The Sale of the Disney Store
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The Children's Place announced the acquisition of The Disney Store, North America from The Walt Disney Company on October 20th. The Disney Stores in The United States and Canada will be operated as a new wholly-owned subsidiary of The Children's Place. The children's Place also has the exclusive rights to operate the Disney Store chain under a fifteen year agreement with three possible ten year extensions. The stores will retain access to create merchandise on past, present, and future Disney characters. In addition, in the fall of 2005 Disneystore.com will be run by The Children's Place. The existing Disneystore.com is being rebranded into Disneydirect.com. Disneystore.com will sell merchandise from The Children's Place's Disney Stores while Disneydirect.com will sell merchandise from The Disney Catalog.
The financial details of the deal are interesting, and on the surface, appear to be beneficial to both parties. At the close of the sale, which is expected to be in November, Children's Place will pay Disney for the capital in the store, which basically means they will pay for the merchandise in the stores and warehouses at the time the sale is complete. Children's Place is also responsible for the store's lease obligations, so Disney is no longer liable for breaking lease agreements if they decided to close the stores. Children's Place is committed to investing $100 million in to the stores $50 million which will be funded at the close of the sale through cash on hand and short term borrowing. The result will be that next year approximately 80 stores will get a modified version of the Castle concept which is already in use at twelve stores with great results. Starting in 2006, The Children's Place will pay a royalty to Disney based on sales. The percentage was not disclosed.
The rationale to purchase the Disney Store was that it offers a second channel to reach the same market. Since most Disney Store product is created internally, like The Children's Place, this also means that only one royalty will have to be paid to Disney.
There is an 80% mall overlap with The Children's Place and it will create opportunities to leverage merchandising, sourcing, and operational expertise. In addition, Disney Stores have excellent real estate locations in malls across the country and the average sales are about $1.8 million per store or $400 per square foot. Disney Stores also generate high traffic with 60% of customers visiting twelve times a year or more. There are currently 298 stores in the U.S. and 15 in Canada, resulting in a total of 313 stores in North America that were part of this transaction.
The first part of the plan that Children's Place has is to remodel the stores. They also hope to use their direct sourcing expertise from running The Children's Place to help create efficiencies. They hope to "strengthen the value equationâ€? by lowering prices and raising the quality of merchandise. They hope to have a character-based merchandise strategy that will be changing frequently and hope to reduce costs by merging back office functions and systems infrastructure with The Children's Place. That being said, Disney Store will remain independent in terms of product development and operations.
Some changes guests should expect to see is a de-emphasis on media (CDs and DVDs) and an increase in softlines (apparel), with a focus on infant items. Media will still be available at the stores, however, because they realize that it generates a lot of traffic in to the store, since a lot of people go to the store looking for a particular movie or CD. Also there will be less markdowns and promotions which have become a Disney Store staple recently. Children's Place does hope to open up a Disney Store Outlet chain which would be a driver for growth while decreasing the need to liquidate inside the main retail stores. Some things that will not change is that the Disney Store will continue to sell adult merchandise as well as theme park tickets. Some of the management will remain, although they said there seems to be room for improvement in their softlines department. The new president of the Disney Store is Mario Ciampi, from The Children's Place. The former head of the stores resigned when it was announced that Disney was looking to sell the chain.
Another change is that Children's Place hopes to grow the Disney Store again in future years. With fewer players in the toy market, Children's Place hopes that they can turn The Disney Store in to a premiere toy destination. This would result in 600 stores in North America, approximately twice as many as there are now. They also hope to expand outside of malls in to "lifestyle centersâ€? and "premium outletsâ€?
While Disney is not receiving any money for the sale, outside of the money for the existing inventory, Disney is offloading a money losing division that will eventually provide royalties. In addition, The Disney Stores will remain a presence for the Disney brand in communities across the continent which will help strengthen the world's most recognizable brand. The hope is, that a retail company will be able to manage the stores a lot better that an entertainment company can. Only time will tell how this deal will play out for both companies and their consumers. But many of the concerns that Disney fans have had about the Disney Stores, such as constant sales, no adult merchandise, and a lack of variety of merchandise seem to be addressed by their new owners, so maybe this will be a good thing.
-- Posted October 22, 2004
-- Story by Benji Breitbart