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Why Jos. A. Bank Is Losing Its Shirt

By James Thompson - Mar 24, 2014 at 10:08AM

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When brands like Jos. A. Bank and Men's Wearhouse merge, nobody wins.

Brand Scoop is a breakdown of prominent brands that have made headlines in recent business news. Typically, brands make headlines for very positive or very negative reasons, which of course affects their brand integrity and value on the stock market. Before investment, there is perception.

Today's featured brand is Jos. A. Bank Clothiers (NASDAQ: JOSB).

Jos. A. Bank's cringe-worthy "I do"
It is with tremendous anxiety that brand advocates of Jos. A. Bank are internalizing the sale of the men's retailer to Men's Wearhouse ( TLRD ) for $1.8 billion, or $65 a share.

These two are simply a bad match. It's like when Sandra Bullock married Jesse James. They have different styles and reputations. Jos. A. Bank is reputed for its classic, conservative sensibility and more mature styles. Men's Wearhouse is known for lower-cost and lower-quality suits that offer ephemeral styles worn by young professionals entering the workforce.

Troubled courtships make for troubled marriages. Jos. A. Bank and Men's Wearhouse have been involved in a tumultuous on-again, off-again relationship. On Oct. 9, 2013, Jos. A. Bank took the initiative and offered to buy Men's Wearhouse for $2.3 billion, or $45 a share. Men's Wearhouse spurned the advance, igniting a very public and contentious acquisitions odyssey that involved the hedge fund Eminence Capital (which holds a 10% stake in Men's Wearhouse and 5% stake in Jos. A. Bank) and unsuccessful buyout dalliances: Men's Wearhouse briefly courted dress-shoe retailer Allen Edmonds; Jos. A. Bank temporarily wooed sporty outerwear brand Eddie Bauer. Neither overture gained traction. Eventually, both Men's Wearhouse and Jos. A. Bank capitulated and merged, a move that resulted in a 50% rise in stock prices for both companies. 

The cultural cost of a "well-suited" corporate merger
The Men's Wearhouse brand raised public suspicion when it unceremoniously ousted its much-beloved founder, George Zimmer -- who reminded everyone of their genial, quirky uncle. Zimmer had an accessible sincerity, infectious exuberance, but a questionable determination that rendered his famous tag line "You're going to like the way you look. I guarantee it" a little dubious. Even so, Zimmer was the face of Men's Wearhouse, which for the public meant there was a semblance of personal accountability connected to the brand. In reality, Zimmer's face was the brand. Not anymore.

The removal of Zimmer -- who spent 40 years of his life building Men's Wearhouse -- marked the brand's entrance into the ruthless thunderdome of capitalism, where shareholders and CEOs often fight their own long-term interests for short-term gains. Shareholders of both Jos. A. Bank and Men's Wearhouse are hoping for a highly profitable combination of strengths. The chairman of Jos. A. Bank's board, Robert N. Wildrick, explains their view of the merger: "Our board has been rigorously focused on pursuing a path for our shareholders that maximizes value created."

That perceived "value created" largely hinges on the brands' shared interests in the menswear category and their purported ability to synergize resources in a favorable marketplace. Recent years have been good to the men's suit industry, especially 2013, which generated $2.3 billion in revenue. The merger is designed to minimize expenses attached to merchandising and production, distribution and marketing, and enable the brands to eliminate stores found in the same mall.

This aggressive reach for profit-driven efficiency, however, could lead to brand erosion and the internal cultural disarray of each company as the merger's claims to "keep both brands intact" becomes distorted, diluted, and absorbed by shareholders' obsession with the bottom line. When products are being sourced, distributed, and advertised through the same channels, they inevitably tend to lose their uniqueness. Furthermore, capitalist business ventures need culture -- which is maintained and practiced by employees -- to survive. Unfortunately, employees in both companies have to feel that if George Zimmer isn't safe, nobody is.

The "combined company" branding fallacy
According to the "Strategic and Financial Benefits of the Combination" section of a March 11, 2014, Men's Wearhouse press release: "The combined company will be the fourth largest U.S. men's apparel retailer with pro forma sales of approximately $3.5 billion. This transaction brings together a high-value collection of national and owned brands."

The flaw in this ambitious strategy resides in the words "combined company." These two brands cannot be managed under the same economic auspices without one fundamentally changing the brand DNA of the other through shareholder mission creep or simple "combined" culture drift. Both brands are competing for middle-class dollars, and if competition (and capitalism) are indeed good for the consumer, one brand must defeat the other.

This merger belongs on Dr. Moreau's Island because it involves a scary hybridization of similar but genetically incompatible beings that will result not in a super brand full of profits and promise, but a gangly monster of self-conflicted identities that eats itself alive. Remember, one of Dr. Moreau's tragic flaws was his misled notion of identity. Shareholders should take notice.

This merger -- despite every effort to keep the brands separate -- means that whatever differentiation Jos. A. Bank had divorcing its styles, sales culture, and brand identity from that of lower-quality Men's Wearhouse have been completely muddled by the contrived affiliation. Consumers know that Jos. A. Bank is marrying down, big-time. Though both members of the merger strongly contend there will be no rebranding, thanks to their much-publicized, prolonged, and combative merger, they already have rebranded. The 52-year-old, seasoned finance department manager now has something in common with his confused 23-year-old intern: They both shop for suits in a place owned by Men's Wearhouse.

Why Jos. A. Bank is no longer suitable
In the retail industry, the men's suit business is unique. Some retail brands can coexist in the same competitive and physical space -- Gap, Old Navy, and Banana Republic, for example -- which collectively contend in the brutal social hierarchy of teen hipness, suburban cool, and family affordability. But a man's suit is different.

Purchasing a suit is an aspirational act that can pay off in various capacities from landing a life-changing job, honoring a loved one, or simply showcasing one's style and self-esteem. For businesspeople, suits are the military uniforms of the civilian world, and most professionals quickly notice what rank, social status, and business acumen are being communicated by a particular suit -- such as, for instance, a suit from Jos. A. Bank or a less-respected suit from Men's Wearhouse.

Though neither Jos. A. Bank nor Men's Wearhouse plays in the same league as (privately held) Brooks Brothers, Nordstrom, or even Macy's, their customers are very different from one another in terms of age, station, and style -- or at least they used to be. With the Men's Wearhouse merger, Jos. A. Bank has not only undermined and commingled its classic and conservative brand, but it has auctioned off its venerable history. Jos. A. Bank was established in 1905. Industrious George Zimmer founded Men's Wearhouse in 1973. Both brands are mere shells of their founders, yet Men's Wearhouse won the merger war. However the only people who profit from this merger are myopic shareholders, and that won't last long.

When leadership dies, so does the culture, and then the brand, and then the demand. Sadly for Jos. A. Bank, history guarantees it. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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