January 28, 2019 Consensus

The Weekly Consensus – January 28, 2019 (Volume 11, Number 4)

The Big Story
Can America’s Digital-First Brands Go Global?
Michael A. O’Hara

The class of emerging consumer businesses known as “digital-first” businesses (and its unique sub-segment of mono-branded “digitally native vertical brands”) has enjoyed special status over the past few years.  Often led by charismatic founders with innovative strategies, these businesses resonate with Millennials, have access to unprecedented consumer data, and have been given extraordinary valuations by an increasingly attentive universe of Silicon Valley venture capitalists.

To date, top-line growth has been the key driver to valuation, and investors have been patient on profitability.  Despite earning enough scale to go public, digital-first brands Wayfair, Purple, and Blue Apron have yet to achieve positive cash flow status.  Digital luxury marketplace Farfetch has a valuation of nearly 9.0x revenue even though it lost over $200.0 million in the fiscal year ended September 2018.  Among privately held digital-first companies, few are thought to be profitable at this time.

But as the market for these businesses matures, there are signs that investors are beginning to grow concerned.  One public example of this sentiment was uttered by Adam Valkin, a managing director of venture firm General Catalyst who said, “one of the things we are seeing with the brands that have emerged is even though they are doing a great job on their execution, they’re just not getting that big.”  Retail Dive reported that Valkin “is seeing many [digital-first brands] tap out between either the $20 million and $40 million range, or the $80 million and $100 million range.”

Investors are increasingly concluding that digital competency alone is not enough to achieve success.  Today’s consumer demands a near-perfect digital experience, but also wants to see product on shelves, interact with brands over social media, obtain products with immediacy and pay rock-bottom prices.  The demand for both omnipresence and low prices mandates scale.  Digital-first brands that achieved success with tech-savvy affluent young people living in American cities must now figure out how to tap into other demand pools, such as suburban U.S. and international markets.  How digital-first brands tap into suburban markets will be addressed in another article this year.

With regard to international markets, however, President Trump and U.S. Commerce Secretary Wilbur Ross are decidedly protectionist.  From immigration, to exiting trade treaties to repatriation of manufacturing, the administration has been willing to sacrifice exports of American brands in order to cull imports.  On January 24, CNBC reported that “amid a lack of tangible progress in trade talks between the U.S. and China, growing tensions around the world, as well as slowing economies, some on Wall Street are sounding the alarm that major international brands could soon fall out of favor.”  Brands like Procter & Gamble, Starbucks, and Canada Goose have seen international momentum fall amid backlash against North American brands.

It is against this unsettled global trade backdrop that America’s digital-first brands must determine how to gain the scale the investor community is beginning to demand.  To be sure, the continued rise of ecommerce generally and the increased spending power and suburbanization of the Millennial generation should provide some of the needed scale.  As for digital-first brands opening international markets, Consensus intends to address the subject at the 9th Annual Consensus Great Brands Show during which we will make available to growing U.S. companies the leaders of the 16 investment banks from all over the world that form The Terra Alliance.  For some growing American companies, this may present the perfect opportunity to begin thinking about whether their business can become the next great global brand.


Please save the date of September 25, 2019 for the 9th Annual Consensus Great Brands Show at the NY TimesCenter in Manhattan.



Apparel & Footwear

Drexler’s Exit Gives J.Crew Chance At True Fresh Start

After more than 15 years at J.Crew, retail legend Mickey Drexler has retired from the beleaguered clothing chain, a departure that gives it a much needed chance to finally reinvent itself. Drexler, who had been CEO from 2003 to 2017 but stayed on as executive chairman, left to concentrate on Drexler Ventures, his fund that invests in and advises emerging brands, J.Crew said in a statement late last week. There is no denying Drexler is a giant in the world of apparel retail. Earlier in his career, he revitalized Gap Inc’s namesake brand, a turnaround that earned him the moniker of Merchant Prince. He also founded Gap Inc’s Old Navy business, a retailer with about $8 billion in annual sales now, and later bought the rights to a defunct brand, Madewell, and turned it into the fast-growing chain that is providing J.Crew Group’s overall business a needed boost. But in a repeat of his history at Gap Inc, from where he was fired in 2002 amid enormous sales declines blamed on the brand falling out of touch with shoppers, Drexler lost his magic touch at J.Crew as well.

Express Inc. looking for a new CEO

The chief executive of Express is out after four years in the role. The fashion apparel retailer on Tuesday announced that, as of Jan. 22, David Kornberg is no longer serving as CEO, president or board member. No reason was given for his departure. Kornberg, who joined Express in 1999 and became CEO in 2015, will remain employed by the chain though Feb. 21. The company has appointed Matthew Moellering as interim CEO and president until a permanent replacement is named. He joined Express in 2006 and has served as the company’s executive VP and COO since 2011.

