March 11, 2019 Consensus

The Weekly Consensus – March 11, 2019 (Volume 11, Number 10)

The Big Story
Why Didn’t I See Many Consumer Startups at Shoptalk?
Paul Alexander, CFA

After hearing rave reviews of the event for a couple of years, I was happy last week to attend Shoptalk, the annual retail and ecommerce conference, for the first time. I enjoyed it, and, in many ways, it was exactly what prior attendees had told me to expect: thousands of attendees, keynotes from A-list industry executives, panels with interesting topics and experts, and countless opportunities to network. However, my experience differed from my expectations in one curious way. I was under the impression that Shoptalk was chock-full of startup brands and entrepreneurs. While there were some consumer startups in attendance and speaking on panels (Lively, GREATS, and Cotopaxi were there, to name a few), there weren’t as many of them as I expected. Instead, it seemed that most keynotes and panelists were from industry titans like Walmart, Amazon, and Google. I was not alone in noting this; a report from Forbes said that, to some, “the show felt big branded,” and an Ad Age article commented on the show’s evolution from 2016, when it felt like an “intimate” gathering of startups, to today, when it is an event touting “executives from big names.”

Much of this evolution is likely attributable to Shoptalk’s success. With each year, the event grows, making it more attractive to big-money sponsors and famous speakers. However, maybe other factors were also at play. One panel discussion at Shoptalk, “VC Perspectives on Innovation in Retail,” touched on two dynamics in the startup world that could have affected what I saw. Unfortunately for emerging consumer businesses, both possibilities are a little foreboding.

First, all three VC panelists (hailing from Union Square Ventures, Cowboy Ventures, and Lightspeed Venture Partners) noted ways in which the environment is getting more difficult for consumer startups. Customer acquisition costs are rising, the competitive field is getting more crowded, and mobile ecommerce as a channel is becoming so well developed that there isn’t the same kind of wide open, land-grab of growth opportunity that there once was. One panelist speculated that perhaps retail needs another major shift in platform or channel in order to open up more fertile grounds again for startups. Perhaps if voice-enabled shopping begins to take off, she wondered, maybe young consumer businesses will find another big window of opportunity. With this issue in mind, perhaps fewer startups this year felt comfortable allocating the time and expense to attend the show than they did in years prior. Perhaps the opportunity cost to attend, namely, dollars that could have gone to digital marketing, has gotten too high for some.

The VC panel discussion also touched on a second possibility. One of the panelists cautioned any small companies in the audience that Amazon is not their friend. She argued that flying under Amazon’s radar is important, and pointed to Amazon’s 2017 launch of Prime Wardrobe, a service that she argued was a direct shot at Stitch Fix, as an example of the competitive threat that the ecommerce behemoth poses to emerging consumer businesses. Perhaps many startups already fear Amazon. Maybe there were just as many startups at Shoptalk this year as in any year prior, but they were opting to not take the stage, to not wear a nametag, and were hiding in plain sight. Why present at Shoptalk and shout to the world that you have a great, innovative new business, if that figuratively puts an Amazon-sized bullseye on your own back?

Not everything at Shoptalk and in the VC panel discussion was a negative for startups. For example, the panel noted that startups usually resonate with consumers as being more authentic than big companies, and startups are often faster and more flexible than the industry incumbents. Beyond the VC panel, the entire exhibition hall of service providers represented another positive for startups, as not as many simple, turnkey tech solutions existed for young companies just a few years ago. In fact, a number of these service providers were themselves startups. Perhaps the greater opportunity for startups in the consumer ecosystem has migrated from the DTC world to the B2B one.

There are still more practical reasons why I may not have seen as many consumer startups as I expected. Many startups in attendance likely took numerous private meetings with vendors and sponsors at the event, which would have taken them out of the main halls. And perhaps I walked by a number of startups and just didn’t recognize the names of the companies on their booth or nametag. Still, Shoptalk appears to be becoming less of a consumer startup showcase. It is still a great event – it may be even better than it was when it first started. But its days as an “intimate” gathering of startups seem to have passed.

 

Headlines of the Week

Airbnb to acquire HotelTonight, plunging deeper into hotel business

On Thursday, Airbnb said it signed an agreement to acquire the hotel booking app HotelTonight, a deal that would be Airbnb’s biggest yet. Financial details of the deal weren’t disclosed. The home-renting company lists roughly 6 million homes for rent in more than 80,000 cities worldwide. The private company is currently valued at $31 billion. Airbnb is reportedly planning an initial public offering sometime this year. But after years of regulatory battles with cities including New York, New Orleans and Paris, the company needs to show investors it can grow. The company has progressively moved into the hotel business over the past couple of years, at first quietly adding boutique hotels to its listings. Last year it announced hotels would be one of four property types it offers on its site.

 

Mark Zuckerberg lays out his vision for a new Facebook

Mark Zuckerberg wants to reposition Facebook as a privacy-focused platform. In a Facebook post on Wednesday, the CEO and founder detailed his overarching vision for how to make the service more secure, including encrypting messages. He also teased plans to integrate its various services, including WhatsApp, Instagram and Facebook, and said there will be a bigger emphasis on ephemeral content.

 

 

Apparel & Footwear

Investor pushes L Brands to spin off Victoria’s Secret

Activist investor Barington Capital on Tuesday urged L Brands to separate its Victoria’s Secret and Bath & Body Works businesses, in an effort to turn around the struggling consumer brands owner. Barington urged the company to retain advisers and explore either a spin off of the underperforming Victoria’s Secret brand or take the much financially stronger Bath & Body Works public. The hedge fund also suggested that the role of chairman and chief executive officer be held by separate individuals, an increasingly popular demand by activist investors who feel it would help companies run better. In a letter to L Brands’ chairman Leslie Wexner, Barington said the “true potential” of Bath & Body Works had not been realized because of years of weak performance at Victoria’s, stemming from a failure to maintain a strong brand image and missteps with merchandising. Barington did not disclose the size of its ownership stake in L Brands. L Brands said in a statement it welcomed open communication with shareholders and “values input that may advance our goal of enhancing shareholder value.”

