Finance Lead Flux
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istock_debenhams_JasonBatterham acquires Debenhams for £55m: Will it all end in tears?


It might strike as a strange acquisition, but the details of it make sense. Boohoo is moving from an “online fashion retailer” to a “tech company that operates in fashion” - a subtle, but important change.

27th Jan 2021
Finance Lead Flux
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On the face of it, this acquisition seems quite strange. Sitting at one side of the table we’ve got Boohoo, an online fashion retailer with no physical presence and a target consumer of 16-24 years old. Across the table is troubled department store and ex-high street juggernaut, Debenhams, with a large physical presence and target consumer of 45-55 years old.

At first glance, you might think Boohoo has gone a bit crazy. Why buy a company where there are very few crossovers? It’s a good question, but there seems to be a method in Boohoo’s madness. Let’s take a look and see why they’re doing this.

They’re buying the virtual, not the physical

Boohoo is buying the intangible assets rather than the tangible ones. This is a key point - the acquisition includes intellectual property such as the website, brand and customer lists. No physical property or stock is included in the deal. If a buyer can’t be found for the physical segment of Debenhams, then it’s likely tovanish from our high streets forever.

If we delve deeper into the Debenhams online business model, we can start to see where Boohoo is going with its thinking.

The marketplace business model

Debenhams currently generates approximately 25% of its online revenue through what it calls a marketplace. A marketplace is a platform that allows third parties to sell to consumers without first having to sell to the retailer - like how individuals can sell through eBay or small businesses can sell through Amazon.

Boohoo’s vision is to relaunch this marketplace and capitalise on a structural change in online fashion retailing. This structural change is a shift away from the traditional retailer model to a marketplace model, where a customer can access a huge variety of brands through one website.

The economics of a marketplace are appealing

It makes a lot of sense for an online retailer like Boohoo to go down this path. Marketplace business models are incredibly lucrative - the marketplace will usually take a percentage of the transaction value that passes through the platform (for facilitating the sale). Stock is normally held by the brand that sells through the marketplace and shipped directly to the customer, meaning Boohoo doesn’t need to deal with the logistical or working capital challenges of holding stock.

What’s more, offline rivals will struggle to compete with the marketplace - in much the same way that physical bookstores can never provide the number of book titles that an Amazon Kindle can, physical stores will never be able to provide the sheer quantity of brands that an online marketplace can.

The model is a high-margin space - eBay makes a gross margin of around 75%, which compares favourably to Boohoo’s 55%. It would also accelerate revenue growth as Boohoo is able to facilitate a much larger volume of transactions without needing to worry about financing stock.

In essence, Boohoo is changing from an online fashion retailer to a tech company that operates in fashion - it’s a subtle but important change.

Why are Boohoo best placed to do this?

Marketplaces are incredibly hard to get going - it’s the classic chicken and egg problem of ensuring there are enough brands to attract consumers, with enough consumers to attract brands.

Boohoo can kickstart this momentum with the Debenhams acquisition, but also through the brands it already owns - nine in total plus any brands acquired from Debenhams. This allows Boohoo to start the flywheel spinning by relying on its own brands on the supply side, while driving the demand side using the acquired customer lists.

Once this marketplace is up and running, Boohoo hopee to expand further to beauty, sport and homeware - all areas where Debenhams was traditionally strong - to further boost its earning potential.

Asos is potentially acquiring Arcadia Group brands too

On the same day as this news was announced, Asos was forced to put out a press release addressing media speculation around its potential acquisition of the Arcadia Group brands (Topshop, Topman, Miss Selfridge and HIIT). 

It appears the key drivers of this transaction are much more traditional - buying brands that resonate with an existing target market with no major change in the business model. Asos already operates a marketplace, so this area of the business will start hotting up now that Boohoo is entering the game too.

Do you take cash?

Looping back to Boohoo, the acquisition is being funded with £55m of cash - that’s about 14% of its cash balance.

Last year Boohoo raised nearly £200m specifically for mergers and acquisitions. The company has a good track record of making brand acquisitions quickly and effectively, having purchased many other brands this way.

Will this deal be quite as straightforward? The previous acquisitions have been similar businesses to the core Boohoo business, which makes things somewhat easier. The Debenhams transaction is a bigger step in a new strategic direction, so only time will tell.

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