Glossy 101: What happens after two fashion brands merge?

Most recently, Kate Spade and Coach combined in a $2.4 billion deal this month, while reports have swirled that American Eagle, Abercrombie & Fitch and Express are in talks to turn into a miniature mall-retailer conglomerate. In beauty, legacy companies like Estée Lauder and Revlon are combatting the rise of indie brands by taking them over. To compete with Amazon, Walmart has been buying up e-commerce brands like Modcloth and is in talks to buy Bonobos.

“Some brands looking for more market power and share are seeing consolidation as the only way to grow,” said Steven Dennis, founder of the luxury and retail consulting firm SageBerry and former svp of strategy at Neiman Marcus. “The only comparison to this phase of consolidation I can think of was when regional department stores were bought up by companies like Macy’s in the ’90s, and back then, you didn’t have any of the pressure e-commerce is causing now.”

But after a brand like Kate Spade combines with a Coach, what happens to both brands, their internal teams and their customers? As the pace of consolidation is poised to accelerate due to a volatile market, here’s a guide to the the thought process and aftermath of a fashion merger.

First of all, what’s the thought process behind these big moves?
When deciding whether or not to merge with or acquire another brand, companies are faced with the question: Buy it, or build it?

“If you’re a brand like Coach, you’re trying to figure out how to attract new customer segments — they’re not reaching as many millennials as they’d like,” said Dennis. Meanwhile, Kate Spade’s kitschy brand has held on to millennial appeal. “You have to ask: Can I stretch my brand any more? Do I create a derivative? That can be dangerous.”

Indeed, introducing more product while moving away from your current core customer is a risk — and, according to Dennis, acquiring new customers in today’s market is expensive. So, brands see mergers and acquisitions as a fast and relatively lower-risk track to a broader customer pool.

Not to mention, as e-commerce cannibalizes brick-and-mortar sales, and Amazon is cannibalizing overall e-commerce sales, prospective outlook is grim.

“This is not cyclical, this is seminal,” said Antony Karabus, CEO of HRC Retail Advisory. “This is never going to get better, this is only going to get worse. E-commerce is going to continue to grow, and Amazon will continue to take market share — and weaker retailers are dying off one by one.”

OK, so a merger it is. What could go wrong?
When it comes to pulling off a merger or acquisition successfully, a lot comes down to who on each team gets cut and who gets kept. Typically, jobs that immediately result in duplicates — in departments like IT, human resources and accounting — see the ax at one brand, whichever is less equipped to handle more work.

Those working directly with the customers or in creative positions at either brand, however — in departments like marketing, customer experience, and product design — are crucial to maintaining the brand value that was appealing in the first place.

“You have to be careful not to lose [brand value], to the extent that brands want to operate with their own unique identity,” said Dennis. “Blending together is where identity gets lost.”

But, don’t consider it a fix-all.
If an acquisition is pulled off properly, customers shouldn’t feel the effects of a merger.

“The customer doesn’t particularly care who owns what, as long as there’s not a social issue with a big corporate parent,” said Dennis, pointing to Modcloth customers’ issue with the brand’s sale to Walmart. “If it’s well managed, it will be transparent to the customer.”

The goal is, of course, that the customer experience will be improved after changes to things like product curation and brand story. There’s also a market advantage after an acquisition: For American Eagle, buying up a direct competitor — Abercrombie & Fitch — frees up the market.

But a smooth consolidation doesn’t mean the brands that were bought up are any more desirable.

“Customers want the brands they want,” said Karabus. “Even once you slash overhead costs through a merger, you have plenty of work to do.”

How much does Amazon have to do with this?
Consider it the Amazon effect. Customers’ shopping behaviors have forced retailers’ hands when it comes to opening up shop and selling online; it’s necessary to combat the decline of in-store foot traffic. But sales lost in stores haven’t translated dollar-for-dollar online. Brands can thank Amazon — where sales are growing at a pace of two to three times the rest of the market — for that.

“The pressure just keeps coming down from Amazon, which is a company that’s become pretty comfortable not even turning a profit,” said Dennis. “Now they have their eyes set on apparel and fashion, so that doesn’t suggest the pressures will end in the foreseeable future.”

So what’s the other shoe to drop?
The mass migration to direct-to-consumer. As traditional wholesale brands like Kate Spade and Coach consolidate, and Michael Kors is closing stores at a rapid clip, the next step to right ship is getting closer to customers.

“The two things you’ve got to do in this complex time is get a much closer and tighter understanding of your customer — who they are and what they’re buying — and how they want to interact with you,” said Karabus. “Being in too many department stores tarnished the image of brands like Coach and Kate Spade, and they’re going to pull back.”

By cutting out the middlemen, particularly the department stores who rely heavily on discounts, brands can make better decisions following the leaner budget of a merger.

“The pace of consolidation is going to accelerate, because the fundamental forces that are shaping what’s going on in retail aren’t going away until a lot of capacity gets taken out of the market,” said Dennis. “But this is the first wave of pressure. We have yet to see what will happen because of so many wholesale brands going direct-to-consumer.”