Country Road is buying Witchery and Mimco for $172 million in a move which looks set to be just the start of further consolidations in the beleaguered retail sector.
SmartCompany reported last month that the retailers were "in talks" and a profit guidance issued to the market yesterday by Country Road confirmed the takeover.
It listed "expected synergies" between the retailers including supply chain efficiencies, integration of systems and structures, optimisation of sourcing opportunities, and increased growth opportunities in new regions, categories and channels.
Country Road chairman Ian Moir said the deal would save the company $10 million a year in costs.
"The acquisition of the Witchery Group creates one of Australia's largest specialty fashion retailers with complementary brands and a strong position in the mid to upper-tier specialist retail sector," he said.
"The acquisition delivers an attractive portfolio of owned brands, greater scale, diversified revenue streams, and industry leading margins."
Moir told News he expected Country Road's takeover would be the start of further consolidation in the retail industry.
"I think we will see more businesses making acquisitions because it's businesses of scale that have more chance of sustaining profitable growth," he said.
"When I see what we can do, it makes a real difference in our ability to go forward."
David Gordon, partner in charge of national retail advisory practice at WHK, told SmartCompany that consolidation made sense, given the "substantial synergies" between Country Road and Witchery.
"There's no question about it both in their Asian supply chain, which is quite complex, and also in their administrative support functions," Gordon says.
"Hopefully it puts the landlords under more pressure and hopefully allows the retailers to reduce their cost per unit overseas."
Country Road, Witchery and Mimco have all extended their brands into South Africa independently and Gordon says consolidation will assist here too.
Gordon is tipping further consolidation in the retail industry and says he "personally knows" of a number of retail businesses that are looking to consolidate. He says he gets many calls from retailers who say they would like to buy businesses that lack a decent infrastructure that could be easily incorporated into a successful model.
However he says there are barriers to consolidation and a potentially negative side to the cost efficiencies.
"The issues arise from whether the potential acquisitions have a balance sheet that is too risky or that there is too high a percentage of their retail stores that are unprofitable and difficult to exist," says Gordon.
"What the Country Road and Witchery consolidation risks is a lack of differentiation because it can breed process rationalisation and efficiency, which could well reduce the focus on the consumer and the retailer's unique fashion proposition."
Witchery was bought by Gresham Private Equity from Solomon Lew's son, Peter Lew, in 2006 for $130 million.
It has been looking for a buyer for the 200-store chain for at least a year, after extensive expansion and the abandonment of a planned initial public offering last year.
Country Road is funding the takeover through a $92 million renounceable rights issue, at $2.66 a share.
Once the acquisition is complete, Country Road chief executive Howard Goldberg will be replaced by Witchery chief executive Iain Nairn, while David Thomas will become chief operating officer and Witchery's Oliver Kysela will be the chief financial officer.
Gordon says it is "interesting" that the rejigged board does not include any creative component from Witchery and Mimco, leaving Sophie Holt as the sole creative on the board.