Here’s What Retail Investors Are Willing to Invest In

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The apparel sector tends to give weight to consumer feedback about what they want from retail and retailers try to lead themselves in the direction they think they should be going, but far less attention is paid to what the investor community has to say. Which, when you consider it, makes little sense since they’re often the ones with the insight into what’s going to spell success for a retailer. And the ones bailing the manifold retailers that don’t get it out of bankruptcy.

In a panel on “The Challenges and Opportunities of Investing in a Rapidly Changing Environment,” at the Cowen and Company Future of the Consumer Conference last week, three things came to the forefront for wise retail investments: companies do well at convenience, experience and customer engagement.

Brands that are taking heed of the e-commerce threat and working to embrace its opportunities are also coming into investment dollars.

“Nobody is really un-Amazonable anymore,” Sanjay Banker, a partner at TPG Growth said, addressing the fact that every retailer is at least at some risk when faced with Amazon’s exponential growth. TPG Growth counts J.Crew, Neiman Marcus and Airbnb among its investments. “And as successful as Amazon is, it’s still only a fraction of the e-commerce market and we still think there’s a lot of opportunity out there.”

How overstored a retailer may be, how relevant its convenience offering and how it’s winning in the experience realm are also key. But beyond all that, it’s about customer engagement.

“In addition to thinking about the notion of a brand…and Amazon has this to some extent—we look for brands and retailers that can generate a true level of customer engagement,” said Colin Welch, managing director of TSG Consumer Partners, which has helped drive growth for Paige and Revolve. “I think that’s critical and we see that in terms of an ability to build a community around a brand.”

Brands have to be authentic, they have to be able to address a consumers’ “why.” To do that, they’ll have to work to understand their customer as intimately as possible, and deliver on a promise that remains no matter how big the brand gets.

“Oftentimes today…authenticity means indie, independent, small, niche,” Welch said. “We don’t necessarily think that way. We think it’s about having a consistent point of view, a consistent message.”

Many brands—even those that have not yet gone bankrupt—are missing the mark on resonating with the consumer or simply being about something. There are too many brands that, should they disappear, few would be much affected.

“Valuable brands are the ones that stand for something in a very clear way that the customer understands and can play back to you,” said Ryan Cotton, managing director of Bain Capital, which counts Canada Goose, Toms and Gymboree as part of its portfolio. “Go to customers and ask ‘what does this brand mean to you?’ See how much consistency there is in the response.”

In doing this exercise with Canada Goose, when consumers were asked what the brand means to them, they consistently responded: warm. That means, when consumers need something that’s really warm, many of them will associate that need with Canada Goose product.

“It doesn’t matter how much money it is, you’ll save your pennies and go out and buy something that solves that need for you,” Cotton said. “I do think the age of the megabrand is over…it’s not indie for the sake of indie, it’s not boutique for the sake of boutique, it’s things that have more meaning for people, for a specific consumer segment.”

Retail brands won’t see the same scale that Pantene, for example, enjoyed 15 years ago, Cotton explained.

“We’re not going back to big because the advantages of scale have eroded,” he said.

Who’s at risk for bankruptcy and who might be able to sidestep it?

The retail sector is clearly overstored and even more clearly in a transition period that will separate the survivors from the irrelevant quickly and without remorse.

Investors are spending money to bailout brands that they think have real staying power, the kind that can—or have already—survived over generations. Beyond that, it’s digital businesses getting a lot of the dollars.

“Digital businesses are off to a rip roaring start,” Banker said. “The challenge is, which ones are attracting flash in the pan type interest versus which ones are built to last?”

And digital will continue to disrupt the sector, bringing on more bankruptcies and store closures, until it yields a more normalized environment.

“It always surprises me how long and protracted some of these death scenes [bankruptcies] can drag out. Maybe that half-life will shrink in the coming years given digital.”

When it comes to malls, the outlook for the future may be just as bleak as the present.

“I think B and C malls are done. I think they go away. I think we take that retail space and plow it into the ground…I think A malls will be around forever because sometimes it rains on Saturdays,” Cotton said.

And continuing on, stating very plainly, Cotton said, “Department stores, you’re done. The consumer has woken up to the game you’ve played with them for a long time…the Macy’s One Day Sale has turned into the Macy’s One Day Not on Sale…and everyone knows that now and you can’t hang out in that space.”

For now, investment dollars are going to retailers that have amassed a community, are acing personalization, are addressing underserved customer segments and delivering on everyday low price as opposed to high-low retail.

“I think there will be a lot of carnage,” Cotton said. “We can’t just compete on selection and price, we lose that game every day. You have to start thinking about what you’re selling your customer and you have to start selling something that can’t be sold online.”


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