anderson – Moderator
Marcus is essentially recession or other economic calamity proof. However, is it not idiot proof. If it’s not broke, don’t fix it.
Most corporate wedding announcements include the happy couple’s avowals of eternal love and loyalty. Generally, love and loyalty end when profits are less than expected, or when egos clash. This can occur within 5 minutes or 5 years or never (rarely). NM has gone through ups and downs. It isn’t recession-proof. Sometimes the happy couple have unreasonably high expectations of each other. Success can lead to unhappiness: can the expansion take place fast enough, yet keep the profit increases? Will the owners commit the new capital needed? How many new spouses ultimately mean it when they say they don’t want their new partner to change anything? Half of all marriages end in divorce and many that continue married are unhappy. How about a realistic wedding announcement? The buyer says: We got married because the price seemed like something we could swallow and still make our shareholders happy if we can increase the profits by a big jump. If we can’t do it fast enough, we’ll either change the management or merge it with something else or find pieces to sell off. We’ll sell the whole thing when we need the money or when someone else comes along who’ll pay us more than we think it’s worth. The seller says: I sold it because I can use the money for something else. The “purchased” says: I hope we can manage the new owner’s expectations, but everyone has an updated resume.
No retailer, or business for that matter, is recession-proof. We just happen to be in a financially-stressed environment that doesn’t really affect Neiman Marcus’ customer, at least not until the fad of owning the latest Manolos is a priority for that customer (and I don’t see this changing anytime soon).
The future for NM in its new and private hands is without a doubt GROWTH, meaning rapid sales increases through store-count expansion nationally and quite possibly internationally in order to justify (and pay for) its hefty price tag.
“We don’t see a need to put a ‘stamp’ on the company other than to let management keep doing what it’s doing.”
What more could one want to hear? That having been said, one struggles to find a successful retailer founded by a “private equity group,” but you can find many that failed after one took over.
In many aspects, it will be “business as usual.” The primary merchandising and marketing strategies are likely to remain unchanged given the success that the Company has enjoyed in recent years.
However, the new owners will be looking carefully at some areas in particular:
1. Asset Sales:
Since NMG has sold their receivables, there’s not a lot left with significant value. But look for the Company’s Brand Development initiative to become history. The owners will sell off the Company’s majority interests in both Kate Spade and Laura Mercier (Gerwitch-Bristow). NMG invested in these small, developing brands in the late 1990’s to diversify, and while there has been some growth, there is not nearly enough potential to mandate holding onto these non-core businesses. They’ll both be sold quickly but not in a “fire sale” mentality.
2. Expense Reductions:
The owners will examine very carefully NMG’s organizational structure which divides the company into 3 business units: NM Stores, Bergdorf Goodman (essentially 1.5 stores in NYC), and NM Direct that combines the Company’s so-so print catalog division with its red-hot e-commerce/online operation that was developed and built by an ex-NMG senior executive. Each of these three units maintains separate merchandising and buying staffs, planning units, marketing units, etc. There is too much headcount duplication in a Company that is now highly-leveraged and needs to maximize cash flow to both pay down debt and fund expansion.
Expect marketing and planning staffs, et al to first be consolidated into Dallas with BG losing a significant portion of its separate infrastructure. Next, they will likely begin to move BG’s buying responsibilities to the Dallas-based NM Stores buyers while maintaining a small merchandising presence in NYC to ensure that the products are right.
After the BG headcount is rationalized, the owners will focus on the separate staff at the catalog/online unit. Buying & merchandising and marketing in the direct marketing business is different from that of NM stores, so there will be a careful analysis of exactly what functions and people need to remain at the Direct business. However, the buying function can be centralized with that off the Stores unit with separate merchandisers and planners for the Direct business to ensure that the right merchandise mix and adequate inventories are procured.
Also expect that corporate functions like IS, Operations, HR and accounting will be streamlined, although there is not as much “fat” in these areas.
