Macy's Not-So-Exclusive Tiff With Martha

In a world where celebrity endorsements are the real revenue churners for some businesses, gaining exclusive rights for certain products proves to be a main differentiating factor.

A recent example of that has been Macy's (NYS: M) suing Martha StewartLiving Omnimedia (NYS: MSO) for contract violation as the latter got into a deal with J.C. Penney (NYS: JCP) . Let's go behind the scenes to find out what's made Macy's so upset.

So what's brand "Martha"?
As a celebrity TV personality, Martha Stewart is the face behind all three lines of her business: publishing, broadcasting, and merchandising. The enormity of brand "Martha" is evidenced by the company's goodwill, which stands at $45 million, a fifth of its total sales.

And why is Macy's crying foul?
The deal between J.C. Penney and Martha, where the former would be able to sell Martha-Stewart-branded products, is similar to what Macy's has been doing until now. This, according to Macy's, violates its 2007 exclusive merchandising contract with Martha Stewart. But, more than that, it would also mean Macy's losing out on whatever promotional advantage it had in its home products division, courtesy of "Martha" brand. To top it all, J.C. Penney is one of the biggest competitors of Macy's in the home products segment.

Is it a direct hit on "Only at Macy's"?
Distribution and sales of such elite brands of merchandise comprise the core of Macy's business. In 2010, the contribution of this so-called "exclusive merchandise" division rose to more than 43% of total sales. With the Martha Stewart association being the biggest brand launch for Macy's in 2007, more than 2,000 of her exclusively designed products are being marketed by the retail biggie.

But that's not all. Martha Stewart's publishing and broadcasting businesses revolve around lifestyle improvement books and TV shows, all of which complement the merchandising business by including content that directly influences merchandise sales. Thus, losing exclusivity in this arrangement will also result in Macy's losing out on Martha Stewart patrons, all of whom flock to Macy's for such products.

Macy's has a right to be fiercely protective about the "exclusivity" factor, which is one of its key drivers for generating revenue. The retailer has consistently partnered with other high-profile celebrity names as well, including Madonna and her daughter Lourdes for their juniors line; Eva Mendes; Rachael Ray; and celebrity designers such as Kenneth Cole and Tommy Hilfiger.

The Foolish takeaway
Macy's has been doing pretty well lately, as it clocked a 6.2% increase in same-store sales in December. Moreover, the contribution of its home division to total sales has largely remained steady at around 15% over the past few years.

Apart from taking up this lawsuit as a step toward safeguarding the nature of its association with Martha until 2018, when their contract ends, the fear of a reduction in sales is thus very real for Macy's -- reason enough to take the legal route. I would keep an eye on Macy's.

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At the time thisarticle was published Fool contributor Priya Singh does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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