Let’s take a look at the situation Kohl’s is up against, and it isn’t pretty.
Mr. Richard Baker
I have already expressed my opinion of HBC’s intent to acquire Kohl’s, under the leadership of the now high-profile Richard Baker. My advice was that Kohl’s must do whatever they can to repel such a deal. Why? Because however many billions of dollars Baker has amassed during his career, they were not the result of his retail acumen. They were, and still are, the result of his brilliant ability to unlock the value of retail real estate under the guise that his primary purpose is to re-energize and grow his retail businesses. While the jury may still be out on whether his leadership over HBC’s retail entities has, or is, yielding positive results, the jury (in my head) has decided on the verdict. While many of his initiatives are still playing out, they are all moves that are ultimately based on unlocking, yes, real estate value. And therefore, in my opinion, they will only have negative results on the retail businesses. With all due respect, Mr. Baker’s brain is hardwired in real estate. Thus, he is programmed to view all of his properties occupied by buildings that happen to be retail stores (and websites) as well…real estate. In fact, there was a telling moment during an interview at a WWD CEO Summit a couple years ago when he said, and I’m paraphrasing here, “The retail business is really hard, real estate is a lot easier.” Well, duh, of course it is.
Here is what failure looks like. Acquire a bunch of once-cool brands on the cheap, license third parties to run them, then license them out to a mall developer who then shovels them into hundreds of dying JC Penney stores that happen to be in dying malls.
Mr. David Simon
Lo and behold, and not surprisingly, another billionaire real estate mogul is David Simon, CEO of Simon Property Group. He has already waded into owning retail with Brookfield Asset Management by acquiring JC Penney, fast-fashion retailer Forever 21 in 2020, and teen retailer Aeropostale in 2016. How did he get there? He took all three out of bankruptcy. Retail is not a certain paradise: Brookfield divested Forever 21 in 2021.
Simon dug even deeper into retail by forming a partnership with (ABG) Authentic Brands Group, naming it Simon Properties Authentic Brands Retail Concepts (SPARC). This clever move brought ABG’s brands under the SPARC umbrella including Nautica, Lucky Brand, Brooks Brothers and Eddie Bauer, just to name a few. In my opinion, the “Authentic” part of ABG should be replaced by “Old.” And the RC part of SPARC (Retail Concepts) should be replaced by Real Estate Concepts.
The reason I say “real estate concepts” is because SPG must preserve as much income as possible from the tenants in his challenged malls, particularly the anchors such as JCP. So, it would appear that Simon envisions a synergy by marrying JCP with ABG brands and inserting some of them into his empty mall spaces that were increasing even before the pandemic. I would say that this is definitely a “Real Estate Concept.” I think Simon believes he might stem the tide of declining traffic in his malls with his retail portfolio. And I believe the CEO of ABG, Jamie Salter sees great licensing and leasing deals enhanced by a SPARC synergy.
Whoops. Wrong picture. I don’t think so. A positive synergy is 1+1= 3. When you have an antiquated stable of dying brands plus a lackluster anchor in many of his malls on life support, you have 1+1= less than 0.
Bear with me: Long story short, here is what failure looks like. Acquire a bunch of once-cool brands on the cheap, license third parties to run them, then license them out to a mall developer who then shovels them into hundreds of dying JC Penney stores that happen to be in dying malls.
And Now, Onto Kohl’s
Red alert to Kohl’s! As reported in a WWD article, a source close to the Kohl’s auction
process said, “No one will outbid David Simon if he really wants it. He wants to bolster JC Penney by merging it with Kohl’s. I think he is going to keep both nameplates and have one team do it all. There could be a tremendous amount of cutting, even closing down Kohl’s Wisconsin headquarters.”
Well, I don’t know the “source,” but reading “have one team do it all” and “closing down KohI’s Wisconsin headquarters,” would indeed be the kind of tactical, short-term decision-making of someone who has no strategic vision. And I wonder what Richard Baker thinks about the statement, “no one will outbid David Simon if he really wants it.”
For Kohl’s, I say repel, repel, repel both of them! SPG, in partnership with Brookfield Asset Management (the second largest U.S. shopping mall owner) put in a $68-a-share offer valued at more than $8.6 billion for Kohl’s. And I say, forget the numbers. What’s the strategy? Where’s the synergy?
First of all, unlike Simon’s deal with ABG and using those tired brands to fill space in both his JCP anchors and other vacant mall space, Kohl’s is not tired or old. They don’t need and likely don’t want any of the ABG brands in store. And more importantly, forget about stuffing Kohl’s into weak or dying malls. Ironically, Kohl’s stole about $5 billion of JCP’s market share in the 1990s directly attributable to their location strategy of placing one-floor, medium-sized, neighborhood stores designed for quicker and easier shopping for the working mom who didn’t have the time to drive to, and shop through the malls.
I suppose there would be some operating economies of scale, backend stuff, and some other cost-cutting opportunities. But if you separate Simon’s idea about retail as real estate, I happen to believe that Marc Rosen, JCP’s new CEO and Kohl’s CEO, Michelle Gass are both strategic thinkers and long-term visionaries. If they are given enough runway with no interference, each can significantly increase the success of their respective brands.
A Final Word About JCP
The problem for Rosen with either a Simon or Baker deal would be the level of interference from his real estate owners. Richard Baker would tend to default to real estate solutions and opportunities with only a second thought about the impact on the retail business. And as mentioned, Simon’s SPARC model is also driven by real estate priorities. That being said, a WWD article said, “Simon has been crowing over the investments lately. And he, in effect, was already doubling down, touting this as a transitional and investment year, setting up bigger gains in retail for the future. Simon told analysts in February that the company’s “platform investments,” including Penney’s, SPARC, ABG and Rue Gilt Groupe produced “terrific results in 2021.” JC Penney in particular, seems to be a source of pride. “Penney’s success is an excellent example of how to better understand our company,” Simon told analysts in November.
Simon seems to have caught the retail bug, said WWD. While he is still very much in the real estate game (80 percent of his cash flow), he has encouraged investors to look at his company more broadly. “We have growth levers beyond our real estate assets that are unique attributes of our company.” He also told the analysts that the retail business was more like “a tail wagging the dog. But you know, it’s an important tail and it’s a beautiful tail and it wags nicely and is very friendly.”
Of course, bringing Kohl’s on board would give that tail even more heft. Let’s stick with the metaphor: Simon’s comment reveals that in my opinion, he will always feed the dog (real estate) first and pat its head (retail) second.
Message to Kohl’s
Don’t be SPG’s or HBC’s tail. Repel, Repel, Repel!