Walmart scoops up ModCloth via Jet.com

Fashion Illustration
Acquiring ModCloth will strengthen Walmart's share in the apparel market.

Walmart is on the cusp of purchasing online fashion retailer ModCloth for its subsidiary Jet.com. Sources say the deal will be worth between $50 million and $75 million. The acquisition would come at the perfect time, as competitor Amazon has announced a greater focus on apparel in recent months.

The buy follows a series of struggles for ModCloth, including several layoffs. ModCloth, which recently raised $78 million from investors, will return some of the capital to investors and use some to help retain employees. 

Stephan Schambach, founder and CEO of NewStore, says that Walmart's move was in reaction to Amazon's foray into fashion and apparel. Until now, Walmart has focused primarily on the lifestyle space. 

"To be really transparent, the timing with acquiring ModCloth is likely Walmart knowing they could score a good deal," said Schambach. "ModCloth was rumored to be raising a new round of funding and struggling to get a good valuation because of their lack of profitability, so Walmart likely got a known brand at a steep discount." 

But this could be just the leg-up that Walmart needed. Amazon is set to be the biggest apparel retailer in the U.S. this year, so Walmart is trying to shore up its position. Schambach says this acquisition could be just the ticket and is definitely something to watch. 

Michael Elmgreen, CMO and co-founder of Handshake agrees that the acquisition could greatly benefit Walmart by helping it to reach a a new set of shoppers: millennials. 

ModCloth experienced little growth in 2014, and as a result reduced its engineering team and soon replaced co-founder and CEO Eric Koger with Matthew Kaness, the previous chief strategy officer of Urban Outfitters. Other veterans of the retail industry were also hired at the time with hopes of a turnaround. As part of the turnaround, ModCloth began experimenting with brick-and-mortar, launching two pop-ups and a retail store in Austin. The company even created more private-label products. But despite these efforts and $15 million in funding in 2015, the company still lacked capital. 

Jet.com itself is a recent purchase of Walmart, bought last summer for $3 billion. Jet.com has most recently acquired Hayneedle and ShoeBuy, and Walmart last month bought Moosejaw. These acquisitions, along with ModCloth, will strengthen Walmart's share in the apparel market. 

The acquisition would certainly help Walmart grow its customer base with better marketing and customer service of the ModCloth brand. Schambach says a giant corporation like Walmart can help work out administrative and funding issues. 

Elmgreen says that Walmart's strategy to grow e-commerce will most likely be contingent upon more deals like this one, while continuing to excite on integration by finding opportunities for the different assets to work together.

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"For instance, integrating ModCloth with Jet.com's dynamic pricing platform to help drive average order volume through competitive pricing might be one place to start and help them maintain and grow the ModCloth customer base," said Elmgreen. "Walmart has started to show that it is committed to mastering e-commerce in the same way it did brick-and-mortar retailing. But closing the gap with Amazon remains complicated because Amazon has moved beyond just retailing with their customers by offering a wide array of digital services that Walmart, to date, can't match."

However, early reactions from ModCloth customers were not positive. According to comments on the company's Facebook page, the young, hip, feminist voice of the brand does not want the label associated with Walmart's reputation. Comments included, "How incredibly disappointing to hear the news," and "Are you planning to make a comment on your recent sell-out to the most notoriously anti-employee company in the country?" 

Gabe Winslow, EVP of media at Ansira, says that if ModCloth is able to keep operating on its own and sticking to their feminist fashion brand aesthetic, then the acquisition should be seamless. If not, he senses trouble and "a further decline in sales." 

RELATED: ModCloth preps DC pop-up

Schambach points out the continuing consolidation of the e-commerce space. He says it's becoming increasingly challenging and profitable independent of Amazon and Walmart. 

"Giants like Amazon and Walmart, who are building new-age conglomerates around their brand portfolios, are able to centralize a lot of the back-end operations and help younger brands and retailers focus on what they are best at, which is often on the design and branding aspects of the business. Logistics and operations are hard, and are only getting more complex. The ModCloth acquisition is further proof of the competition ahead," he added.