THE RETAIL BULLETIN - The home of retail news
Home Page
News Categories
Christmas Ads
Commentary
Department Stores
Electricals & Technology
Entertainment
Fashion
Food & Drink
General Merchandise
Grocery
Health & Beauty
Home & DIY
Interviews
Property
Retail News
Retail Solutions
Shopping Centres, High Streets & Retail Parks
Sports & Leisure
Retail Events
People in Retail Awards 2023
Retail Marketplace Strategy 2023
Omni Channel Futures 2023
Retail HR Central
Digital Transformation Strategy 2023
Customer Engagement Strategy 2023
Retail HR 2023
THE Retail Conference 2023
Upcoming Retail Events
Past Retail Events
Retail Insights
Retail Solutions
Advertise
About
Contact
Subscribe for free
Terms and Policies
Privacy Policy
[COMMENT] Retail: A sector out of favour?

Rebecca Saunders speaks to leading investors in the retail & consumer industry to understand the impact of the turmoil in both financial and consumer markets on… View Article

COMMENTARY

[COMMENT] Retail: A sector out of favour?

Rebecca Saunders speaks to leading investors in the retail & consumer industry to understand the impact of the turmoil in both financial and consumer markets on funding for companies in the sector.

Markets have slowed

At the time of writing, the most dramatic retail story is that Made.com – a business that floated with a market cap of £775m less than 18 months ago – has ceased trading. Made.com’s fall from grace will only reinforce caution about retail in the equity markets, especially for companies without proven routes to ongoing profitability.

James Anstead, senior retail analyst at Barclays, says of the sector overall: “the outlook… is challenging from a customer, retailer and investor perspective. Shoppers are being faced with a huge increase in the cost of living – with energy the most dramatic example… It is difficult to imagine that many retailers will be able to avoid clear downwards pressure on sales volumes over the coming quarters – a potentially toxic mix when combined with the increases in costs they face on energy and labour. For some retailers there will be added pressure from the strength of the US dollar against sterling.”

His view on public equity investors is that they “currently have little appetite for the retail sector, although there is a feeling that some retailer share prices might rally when there is evidence that the worst point has passed. Investor sentiment is quite consistently negative across the retail sub-sectors – food retailers, general retailers, online retailers have all seen share price weakness in recent months”.

The impact on early-stage funding

For earlier stage investors, such as venture capital and some private equity firms, the sentiment in public markets is important, as it will drive valuations down the road. However it is not the only factor these investors take into account.

There are still interesting acquisition opportunities for these firms, especially with transaction multiples reducing from their peak.

Several venture capitalist remain confident, including Tom March, Founder and Investor at Redrice Ventures, who invests in consumer brands and related Tech such as Castore, DAI and By Rotation. Tom explains “there is no shortage of opportunity. We are focused on great founding teams who are organically building communities of fans not customers. We look for founders who have done a lot with a little and we’re drawn to experience”.

Likewise, Jason Mahendran, an Investor at Active Partners, who count Rapha and Tala among their portfolio, says “as investors with a strong focus on brand, we continue to search for businesses that have earned exceptional levels of customer engagement anchored in strong product market fit, and this defensibility that comes from the power of brand, remains central to our investment thesis right now.”

I hear a similar, positive message from Elio Lenoi Sceti, Co-founder and Chief Crafter at The Craftory, where he focuses on purpose driven consumer brands such as Freddie’s Flowers and Who Gives A Crap. He tells me “it’s now a buyer’s market and there are plenty of opportunities coming up… we are very focused on purpose driven, consumable CPG with annual recurring revenues over 20mil $/€, and on very strong brands only … companies like this are always rare, so at our quality levels we aren’t seeing, and don’t predict a huge shift in deal numbers.”

Pockets of excitement

In addition to this general sentiment, the investors I spoke to have identified sub-sectors where they remain particularly confident, especially in categories where there is potentially more consumer resilience in a downturn for well-run companies with a strong consumer proposition.

Libby Gibson is a Founder Partner at Piper Private Equity, focusing on Beauty & Wellness, Food and Pets, having recently invested in Neom. She explains “there are a number of sectors where we can see consumer demand continuing to hold strong for good brands, for example Health and Wellness, Beauty, Fitness, Travel and Hospitality”.

Jason Mahendran agrees that “there are areas of the consumer industry that are typically more resilient when consumer sentiment drops including domestic travel, pet care, and beauty… as well as the technology that enables consumer brands.”