Raincoat maker Burberry avoids China showers, but warns of Brexit clouds

Burberry shrugged off the slowdown in China that hit Apple in the most recent quarter, but has raised the alarm over Brexit. Britain’s biggest luxury goods firm used its festive third-quarter trading update to buck a recent trend with “marginal growth” in Chinese sales. Asia is a key market for Burberry and the “mid-single” digit increase will be a relief for investors. The retail giant, famous for its raincoats with red, black and camel lining, had seen 6% wiped off its shares when Apple warned of a sales shortfall in China three weeks ago. The group’s finance director, Julie Brown, said more Chinese customers had been buying Burberry in their home market because negative exchange rates meant it was more expensive to shop abroad. Brown also warned that Burberry could suffer costs running into tens of millions if Britain left the EU without a deal.


Athletic & Sporting Goods

Why Adidas is taking a radically different approach to sneaker technology

Let Nike and Under Armour have sneakers filled with sensors that connect to an app, said Adidas CEO Kasper Rorsted.  Adidas has instead chosen a different path under Rorsted’s watch. The company has tested releasing limited edition 3D-printed sneakers while also teaming up with rapper Kanye West in an effort to drive buzz among athletes and sneaker-heads. Adidas has also ramped up its initiative to make shoes and apparel out of recycled material.


Nike Is Safe, Under Armour Is Out as MLB’s Jersey Supplier

Nike Inc. is safe and Under Armour Inc. is out as the next official jersey supplier for Major League Baseball after Nike signed a 10-year deal with the league that begins in 2020.  Under Armour made waves in 2016 when it announced that it signed a preliminary deal with MLB to take over for Majestic as the official apparel supplier for the league once its contract runs out after the 2019 season.

Cosmetics & Pharmacy

Procter & Gamble Bets on Demand for High-end Fabric, Skin-care Products

Procter & Gamble Co raised its sales forecast for the year after quarterly results topped Wall Street expectations, boosted by price hikes and strong demand for premium fabric and skin care products. Premium products such as Gain or Downy fabric enhancer beads and SK-II skincare products boosted growth during the quarter, and helped P&G, the no. 1 personal care goods company, set itself apart from in-house supermarket brands that have been encroaching on market share. Consumer goods companies have faced a string of challenges in the past year, including soaring commodities costs, a shortage of truck drivers, competition from supermarket brands and direct-to-consumer start-ups. To counter this, P&G is cutting costs and revamping its brands and marketing strategy. The company, which makes Gillette razors and Tide detergents, has also raised prices and launched higher-end products in its beauty and fabric care businesses.

Kimberly-Clark Shares Slide after Q4 Earnings Miss, Softer 2019 Guidance

Kimberly-Clark Corp. posted weaker-than-expected fourth-quarter earnings as profit margins declined in a “challenging” environment of higher input prices and increased currency market volatility. Kimberly-Clark said adjusted earnings for the three months ending in December came in at $1.60 per share, 5 cents shy of the consensus forecast of $1.65 but up 1.9% from the same period last year. Group sales, the Kleenex maker said, fell 1% from last year to $4.569 billion but came in just ahead of Street forecasts thanks to across-the-board price increases.

Manufacturers Are Growing the Men’s Grooming Category with New Products

It no longer is a taboo for men to take care of their appearance. Gone is the mindset that men are not interested in anything more than basic grooming options. In its place is a more evolved understanding that, given the opportunity, men want to buy products that help them look and feel their best. As assortments have changed, so too has the preferred destination for men to buy their grooming products. According to observers, the category — once dominated by brick-and-mortar stores — is seeing business slowly gravitate toward online merchants. Officials at Wahl Clipper, for example, said that while it is true that sales of clippers are up more than 10% this year in stores thanks to a trend toward self-barbering, the increase is even greater online. A similar picture can be painted for trimmers.


Discounters & Department Stores

Walmart raises trucker pay to help fill its 900-driver shortage

Walmart is raising trucker salaries in its push to hire 900 more drivers this year across the U.S., including Texas where it has a big concentration of distribution centers where empty trucks get filled. Companies are competing for the best drivers as a shortage of truckers in the U.S. persists. Walmart is promising more predictable scheduling to be conscious of work-life balance and is shortening the time from application and starting work. Last year, it also started a $1,500 referral bonus. In the latest hiring push, Walmart’s driver wages are rising from a combination of a per-mile increase and higher activity and drop-off pay.

