Using the ABC Model to Reinvigorate Retail Brands


Date October 2017

Featured in the Journal of Corporate Renewal

It’s not news that traditional retail has been undergoing a sea change for quite some time, as evidenced by the growing number of big names that have been forced to downsize or close altogether in the past few years. Rue21 and Payless Shoe Store have each closed 400 stores so far this year. Gymboree announced plans to close 375 of its Gymboree, Crazy 8, and Janie and Jack stores. Gordmans, Gander Mountain, hhgregg, Wet Seal, and The Limited all have closed stores or are in the process of closing entirely.

In fact, this year is on track to significantly outpace the closure levels from the peak of the financial crisis, with 5,300 announced closures through the end of June 2017, compared to 6,163 throughout all of 2008. This year has also seen a 32 percent increase in retail bankruptcies over the same period in 2016.

The reasons for this significant dislocation have been well-covered elsewhere. The long-term liabilities include unfavorable store leases and supplier relationships, relatively slow time to market, outdated marketing strategies, and a belated and sometimes half-hearted commitment to the internet as a sales channel that characterizes most traditional retailer businesses. Many traditional retailers simply have not adapted to mesh well with the fickle, digital-native customer who is engaging with consumer products in a fundamentally different way.

Into this chaotic environment have stepped several brave and big-name private equity firms that have acquired distressed retailers either in or out of bankruptcy. Typically, these firms come in with detailed plans and go about methodically closing unprofitable stores, changing to more advantageous sourcing relationships, investing in the company’s web business, and sometimes even bringing in new creative leadership to reinvigorate the business.

Despite these significant investments of time and treasure, the winds buffeting traditional retail continue to strengthen, and it is becoming clear that even these efforts do not go far enough to save these broken businesses. “Chapter 22,” a euphemism for two Chapter 11 bankruptcy filings in quick succession, has gone from being a unicorn of sorts to something more commonplace, with retailers such as RadioShack, American Apparel, and Wet Seal all achieving this dubious distinction over the past year.

Tapping Brand Value

If traditional tools for reviving ailing retailers are no longer working like they once did, then the time has come to fundamentally rethink whether such retailer businesses even deserve to be saved. The inclination in some quarters, based on several high-profile failed revivals, has been to throw in the towel on the assumption that the time for many traditional retailers has passed and no amount of restructuring will allow them to be reborn.

A new class of investors does not share this pessimistic view, however. In the carnage of the current retail landscape they see what they believe are assets significantly undervalued by the market—some retailers’ brands. Over decades, most major retailers have invested astronomical sums in marketing their brands and in building awareness and affinity for them among consumers throughout the United States, and often around the globe.

The new breed of retail investor believes that these investments retain significant value, even if the retailer cannot make the math work in its current business model. By stripping retail businesses down to their core brand assets and building from there, they believe they can launch the successful retail businesses of the future on the foundation of the retail brands of today. 

 All signs are pointing to the success of this fundamental paradigm shift. The future of 21st century retailing seems to have arrived in the form of the assetless brand company (ABC), an innovative new entity that maintains the brand name—and the loyalty that goes with it—while shedding all of the operational complexities associated with running the retailer, including real estate, inventory, and staffing.

Through strategic licensing arrangements with firms that specialize in various aspects of retail, ABCs can delegate obligations like sourcing, maintaining inventory, distribution, shipping logistics, or even store operations to third parties. Liberated from these constraints, ABCs have the flexibility to focus on what is most critical for survival: trend identification, world-class marketing, social media, innovative online strategies, and, above all, cultivating the brand. 

In a retail market that has been turned upside down, the teen apparel segment has been one of the most deeply affected. Representing a $30 billion market, the weakness in teen apparel is a significant challenge. In addition to all the usual suspects that have been putting general retailers under pressure, today’s teens pose their own unique challenges in terms of product development and marketing.

This cohort has high expectations, demanding increasingly quicker time to market for the hottest trends. And, they rely heavily on digital channels to access and interact with a hyperconnected world. This includes how they learn about brands, trends, and style icons via social media and influencers in their communities. It also holds true for their consumption habits—buying and exploring products online.

So how does a retailer stay close to such a fickle consumer? It all comes down to flexibility, which is why starting an ABC with a clean slate is so important. Its structure allows the brand to cater to consumers on their own terms, even in an environment where the stakes are consistently rising in terms of product demands, shopping formats, and building brand loyalty.

The Idea in Practice

The ABC model offers a compelling framework for success, especially since it provides great opportunity for a brand to reinvent itself in a way that meets change and challenge head-on. After the second bankruptcy filing of Wet Seal, a teen-focused fashion retailer, the author’s firm saw an opportunity to acquire the brand and the other intellectual property of the business and put the ABC strategy to work. There were several characteristics of the business that inspired confidence that the brand was a perfect starting point for a relaunch under this business model.

First, the business had significant scale from a revenue standpoint, even if the profitability wasn’t there in the past few years. As recently as 2014, the retailer was doing more than $500 million in revenue and had 478 retail locations dotted around the country. This scale and footprint were responsible for an astonishing 97 percent brand awareness in the targeted 13- to 24-year-old demographic.

Furthermore, approximately 66 percent of these target consumers had shopped in a Wet Seal store in the year immediately preceding the firm’s purchase of the brand. Customers loved the brand, with more than 88 percent having a favorable or very favorable view. Most importantly, 84 percent said that they would be likely to shop the brand even if it did not have its own stores anymore. All these signs pointed to a valuable brand trapped in a broken business model. 

As stated earlier, the ABC model is critically reliant on finding the right licensee partners to assume the operating responsibilities of the business. In the case of Wet Seal, a partner that could shorten product time to market and had a deep understanding of the web as a platform for retail was critical. The team needed a licensee partner that had an in-depth view on the fast-fashion consumer and would work with the firm to deliver visionary marketing campaigns that would drive loyalty and revenue from both historical and new customers. Finally, it was absolutely essential that the new partner would treat the Wet Seal brand as its own and not just as an add-on it to a large portfolio of other businesses that it operated. 

The opportunity attracted one of the largest e-commerce companies in Mexico, which was looking for a way to strategically enter the U.S. market. The company, which delivers quality and value fast-fashion products from its web-based retail operations in Mexico, also saw tremendous value in the awareness of and affinity for the Wet Seal brand, as well as its multimillion-person mailing list and Facebook following. Combining the e-commerce retailer’s operational infrastructure with brand management skills put the two in a position to relaunch Wet Seal—all under a far more efficient and profitable business model—less than six months after acquisition of the brand.

Light at the End of the Tunnel

The headwinds affecting retail are strong. But for those who think differently, there might be an incredibly lucrative silver lining. Is the ABC the future of retail? For certain segments, teen apparel among them, it certainly looks that way—provided there is a clear vision, a creative approach, and a passion for reinvigorating underutilized brands. And to do so while authentically serving consumers and maximizing profitability—that’s one trend that has real staying power.