Consumer Reactions When a Startup Brand is Acquired by a Big Company

By Daeun Chloe Shin

In the fashion industry, digital startups referred to as direct-to-consumer (DTC) brands are growing in number and popularity. As implied by the name, DTC brands sell directly to consumers without intermediaries like department stores. They typically begin as a pure e-tailer, capitalizing on the low barrier to entry.

Select successful ones have sold their businesses to a big company for growth. To illustrate, Bonobos, a men’s clothing brand founded in 2007, sold its business to Walmart in 2017. Lively, a lingerie brand founded in 2016, sold its business to Wacoal International Corporation in 2019. For startup brands, being acquired by a big company offers them access to resources needed for growth. Big businesses like Walmart acquire startup brands for their unique assets, such as young customer base, product category expertise, and digital marketing capabilities. However, from the customers’ perspective, a major organizational change such as a transfer of business ownership may create uncertainty around the startup brand’s business continuity. For example, customers may wonder whether the startup brand’s product offerings will change (for the worse) after the acquisition.

In a paper presented at the International Council for Small Business World Congress in July, 2021 (“The Effect of Founder Involvement and Operational Independence on Post-Acquisition Customer Support”), I and my co-author (Dr. Byoungho Ellie Jin) worked to understand what and how acquisition-related factors would impact customer expectations regarding the startup brand’s future product offerings and their consequent intentions to shop from the brand.

In particular, we examined the role of 1) founder involvement, 2) operational independence, and 3) perceived fit. Founder involvement refers to the extent to which the startup founder is involved with managing the business. Operational independence refers to the extent to which the startup brand has autonomy in managing its business. Perceived fit refers to the extent to which customers perceive the startup brand and the big company to be similar. In the survey, we presented to the participants a hypothetical scenario in which a fashion startup, known for high-quality products at competitive prices, is acquired by a large retailer. We asked the participants how they expect the startup brand’s product offerings will be in terms of quality, design, product assortment, and fit, and whether they would shop from the startup brand after the acquisition.

The findings showed that operational independence, rather than founder involvement, plays a key role in influencing the customer expectations regarding future product offerings. The more independence the startup brand has in managing its business, the more favorable customer expectations were. That is, operational independence served as a meaningful signal of future product offerings. The participants relied less on the startup’s operational independence as a signal if they thought the two companies were similar. That is, if customers thought that the two companies were similar, they were more likely to give the benefit of the doubt and have more optimistic expectations.

What are the implications for both prospective acquirers and startup brands seeking to grow their business by selling it to a larger company? When choosing an acquisition partner, they should be cognizant of the consumer perception of the fit across various domains, such as product categories as well as company values, such as commitment to environmental and social sustainability, diversity and inclusion, innovation, and superior customer service and experience. In a less ideal situation where they are unable to find a partner with a high fit, then it would be crucial to ensure the acquired company’s operational independence for safeguarding favorable customer expectations and support.