Over the past few years, J.C. Penney (JCP) has been remodeling and refurbishing many of its storefronts in order to enhance the customer shopping experience. Though the company was hard hit earlier by the softness in consumer spending, these moves helped offset some of the macroeconomic pressures.
For example, starting in 2006, JCP revitalized its merchandise. It joined forces with LVMH’s Sephora and rolled out beauty counters in many of its establishments, which garnered much success for those two companies. This past October, J.C. Penney moved to acquire the Liz Claiborne and Monet family of brands from Liz Claiborne (LIZ), and many were curious whether vertically integrating J.C. Penney’s organization would be helpful.
J.C. Penney initiated another major strategic alliance in early December. It invested roughly $38.5 million and purchased a 16.6% stake in Martha Stewart Living Omnimedia (MSO), granting it two seats on the board and a ten-year commercial agreement. While MSO investors seemed enthused by the deal, JCP shareholders were somewhat more skeptical about the joint venture. This announcement followed Martha Stewart’s strategic review of its own portfolio, which many feared would encourage the homemaker media conglomerate to sell parts of its business or put itself on the auction block.
As part of the arrangement, J.C. Penney will begin to build Martha Stewart retail kiosks within the majority of its department stores starting in February, 2013. Additionally, JCP has concentrated on widening its digital footprint in order to keep pace with its competitors. As such, the two companies will likely develop a jointly-branded Web site, which is also expected to launch sometime early next year.
Martha Stewart has had a long history of merchandising, and has ramped up its retail relationships over the past few years (in an effort to bolster sagging sales at its publishing division). Its home improvement line at the Home Depot (HD - Free Home Depot Stock Report), crafts at Michael’s and Jo-Ann Fabric and Craft stores, and pet-related products at PetSmart (PETM), among others, have helped the lifestyle goods company bolster its brand equity.
Yet, some are concerned that this new deal with J.C. Penney will hurt Martha Stewart’s other business relationships, specifically with Macy’s (M). Of course, the discount department store only plans to open the Martha Stewart kiosks when the homemaker brand’s contract with the Herald Square retail giant expires. Likewise, the new commercial agreement grandfathers in Martha Stewart’s existing relationships with vendors in case the two prior partners choose to renew their commitment.
Even so, some consider the J.C. Penney deal to be a step down for the lifestyle brands company. The department store giant promises: “We make style affordable, we make it yours.” Some wonder if the move will make the Martha Stewart housewares name too ubiquitous, causing the merchandiser to lose some of its cachet base.
Brands thrive with the help of merchandising and marketing efforts, and often rely on retail relationships and licensing deals in order to grow. Yet, these companies do walk a fine line between making product lines accessible versus diluting offerings by inundating the marketplace. Many companies aim to serve a niche market, and though they may try to widen their footprint, it is important that they not lose sight of their original customer base.
Thus, merchandising companies often try to create a multi-tier strategy and offer their labels at various price points to maintain their brand identify, while targeting members of various economic classes. Over the past few years, partnerships (like the J.C. Penney-Martha Stewart alliance) have cropped up. This has led to much discussion about the benefits the designers and retailers may reap from such a deal.
Some have criticized luxury designers for diluting the marketplace, thereby eroding its own brand perception. PVH Corp’s (PVH) Tommy Hilfiger, for example, grew well beyond its original audience. But the preppy clothing designer cast its net a bit too wide, and lost much of the appeal it had to its higher-end customers domestically. The Hilfiger brand lost steam in the United States, and though its performance in the European marketplace helped salvage some of its image, the company cannibalized many of its revenue streams.
Consequently, some are concerned that the J.C. Penney and Martha Stewart alliance, seemingly strange bedfellows, could bode poorly for the companies involved. Luxury brands or higher-end designers run the risk of oversaturating the marketplace. Still, certain vendors and brands will forego the potential negative outcome for near-term profit potential. Indeed, many consumers are more likely to splurge on designer goods when they are easy to obtain.
For example, last September, when Target (TGT) partnered with Iconix Brands’ (ICON) and launched the Missoni line in stores and online, the collection quickly sold out and the Target Web site crashed due to the surge in traffic.
Designer Vera Wang (famed for her wedding dresses and couture gowns) also faced skepticism when she launched an exclusive bridal jewelry line with mall jeweler Zale (ZLC). The company already made inroads into mass marketing its designs when it partnered with discount department store Kohl’s (KSS). In fact, Vera recently expanded its clothing line there.
Even though it can be somewhat tricky, we believe that merchandisers’ pursuit of a multi-tier strategy could provide ample room to grow. All told, as long as these companies remain true to their brand identify, while targeting members of various economic classes, they should profit from mass marketing their goods. So J.C. Penney and Martha Stewart may end up being a “Good thing.”
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.