3. Multi-Channel Management:
While NMG has a very successful e-commerce business, the multi-unit structure that exists mostly for functional reasons is an inhibitor to the Company really driving multi-channel sales. NMG’s marketing efforts have focused mostly on maximizing sales from existing, high-value customers which are mostly store customers. The percentage of NMG customers who shop NM Stores, online and catalog is still too low (low single digits). In their own presentations for the Street, Tansky has said that these multi-channel customers can spend up to 4x per annum versus a single-channel customer. Look for much more substantial focus on truly integrated multi-channel marketing as opposed to simply operating in multiple channels.
4. New Customer Acquisition:
With NMG focused mostly on maxing out their best customers, their total customer file/count has remained flat for at least 3 consecutive years. They’ve been generating their strong comp sales results off of their “super-core” customers. While profitable in the short-term, this is not healthy for business over the medium term. Look for the new owners to push NMG management to walk and chew gum at the same time: keep mining those super-core customers but substantially increase efforts to attract new and younger (25-35 year old) customers who can develop into loyal and large spenders, and who will potentially shop Neiman Marcus for the next 2-3 decades. NMG has done an outstanding job with its most profitable customers, but in doing so it is getting an ever-greater share-of-wallet of a very, very small corner of the overall market. They need to expand their customer base to attract younger, up and coming affluents who they can develop into highly profitable customers for years to come.
5. New Concept Development:
NMG has to increase store count aggressively to meet the ambitious growth and cash flow targets that the owners are seeking to make the financial returns work. While they can add more full-line stores, NMG needs to develop a smaller-box concept that will allow them to expand into even more markets. The Company tried back in the 1990’s with a 10,000 sq ft concept called “The Galleries of Neiman Marcus” but it was a complete bust. Store included designer jewelry (David Yurman, et al) and home decor (which still looks awful and dowdy by the way). They need to develop another mini-me concept in the 10,000-15,000 sq ft range that will work: add NM to smaller markets that can’t support a full-line 120,000 foot store, and possibly gain incremental sales in existing markets. The hot merchandise categories are contemporary sportswear, shoes, handbags and related accessories. Surely these guys can figure out how to put something together that works that can add at least 1.0M sq feet of productive selling space to their Company.
Second opportunity is in the home goods arena. The high-end home furnishings market is complex is procurement and distribution, and has a very high service component to it. But this is a $100B+ market and one that NMG has not really tapped. Their home decor departments in the stores are relatively weak; and while they sell home furnishings in their Direct business via Horchow and some on NM.com, they have a long way to go before they can develop a substantive business here. They have played around selling sheets and towels from their Horchow brand in mini “showrooms” within a few NM stores (rebranded as NM goods), but this is a very modest effort that has not gained any traction.
NMG has a relatively weak track record of developing new businesses. The current head of Direct seems to be achieving good success following the strategy and formula put into place by the former senior executive. It remains to be seen if NMG has the ability to do this again in a new venture with their very in-bred management team and culture.
So the new owners will want to keep doing certain things but expect them to begin to make some fairly major changes beginning either spring 2006 or 2007. It will be fascinating to watch how the current senior management team — which is comprised entirely of people who’ve spent their entire careers at NMG — will mix with the new owners after the latter move from the background to the foreground.
Due to Stanley Marcus’ vision, Neiman Marcus has maintained a loyal upscale customer base through several ownership and management changes (among others, CHH and General Cinema ran Neiman’s for quite a while). Neiman’s shoppers can hope that the store continues Stanley’s vision, although new debt and ownership is a risk. Initial promises may give way to bottom line realities. Is Neiman’s recession proof? No, but the high end consumer has proven to be reluctant to give up personal luxuries. There may be fewer donations to charity, stays at the Four Seasons may be cut a little shorter, but nobody wants to give up Prada or Zegna. We’ll need a true recession to really affect Neiman’s, although certain departments may feel a pinch as demand patterns change (as in the past, when men’s tailored clothing suffered when most businessmen stopped wearing suits to the office).
This type of investment is a clear indication that the trend to go upscale and after the ultra-luxury market is a solid strategy.
Unfortunately, it also marks the beginning of the end for many if “too many” begin to compete for “too few” ultra luxury shopper dollars and hours.
These people recognize that owning the original, one-and-only is a better position to be in than to own an up and comer that hopes to compete with the entrenched provider for loyalty from the same market. Very smart move.
Is the old game, “battle for the masses” becoming the new game, “battle for the classes”?