Retail Partnerships: A Preamble to Market Consolidation?

Last month saw the announcement of several high-profile retail partnerships, including the collaboration between Target and upscale retailer Neiman Marcus and the introduction of trendy British retailer Topshop to Nordstrom department stores. Such partnerships are increasingly common to the retail industry, as evidenced by J.C. Penney’s earlier deal with Martha Stewart, and the popular “mini store” concept. Recent partnership announcements are certainly meant to position these retailers for the holiday season, but they are also an important signal of how the retail industry is changing.

E-commerce is the driving force behind this change. Consumers now have far more shopping choices at their fingertips, and are growing more comfortable with this newfound power. As e-commerce makes the retail industry more competitive than ever, differentiation will be the key to brick-and-mortar retail survival. It is no longer enough to offer strong customer service or a wide range of goods. Middle-market department stores are struggling for this very reason. Today, consumers are finding that many retailers offer essentially the same product and the same shopping experience, simply with a different name on the door. Retail partnerships or exclusive vendor deals are a way for retailers to set themselves apart – making a customer’s visit worthwhile by offering a unique shopping experience.

Retailers have always had an ability to react quickly to change. Survival in the industry is not unlike a game of cat-and-mouse—retailers, consumers and vendors each have the power to change the game, and equally, to be changed by the game. Two to three years ago, vendors exercised a great deal of power in the retailer-vendor relationship. This uneven balance spurred a number of retail mergers that allowed the consolidated and more powerful retail entities to negotiate better prices.

Today, the cat-and-mouse game is taking a new turn as retailers find themselves responding not to vendor pressures, but to the increasing popularity of e-commerce. Retailers are pursuing partnerships and exclusive vendor deals in order to differentiate themselves. As e-commerce further squeezes the market, these partnerships are a preamble to further consolidation. It is my prediction that the pressures of e-commerce will lead to another flurry of M&A activity – not unlike the industry’s prior reaction to the uneven retailer-vendor relationship. With e-commerce here to stay, expect further market consolidation to be the next move in the game.

Do you agree? Can we expect a surge in retail M&A activity in the future?