Loehmann's Went Bluefly-Fishing Before Bankruptcy Filing

The preliminary talks came to nothing, but they underline traditional retailers' interest in e-commerce partnerships.
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In January,

Loehmann's

(LOEH)

top executives approached the management of

Bluefly.com

(BFLY)

, an Internet start-up and apparel discounter, about pursuing a joint venture, strategic alliance or outright merger, according to Bluefly executives.

But Loehmann's financial troubles eventually derailed the talks. The Bronx-based company filed Tuesday for Chapter 11 bankruptcy protection from creditors.

Nevertheless, the fact that Loehmann's, a bastion of old-world retailing, was even eyeing the Internet shows how drastically retailers' conventional ideas about the Web are changing. It also suggests that the go-it-alone strategy that has fueled many Internet start-ups to date may give way to more partnerships between real and virtual companies.

"There will be loads of these kinds of deals," says Lauren Cooks Levitan, an analyst with

BancBoston Robertson Stephens

, who tracks online retailing but doesn't follow Loehmann's or Bluefly. "Traditional retailers are acknowledging that they better figure out how to reach customers online. And online companies are realizing that it's more expensive to build a brand from the bottom up. There are a lot of areas where a marriage makes sense."

Earlier this week, drugstore chain

CVS

(CVS) - Get Report

and

Soma.com

acknowledged they'd both benefit by

joining forces when CVS said it would buy the online drugstore for $30 million.

"Loehmann's believes that the Internet will eventually be a big part of retailing," says a company spokesman, who confirmed that the retailer had been in discussions with Bluefly as well as several other Internet companies that he declined to name.

That way of thinking is a departure from the approach taken by two leaders in the off-price category,

Ross Stores

(ROST) - Get Report

and

TJX

(TJX) - Get Report

. While both have informational Web sites that offer annual reports and disclose store locations, neither plans to sell merchandise on the Net.

Shelly Lang, a TJX spokeswoman, says that instead of focusing on e-commerce, the company is using technology like inventory management systems to better run its brick-and-mortar business.

Off-price retailers typically serve as a clearinghouse for designer overruns and other items that fail to sell in full-price channels like department stores and specialty shops. But because designers prefer to keep markdowns under their hats, so to speak, off-price retailers typically sign agreements with suppliers that prevent them from advertising, say, that

Prada

bag at 50% off retail prices.

So a fear of angering their suppliers by publicizing these markdowns over the Internet is one reason Ross Stores is staying away from e-commerce, says Janet Kanios, vice president of marketing.

Nevertheless, Bluefly has plowed ahead. In the first quarter, the company sold $342,000 worth of merchandise, up from $238,000 for the fourth quarter. (Year-over-year comparisons are unavailable, since Bluefly launched its site Sept. 8.)

While those figures pale in comparison to the $27 billion off-price industry and are a fraction of the millions of dollars worth of merchandise that Ross, TJX and Loehmann's each sold in their most recent quarters, they were apparently robust enough to entice Loehmann's top brass.

Jonathan Morris, Bluefly's executive vice president, says that on three occasions he met with Robert Friedman, Loehmann's chairman and chief executive, and Robert Glass, president and chief operating officer.

"The first meeting we each held our cards close to the vest," Morris says. "But then we started talking in more detail about the opportunity of becoming their online distribution channel and having them allocate some of their products to us."

The synergies to both parties could have been considerable. Bluefly would have brought technology to the table, while a land-based retailer like Loehmann's could've offered the 79-year history of its brand name as well as buying clout with suppliers.

But Morris says the talks never went beyond the preliminary stages once Bluefly executives got a peek at Loehmann's financial statements. "We didn't want to start working with a partner that was facing some serious issues with their creditors," he says.

He adds that Bluefly executives were also concerned that exchanges with Loehmann's management either took place in person or over the phone rather than via email. "That was a warning signal," he adds. "If management isn't using email, how will they understand the issues of an e-tailer?"

The Loehmann's spokesman says the company has email capabilities.

For now, Bluefly is going it alone, Morris says, declining to comment on whether his company has been approached by other brick-and-mortar retailers.

But in a sign that nuptials may be in store for some other online retailers, Lauren Battista, president and chief executive of privately held

designeroutlet.com

, another off-price e-tailer, says she's been approached by several traditional retailers interested in forming a partnership. She declined to elaborate.

Perhaps other real-world players will pick up Loehmann's thread.