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Walmart Acquired ModCloth But Left Customers Unhappy

By: Usman Raza


Walmart Acquired Modcloth

The news of Walmart acquiring clothing and apparel giant ModCloth has spread like wildfire. Skeptics and industry leaders have shown mixed reactions to the news, more so because ModCloth is a favorite brand among fashion enthusiasts and a young clientele. Now with Walmart at the helm of affairs, customers are not shying away from showing their reservations about the acquisition.

Launched in 2002, ModCloth focused on fashion and e-commerce business from the get-go. With its vintage-inspired affordable but dainty clothing, it quickly established itself as a market leader. ModCloth focused on a unique marketing strategy that helped it garner fans and popularity across the board. So the company’s tech team was always cooking something new to make a buzz in the e-commerce fashion industry. Here is more to the story:

ModCloth Technology and Customer-Centric Loyalty

Walmart is huge and expanding at an unprecedented pace. The retail giant is on a buying spree lately, having bought leading e-commerce fashion companies like ShoeBuy ($70 million) and now, ModCloth.

But what made Walmart buy the emerging e-commerce fashion apparel provider is no more a mystery. The most apparent reason is ModCloth’s extensive social media presence and popularity among customers. The company had devised new ways to engage customers by providing them modern clothes with a touch of vintage design. That’s not all, as customers can choose from thousands of clothing and accessories, exclusive styles and extended range of products that go well with their demographics.

Technology is one aspect that ModCloth never compromised on. Moreover, the company kept churning new styles in clothing brands. The company launched a hugely popular style gallery that allows shoppers to upload photos of them wearing ModCloth merchandise. Afterwards, the company launched the Fit Me campaign, a feature that allowed customers to search for a product by reading reviews from customers owning a similar product.

Appointing Nicholas Genest as the Chief Technology Officer was, in fact, a testament to this fact. Genest was to redesign the e-commerce platform to make it more user-friendly and equipped with new technologies. With 15 years of hands on experience in designing online e-commerce solutions, he was deemed the ideal person for the job. The CTO was to stir the e-commerce platform and introduce newer methods to better interact with customers via the platform.

Social Media + Deals + Discount Codes

Apart from having a huge social media presence, ModCloth worked on some strategies to sell its products. One such strategy was to partner with sites like Clothingric.com to sell merchandise at discounted rates, coupons and promo codes. Here, customers can buy different ModCloth products at deep discounts through coupons. You can buy heels under $50 with up to 70% off while some cloth promotions will offer discounts up to 30%. Clearance stock is also available under site-wide promotion where customers can enjoy up to 15% discounts on select deals. Free shipping promotion on some products is also available.

How ModCloth Fell into Debt

In their quest of expanding the business, ModCloth went in search of series C category funding. However, the process never got going as the company suffered poor quarters in succession. Subsequently, the company accepted an unsecured bank debt of $20 million. Ironically, the company began treating the loan as growth equity instead of reorganizing it appropriately.

As a result, the company kept injecting new debt, thinking of it as equity. By 2015, the company had to pay the debt back, but investors kept kicking repayments for two years. By that time, the company had five profitable quarters and just got the new CEO onboard. With an ever-dwindling income statement, the company tried raising more equity, but investors refused to state overhung debt as the reason, though the situation was not as bad as it was made out to be.

Upon hearing ModCloth’s debt going overdue, Jet.com, the Walmart subsidiary, stepped in with an offer of $71 million. Sources say that the actual buyout occurred for just 40 million. If true, the company may have left with nothing after paying the debt.

Reasons Why Walmart Acquired ModCloth

As the situation stands, Walmart has been buying notable online e-commerce fashion startups for a while. But, the retail giant makes clever decisions about which ones to buy. Buying ModCloth was just a matter of time, as people at Walmart knew about the value of the brand. ModCloth enjoys huge fan following and is known as a brand for the youth market, a segment that industry giants like Walmart and Amazon are carving to penetrate lately. Another reason for buying ModCloth at an estimated $75 million is that it will help the company to triumph arch rival Amazon in the e-commerce and fashion industry.

The acquisition was made through Jet.com, another e-commerce company that Walmart acquired lately. It’s obvious that Walmart is itching to penetrate a bigger share of the e-commerce pie, but is the acquisition going well with ModCloth customers? Let’s find out.

Why Are Customers Freaking Out?

Given Walmart’s status in the market and how it is buying some innovative and modern startups, consumers are scared and infuriated for some reason. First, Walmart is seen by many as a monopolist, which is understandable as the corporation is so vast. Then, customers like to see new businesses emerging and competing with much larger counterparts. Upon hearing the news, the loyal ModCloth customers were outraged. Several customers commented and shared posts on their Twitter and Facebook accounts.

Not shying away from the situation, customers didn’t welcome the development. Some customers claimed to have bid farewell to the brand instead of buying it from Walmart. Another customer claimed Walmart was known for not treating women employees well. Another customer shared other places to buy plus-size clothing instead of buying from Walmart. Overall, clients and fans of ModCloth had a lot to say, and most of it was not a pleasant read.

Understanding the situation, Susan Gregg, the co-founder of ModCloth, explained things in her ModCloth blog. She labeled the case as bittersweet but didn’t further elaborate her thoughts on the issue.

Buying a widely popular women’s brand like ModCloth is a great move by Walmart. It will align with the company’s business plans and will likely cement its position as a viable fashion brand in the market. Dough McMillan, CEO of Walmart stores, claims that ModCloth enjoys a great assortment, customer engagement and pricing strategy, which is where Walmart falls short. So, combining ModCloth’s fashion prowess under Jet.com is a perfect merger. All in all, joining Walmart is a win-win situation for ModCloth, Walmart, and customers alike.

So, is there any lesson from this acquisition? Perhaps it is that no business should expand on loans when the chips are down. ModCloth didn’t see it coming and began expanding despite being low on finances. Having a huge fan following will not save your business if poor decision-making becomes the norm. Timely decisions are just as important. ModCloth management made bad decisions, one after another. Walmart plans to inject much-needed finances into the company without touching or altering ModCloth’s customers.

It is an ideal case of things to avoid while doing business, especially this: Never invest and expand your “sales running low” business with bank loans, or your business might suffer the same fate as ModCloth.

Author: Usman Raza is a marketing specialist at Crawford and O’Brien and Couponbend.com. Aside from doing dental SEO and helping dentists get new patients, when not working there is a 99% chance he is praying with his family. Follow him on Facebook @usmanraza40 and Twitter @usmanintrotech.

Published: May 25, 2017

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Usman Raza

Usman Raza is a CEO of Usman Digital Media and co-founder of Christian Marketing Experts, content marketing specialist at webdaytona.com. He has been writing for magazines and newspapers since 2001, and editing and managing websites since 2006. Usman has a BA in Business Development, Philosophy, and English. A generalist, his most covered topics are business and technology. When not working, he’s probably spending time with his family.

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