Department store buying fashion designer

Lord & Taylor is close to an agreement with high-end fashion designer Peter Som (article), giving it "first dibs" on any lower-end lines Mr. Som creates in the future. The Wall St. Journal reports that the merger is a response to new retail competition from lines that department stores once used to carry.

Department stores that once counted on lines such as Liz Claiborne Inc.'s Juicy Couture, VF Corp.'s Nautica, privately held David Yurman and Polo Ralph Lauren Corp. as key suppliers are now competing with the well-known designers' own stores in malls across the U.S.

In earlier posts, e.g., If merger is the answer, what is the question?, we warn against acquisitions that do not have a clear value-creating purpose. In this case, it looks as if Lord & Taylor is buying a brand that will drive foot traffic to its "aging" stores. The fact that these designer brands are opening up their own retail outlets tells us that they can do that.

Just as most grocery stores lose money on soft drinks to attract customers to their stores, so too will Lord & Taylor use the Peter Som brand to bring in younger and wealthier customers. The acquisition will pay for itself if these customers buy other items once they get into the store.

But don't underestimate the incentive problems created by joint ownership of the fashion brand. There is a reason that most fashion brands are owned by the designers themselves. It is probably the best way to motivate designers to design popular clothes.