Ex-Sears CEO Eddie Lampert orchestrated ‘scheme’ to ‘steal’ Sears, creditors allege

Longtime Sears boss and investor Eddie Lampert orchestrated a “multiyear and multifaceted scheme” to strip the company of assets and capitalize on its decline, a group of the retailer’s major creditors alleged. Lampert, who remains chairman of Sears and was CEO until the company filed for Chapter 11 bankruptcy in October, presided over the closure of more than 3,500 stores and the loss of about 250,000 jobs, according to a scathing filing Wednesday by unsecured creditors.



Emerging Consumer Companies

Amazon asks brands to create products specific for Amazon

In an effort to reduce its own manufacturing and product development costs, Amazon is asking companies to create new, exclusive products for sale on the platform. Early result include a new mattress line from Tuft & Needle called Nod.

Bevi raises $35 million to become the “anti-brand”

Bevi, maker of “smart” beverage dispensing systems sold to offices and in food service channels, has raised $35 million in Series C funding. The round was led by Bessemer Venture Partners. Bevi’s machines filter water directly from the tap in both still and sparkling form, and infuse a variety of flavors, including lemon, lime mint, coconut, blueberry, and cucumber. The latest funding will help Bevi further develop customization capabilities.

The Pill Club Raises $51 million  

The Pill Club, which couples healthcare services with at-home delivery through a team of doctors, nurses and patient care coordinators, raised $51 million in Series B funding. The investment was led by VMG Partners, with participation from new investors GV and ACME Capital, and existing investors Base10 Partners and Shasta Ventures. The Pill Club operates its own pharmacy and is licensed to prescribe medication in 35 states. The funding is expected to grow the business fifty percent and expand its prescription service across the entire U.S.



Grocery & Restaurants

Luby’s plans board changes amid proxy fight

A week before Luby’s Inc.’s contested shareholder meeting, the company on Friday announced it would be replacing two independent directors and elect a new chair this year. The Houston-based parent to the Luby’s cafeteria chain and the Fuddruckers burger brand is in the midst of a proxy fight with dissident investor Bandera Partners LLC, a New York hedge fund that now owns about 9.8 percent of Luby’s shares.

Munchery Ceases Operations

After raising a total $125 million in venture capital funding, on-demand food delivery startup Munchery has decided to close its operations, effectively immediately. Munchery previously laid off 30 percent of its workforce in May after shutting down its Seattle, Los Angeles and New York operations.

Home & Road

Lowe’s Announces Major New Deal with the NFL Months after Cutting NASCAR Ties

Lowe’s has announced a new sponsorship with the NFL. The multiyear deal comes as the Mooresville, North Carolina, home improvement retailer is looking to give itself a competitive edge against its chief rival, Home Depot. Lowe’s is kicking off the partnership the week of the Super Bowl, which takes place next month in Atlanta, Home Depot’s hometown. Lowe’s Chief Marketing Officer Jocelyn Wong told the Charlotte Observer the NFL deal is a way that Lowe’s is working to grow its professional customer base. Pro customers, such as contractors, spend an average of five times as much as the typical do-it-yourself shopper, Lowe’s has said.

West Elm Hits on a Good Thing

West Elm is partnering with Good Thing, a Brooklyn-based direct-to-consumer furniture design company whose modern, everyday affordable products will now be sold exclusively at West Elm. West Elm will be the exclusive retailer of the Good Thing line of products including the merchandising, development and marketing of existing and future products, said West Elm spokesperson Dru Ortega. The extensive line ranges from bar stools and coffee tables to mirrors, rugs, pendant lighting and vases. Good Thing founder Jamie Wolfond still owns the company and will act as creative director, partnering with West Elm to identify emerging designers to collaborate with under the Good Thing collection.

Jewelry & Luxury

2H Slump Dents De Beers Sales Volume

De Beers’ sales volume fell 4% last year due to weakened demand for lower-value diamonds in the second half. The miner sold 33.7 million carats of rough, compared with 35.1 million carats in 2017, as clients bought fewer of its cheaper stones, it reported Thursday. De Beers’ average price for sales — excluding some sales by its joint-venture partners — rose 6% to $171 per carat for the year, reflecting the larger proportion of higher-value goods.

The Jewelry Industry Shrank Again in 2018

The traditional jewelry industry continued to consolidate in 2018, with 1,064 North American jewelry companies discontinuing operations last year, though the number of companies entering the business rose nearly 30 percent, according to the annual statistics compiled by the Jewelers Board of Trade (JBT). The 1,064 discontinuances break down to 893 retail jewelers (852 in the United States, 41 in Canada); 106 wholesalers (100, United States; 6, Canada); and 65 manufacturers (61 in the United States; 4 in Canada.)

