The Finish Line Inc.'s agreement to buy Genesco Inc. for $1.5 billion brings 2,850 shoe stores under single ownership. While, at $800 million, Payless ShoeSource Inc.'s earlier acquisition of Stride Rite Corp. is significantly smaller in dollars paid, it amassed about 4,900 retail shoe stores in one company. While these two acquisitions are different, both follow in the footsteps of consolidation that has taken place in other retail segments.
"It's all about scale," said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm based in New York City. "The scale is what's important, driven by Wal-Mart," he said.
"The name of the game is to develop scale, leverage across a wider base, consolidate administration, cut out duplicate costs, and increase margin, because you're buying more, and deliver better earnings per share for the stockholders," Davidowitz explained. "They can buy better, and it would be smart to pass some of that savings along to the consumer," he added.
"Parents are revolting against high priced athletic shoes," said Britt Beemer, Chairman and CEO of Americas Research Group, Charleston, NC. "Consolidation helps these companies diversify. They need diversity, especially with the current conservative spending nature of customers."
"Finish Line will not be 100 percent dependent on athletic shoes," Beemer said, "and that has been a lagging sector. With Stride Rite, which is strong in high quality, high end children's shoes, Payless has an opportunity to build a quality shoe business at lower costs. And Payless will be able to enter into the upper end market."
"Finish Line has frankly had problems," Davidowitz noted, "while Genesco has generally been doing better. The consolidation is expected to generate $20 million in annual cost savings." Davidowitz also pointed out, "The Finish Line deal, despite the price, doesn't have that much in cash. The acquisition is mostly on debt. It's sort of like a private equity buyout, since Finish Line is only putting up about $11 million in cash."
"Payless/Stride Rite is a small deal, and an affordable acquisition that adds to their mix of merchandise. Payless has bought several companies, but not on debt," he said. "They have the idea that different brands will broaden their customer base, and this one gives them a big play in children's shoes."
"Both consolidations," Davidowitz said, "are really what's going on in every retail segment." He pointed to Federated's acquisition of May Department Stores and the grocery industry, in which consolidation has been, "massive. There used to be 100 top discount retailers, now there are five," he noted.
From the shoe customer's point of view, he predicted, "The stores will try to make the consolidation invisible. They will want the customers to have a better, or at least as good, experience as they had before. Because the companies can buy better, they can improve the customer experience through better marketing, better display, and, if they are smart, better pricing."
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