Winners and losers of the Shutterfly/Lifetouch combination

The photo industry’s biggest merger in years has brought up rampant speculation among competitors, vendors and gadflies about the Shutterfly acquisition of Lifetouch. Details of the combination are still coming out, but it’s clear there is a short-term positive reception. Shutterfly’s stock rose to more than $70 a share, after being mired in the mid-$50 range for months.

From a financial/stock analyst point of view, the Shutterfly/Lifetouch deal makes sense, as we wrote here last week. Despite the combined production capabilities, however, there are nagging problems inherent to Lifetouch’s core business.

“Longer term the issues plaguing school photography, primarily the consumers shift to mobile and away from prints continues. If this acquisition falls short of transformational and a change in the school picture model is not on the horizon the combining of these two powerhouses may do little to change the trend line,” says Mark Schoenrock, of Professional School, Sport & Special Event Consulting (PSPC), Eden Prairie, Minn. Schoenrock spent more than 25 years as part of the Lifetouch leadership team. “Short-term this move is critical to removing the burden of the ESOP’s repurchase obligations on the company and reducing its expenses. It should improve Lifetouch’s consumer product offerings, provide more opportunity to monetize their images and revive their spirit of innovation.”

Another side is, while both companies are photo printing industry giants, they are not in the position to take advantage of the digital viewing technologies consumers are embracing.

“So, why is Wall Street all wrong and is this a bad deal for our friends in Redwood City?” writes Hans Hartman of Suite 48a, organizer of the Visual1st conference. “In short: Lifetouch is an 81-year-old company with a business model that is fine-tuned for an era that preceded today’s mobile- and social network-dominated photo taking, engaging, sharing and printing trends. For Shutterfly, this means a step forward to the past, at a time that Shutterfly desperately needs to take steps forward to the future.”

Two points of contention linger, according to Hartman: Printing photos for memories is no longer a given and the continued disruption of the portrait business by the gig economy. Spending $825 million on digital alternatives may have better prepared Shutterfly for the long-term future.

“These alternatives all boil down to thinking through, and using one’s creative imagination, how consumers will use visuals (whether photos, videos, 360 footage, always-on camera footage, collages, montages, animations, VR content, AR content, AI-curated content and everything in between) 5 years from now and how print could leverage this.  Offering the same old photo print products and services won’t suffice,” writes Hartman.

There are also questions how competitive the combined entity will be in the portrait market. Lifetouch is the dominate player in the business, but not necessarily the most innovative one, as attendees at the SPAC 2018 conference would tell you. Speed and agility mean a lot in the photo technology business, and the front-line Lifetouch sales rep does not have the personal connections as a local photo studio bidding on a school contract.

[bctt tweet=”Shutterfly has little-to-no experience managing a consumer business that is not web-based.” username=”DeadPixelsSocty”]

Further, Shutterfly has little-to-no experience managing a consumer business that is not web-based. Lifetouch operates school portrait business, which is a one-to-one relationship business, as well as JCPenney photo studios, which are retail. As we have mentioned in the past, Shutterfly has not taken its prominent brand name direct to retail in any meaningful way.  Prior Shutterfly acquisitions like GrooveBook and BorrowLenses – granted they were during the Jeff Housenbold regime – have failed to contribute in a meaningful way to the company’s overall business. Shutterfly can’t afford the same sort of result with the Lifetouch acquisition if investors are going to be appeased.

And the winners are…

So, who comes out ahead in this merger? Let’s make some observations:

Winners:

• Lifetouch is the first clear winner. As an employee-owned company, Lifetouch was under continued cash-flow pressure to buyback retire stock and other employee benefits. Without this burden, the Lifetouch business will have more cashflow available for new technology and equipment.
• Shutterfly also wins, because of cost efficiencies related to offsetting production cycles. It’s not secret SFLY has worked to maximize its CAPEX since CEO Christopher North joined the company, with a special emphasis non-seasonal commercial printing.
• Shutterfly also gains access to millions of Lifetouch customers. Presumably, many of them were already Shutterfly customers, so the net gain is probably not that great, but the continued production efficiencies and reduced customer acquisition costs will make up for this.
• Parents everywhere. The convenience of having a child’s professional portraits integrated into their regular Shutterfly account – assuming that is what is going to happen – will be a compelling addition. This will spur output.
• Independent photo retailers and professional photographers win, as they will continue to gain share at the expense of Lifetouch. This has already been the trend and will continue.

Losers:

• Printing equipment manufacturers who just lost a big customer. Shutterfly has made a big commitment to HP Indigo presses, so we expect that to continue. Competing platforms from Xerox, Fujifilm, Canon and Kodak will have difficulty gaining placements.
• Shutterfly will have long-term difficulty managing the retail studio business and probably the church directory business. Look for those to be divested in the near term.
• iMemories will be lost in the shuffle. The photo scanning business can be profitable and there is still considerable upside potential, but it’s not core to Shutterfly’s printing capability.

What do you think? Leave a comment below.