How Neiman Marcus’ CIO wants to frame customer experiences

When most 12-year-olds relished having a spelling quiz taped to the refrigerator, Sarah Miller was writing her first computer program. Technology was always on Miller’s horizon, and now she sits at the technical helm of a luxury retailer. As CIO of Neiman Marcus, Miller knows her business partners’ basic expectations of technology is that “it just works,” she told CIO Dive in an interview. But now CIOs are expected to maintain the current infrastructure while creating new technologies.


Office & Leisure

The U.K. Is Worried About Running Out of Paper and Pens

WH Smith Plc has boosted reserves of stationery in the U.K. in case ports become jammed due to Brexit, joining a host of other consumer-products companies stockpiling to prepare for disruption. The retailer will hold five to six months worth of stationery rather than the typical level of three to four months as a result of uncertainty surrounding Britain’s exit from the European Union. Such products, which include pens, notepads and diaries, are sourced mostly from Asia. Beyond stationery, the majority of WH Smith’s goods are sourced domestically, such as magazines, newspapers and books. This comes as publishers and paper manufacturers stockpile newsprint and ink to avoid supply disruptions and hedge against the risk that imported goods become more expensive if the pound weakens further.

Brandless adds baby, pet products, moves beyond $3 pricing

Brandless Inc., the fast-growing online food and housewares retailer known for $3 pricing, is expanding into baby and pet products, categories where many shoppers are increasingly willing to pay more. The expansion, announced Wednesday, represents the largest new-product rollout since Brandless launched in mid-2017 and pushes it beyond the $3 prices that first brought it attention. Brandless, based in San Francisco and Minneapolis, is an e-commerce website that aims to sell better-for-you and better-for-the-planet food and household staples at an affordable price. Brandless has grown to more than 400 items from 107 when the company launched in July 2017. Wednesday’s launch added about 50 more products. Simple pricing is one of its key selling points; it has been selling all products for $3 (or two for $3 or three for $3). But Brandless’ expansion into pet and baby comes with another announcement: a new class of $9 products.

Technology & Internet

Amazon Prime has more than 100 million members in the US

Amazon.com Inc. had 101 million members of its Prime loyalty program in the United States as of December, according to new estimates from Consumer Intelligence Research Partners (CIRP). The retail giant added 6 million U.S. consumers to Amazon Prime in the second half of 2018, with two-thirds of those new signups joining in the fourth quarter, CIRP estimates. Amazon does not disclose how many Prime members it has by country; however, in 2018 it said it had more than 100 million globally.


Amazon tests autonomous vehicle for deliveries

Amazon.com Inc. has begun field-testing a compact, self-driving delivery vehicle dubbed Amazon Scout. The e-tailing giant said Wednesday that six of the autonomous, all-electric vehicles — about the size of a small cooler and emblazoned with the Prime logo — are now making package deliveries in a neighborhood in Washington’s Snohomish County.


Elliott Management Urges Change at eBay

Investment firm Elliott Management is embarking on an activist campaign against online retailer eBay, arguing that the company is too diversified and lacks focus. In a letter published Tuesday by Elliott Management, the firm revealed that it owns a 4 percent stake in eBay, valued at approximately $1.4 billion. According to Elliott, eBay is underperforming its peers, despite its inherent value, and could be trading at between $55 to $63 per share. That would mark an increase of at least 77 percent over Friday’s closing price of $31 per share.


Finance & Economy

US weekly jobless claims fall to the lowest level since 1969

The number of Americans filing applications for unemployment benefits fell to more than a 49-year low last week, but the drop likely overstates the health of the labor market as claims for several states including California were estimated.  Still, labor market conditions remain strong, which for now should help to temper fears of a sharp slowdown in economic growth. The economy is facing several headwinds, including a month-long partial shutdown of the federal government, which is starting to hurt both consumer and business confidence.


Government debt hits record $66 trillion, 80% of global GDP, Fitch says

Governments are continuing to run up huge debt levels, with emerging countries helping push the total global IOU to 80 percent of gross domestic product.  The worldwide tab through 2018 is now up to $66 trillion as measured in U.S. currency terms, about double where it was in 2007, just as the financial crisis was beginning to unfold, according to Fitch Ratings’ new Global Government Debt Chart Book.

U.S. home sales hit three-year low, prices rise slowly

U.S. home sales tumbled to their lowest level in three years in December and house price increases slowed sharply, suggesting a further loss of momentum in the housing market. The weak report from the National Association of Realtors (NAR) was the latest indication of slowing economic growth. The housing market has been stymied by higher mortgage rates as well as land and labor shortages, which have led to tight inventory and more expensive homes.