He goes on to say that ESG is important “in an authentic, bottom-up way”, with a note of caution that “this alone is insufficient to meaningfully resonate with consumers; the service, quality, and value that a brand can offer has to also work.”

Adding value to investments

All the investors I spoke to pride themselves on the value they add to their portfolio companies, with each having a variety of experienced industry practitioners on hand to support founders with growth. Gone are the days when a new brands could build a direct-to-consumer business on paid marketing alone and a more holistic approach is now needed.

Piper Private Equity’s Libby Gibson stated: “we continue to support our portfolio companies through our in-house experts who can help in four key areas: brand & marketing, digital, people & culture and growth & business model. We also assist in internationalising the businesses we invest in”.

Elio Leoni Sceti also highlighted that The Craftory’s team includes “practitioners and experienced brand people; our Craft Partners have seen it before”. The type of support they include to portfolio companies includes “revising strategies, refocusing marketing plans, redesigning go-to-market, and rethinking product offerings. We know that in moments like these the main attention should be on re-evaluating the growth strategy and in strengthening the core.” He also explains they The Craftory has done some internal equity rounds to support investee companies in extending their runway.

Tom March explains the shift in focus, and sometimes mindset, that is required of leaders of growing brands: “we are still helping brand founders to focus on organic growth initiatives… where relevant we’re also encouraging product-led growth over paid marketing, encouraging consumer tech founders to be smart around product investment, focusing on organic and viral community growth”.

Jason and the team at Active Partners “work closely with our portfolio to assess the effectiveness of how the capital they have is being used, and encourage [founders] to remain focused on the fundamentals of their unit economics. [This] can involve thinking creatively about the different paths of profitable growth, as well as managing costs… Being nimble in a tougher consumer environment is also really valuable, keeping your cost base flexible, trialing growth drivers in a cost efficient way, as well as being open minded to channel, product, and geographic mix”.

He highlights a challenge faced by many retail & consumer businesses: “how to assess your value proposition and how you are communicating this effectively to consumers, and that doesn’t just mean more discounting… Preserving your brand reputation and credibility is central to navigating turbulent markets” – something many of the larger, incumbent retailers in the sector would do well to remember.

Opportunities for exits

The aim of private ownership is no longer about growth at all costs, since strategic buyers are now more concerned with profitability. Libby Gibson explains: “We are continuing to focus on how you build not just a big business, but a valuable and sustainable business.  For us the key is to focus on how the business is better and different to the competition, and ensure that the strategic focus of the whole team is on the handful of value drivers that will attract a strategic or financial buyer.  In addition, we are doing more to educate the potential acquirers of our businesses well before an exit process begins”.

Similarly to the early stage investors’ own theses, Jason Mahendran is finding similar thinking around later stage strategic buyers: “in our portfolio, interest can often come from trade buyers (rather than IPOs), and we continue to see demand for businesses with differentiated products and services with high levels of consumer engagement, that often fill portfolio gaps for these strategic acquirers”.

Both Tom March and Elio Sceti Leoni describe the long term time horizon of their investments, with Elio explaining “we don’t have fixed deadlines for exits… generally speaking we don’t see this as an ideal exit moment. There are exceptions for certain categories and there will always be interest in strong brands supported by the right P&L, especially margins, but we don’t expect to see the VC/PE market re-energise until later in 2023.

Tom also explains that he is looking 5-7 years ahead: “we are looking through the economic and political malaise… generally, there is no shortage of potential acquirers for emerging innovative fast growth brands – incumbents can’t magic up authenticity and purpose, particularly if it demonises their existing brands”.

Positivity about the future

The early stage investors I spoke to all shared positives to be found in these tough times, around rigour, creativity and a renewed focus on ESG. Here are their parting words about the future:

Tom March: “we believe there will be a new breed of consumer start-up that leverages the latest tech innovations to build modern offerings designed for new consumer behaviours”.

Libby Gibson: “Recessions… can be an excellent time to invest and scale. Good businesses are good businesses whatever the economic backdrop.”

Elio Sceti Leoni: “Growing consumer brands touch millions of lives and can make a huge difference in terms of ESG… changing even a little bit of the bad habits of the CPG industry will have a huge positive ripple effect.”

Jason Mahendran: “Some of the best businesses are born in economic downturns, and we are still seeing lots of inspirational founders launch amazing consumer businesses solving real-world problems for consumers”.

Given this positivity, I am excited to see the businesses that launch at this time across consumer and retail, and how they innovative and disrupt the sector to drive growth.

Email this article to a friend

You need to be logged in to use this feature.

Please log in here

Subscribe For Retail News