Thursday 5 March 2009

Can a House Mark or In-House Brands Be Saved Despite Bankruptcy?

Nearly two months ago, I looked at the demise of the Mervyn's retail chain in the US as an example of what happens when a brand loses its cache, first because it was acquired by a retail conglomerate more interested in its cash flow than brand longevity, and then by private equity owners more concerned with the value of the real estate than the brand. The fate of Mervyn's got me to thinking about whether a service-oriented brand that goes into liquidation has any residual value, particularly when the brand had anyway been on a downward trajectory for a number of years.

My initial sense was that, in such a case, the brand itself would likely be irreparably impaired with the result that it would have little or no value, but that there may be bits and pieces of the operation, either product lines or discrete sub-services, that might be attractive to a potential buyer. Little did I know that my hypothesis would be put to an early intitial test. And the result seems to be that I may be only partly correct. As reported by the Wall Street Journal on February 15th ("Family Aims for A Return of Mervyn's", written by Kelly Nolan), the Mervyn's house brand, and most of the house-brand porfolio of the chain's apparel lines, were each separately sold.

As for the Mervyn name, three of the founder's sons agreed to purchase the retailer's house mark, plus a number of otherwise unspecified "Internet-related intellectual properties". Contrary to what appears to be an irreparable decline in the value of the Mervyn name, son John Morris opined that "[w]e strongly believe we have a very strong, loyal base of families in the Western states that would support Mervyn's." So on first blush, I was wrong. The Mervyn children appear to be willing to put cold cash to reacquire the house mark.

But for how long will these customers stay loyal?

That said, it still seems to me difficult to fathom that a declining brand can be so righted, especially given the state of the current world economy. Even assuming that there is a critical mass of a "strong, loyal base of families" (something I about which I am skeptical), then every week that passes without the reopening of the Mervyn chain will diminish such loyalty, no matter how fervent it once may have been. Time will tell, but my instincts tell me that either the sons purchased the name out of paternal respect to preserve the family name, or that there is some material value in the "Internet-related intellectual properties."

The sale of the apparel lines, most notably --High Sierra (for casual sportswear), Hilliard & Hanson (for woman's fashion), and ellemenno (for young women's apparel--to four other entitities--is perhaps more understandable. After all, the way that lines can be shuffled from owner to owner, it may be more likely that one or more of these lines can be revived. It also suggests that the purchasers viewed these retails lines as having value separate from the chain itself.

High Sierra, Bogart-style

Interestingly, the rights to these apparel lines were purchased at a bankruptcy auction. I have always been surprised that anyone would purchase apparel brands at auction without acquiring substantial underlying assets. Goodwill is a basic component of a mark, and there does not seem to have been any acquisition of any underlying goodwill in the case of these Mervyn house brands. (Indeed, given that U.S. trademark law requires that the acquisition of a mark be accompanied by goodwill, lest the assignment be viewed as a naked assignment, one wonders whether the acquired marks are at legal risk.)

The bottom line is that the acquisition of both the Mervyn house mark and the various house brands raise a raft of questions about the economic viability of such moves. Given that retail consultants direly predict the demise of additional retail entities during the current economic downturn, we will likely encounter additional instances in which brands and marks are purchased in the insolvency context. It will be interesting to see how such acquisitions play out.


Anonymous said...

Of course we have a smilar situation here in the UK with Woolworths. That has just been acquired for internet use. But in any case, its not the brand I think that is devalued or impaired but rather the business model. With a revamped makeover/business, who knows: in a few years perhaps Woolies will be back on our high street.

Neil Wilkof said...

Thanks--I guess the question is how can one change/revamp the business model in time to take advantage of the residual goodwill in the brand. Maybe Woolworth will be able to buy more time to remake itself, given that it is such a hoary name in the UK. It will be interesting to see...