Charlotte Russe will close all of its stores and start liquidation

Charlotte Russe will close all of its stores and is in negotiations to sell its intellectual property, the company confirmed Wednesday. “We are partnering with the buyer and remain in talks to sell the (intellectual property), are optimistic about the future of the brand, and remain in ongoing negotiations with a buyer who has expressed interest in a continued brick and mortar presence to continue to serve our loyal customers in the future,” the fashion retailer said in a statement to USA TODAY. In a court hearing in Wilmington, Delaware, on Wednesday, Judge Laurie Selber Silverstein approved the sale of Charlotte Russe’s assets to SB360 Capital Partners LLC, a liquidation company.

Children’s Place, Gap buy Gymboree assets at auction

Gymboree Group has found buyers for its brand assets. The Children’s Place Inc. plans to buy $76 million in assets from the bankrupt retailer, including the rights associated the Gymboree brand and its value-oriented Crazy 8 brand. Gap is buying the intellectual assets, including the website, of Gymboree’s upscale Janie and Jack chain for $35 million. It also plans to buy the chain’s inventory from a liquidation company. The sales were revealed in court documents. Both are subject to court approval, with a hearing to begin March 4.

Denim brand Diesel USA files for bankruptcy

Diesel USA Inc., the premium denim and accessory brand whose five-pocket pants dominated pop culture in the 1990s and early 2000s and No. 418 in the Internet Retailer 2018 Top 1000, filed for bankruptcy in Delaware Tuesday. The unit of Italy’s Diesel SpA blamed plummeting sales, a botched turnaround, pricey leases and unwavering landlords—plus several instances of cyber fraud and theft. The Chapter 11 petition—filed with a three-year plan to correct a strategy that had it leasing expensive stores in premium locations—estimates up to $100 million in assets and as much as $50 million in debt. Unlike some other retailers that have announced massive store closures, Diesel USA doesn’t plan to shutter. Instead, its court papers described a plan to restore the Diesel brand in the U.S., including opening new stores and retrofitting some old ones to make them cheaper to operate.

 

Athletic & Sporting Goods

Three sentenced in Adidas recruiting scandal

A federal judge sentenced the three men convicted of pay-for-play schemes to steer high-profile recruits to Adidas-sponsored college basketball programs to multiple months in prison.  U.S. District Court Judge Lewis A. Kaplan sentenced former Adidas executive James Gatto to nine months in federal prison, former Adidas consultant Merl Code to six months and aspiring sports business manager Christian Dawkins to six months.  In October, a federal jury in New York convicted the three men of felony charges of wire fraud and conspiracy to commit wire fraud after a three-week criminal trial. They were accused of funneling money from Adidas to the families of high-profile recruits to ensure they signed with the sneaker company and certain financial planners and business managers once the players turned pro.

 

Nike Signs Its First Esports Sponsorship Deal

Nike is entering the esports game, following competitors Adidas and Puma into the field.  The global sports brand has signed a four-year deal with China’s League of Legends Pro League, agreeing to supply all squads with clothing and footwear starting this year.  The league consists of 16 teams and has one of the largest followings in the world. Fans will also be able to buy Nike-produced products at live tournaments.

 

New Balance opens pub where runners cash in miles for beer

New Balance has found a way to win over London with the two things Brits hold dearest to their hearts: pubs and pints.  The retailer, which is headquartered in Boston, U.S., has launched The Runaway — a pub based in the capital city where runners can cash in miles for beer.  It teamed up with VMLY&R to tap into U.K. culture where runners often get together and celebrate their training with a (somewhat counterproductive) few pints.  Runners’ miles are recorded through fitness network Strava, then are tallied and converted to currency using a “Runaway Card” that they add to their Apple and Google Wallet Passes. Runners use these miles – the only currency accepted at the pub — to pay for pints via their mobile wallet.

Cosmetics & Pharmacy

BeautyBio Takes Minority Investment from Kainos

BeautyBio has closed on a minority investment from Kainos, a Dallas-based private equity firm. BeautyBio, best known for its GloPro microneedling devices, plans to use the funds to continue product development and global expansion, according to founder and chief executive officer Jamie O’Banion. “They’re not a traditional beauty fund, which is something that I loved because we want to make sure we’re always meaningful to whoever we partner with,” O’Banion said, referencing the firm’s current lack of other beauty investments. “Because we’re scaling right now it’s less about having someone that is able to make an introduction…What I need is someone who’s an operational expert.” Terms of the deal were not disclosed, but industry sources estimated BeautyBio is expected to double in 2019 to more than $100 million in sales.

GNC Shares Tumble as Weaker-than-expected Earnings Offset News of IVC Venture

GNC Holdings Inc. shares slid about 14%, after the vitamin and dietary supplement retailer posted weaker-than-expected earnings for the fourth quarter, offsetting news of a partnership that will garner it about $176 million. “While fourth quarter operating results were below our expectations, we recently achieved some major milestones in repositioning the company,” Chief Executive Ken Martindale said in a statement.

Paris Hilton Is Making Her First Outside Beauty Investment: The Glam App

Paris Hilton may just be beauty’s next big investor. Hilton, whose brand includes fragrance, cosmetics and skin care, has made her first outside beauty investment in The Glam App, which provides in-home beauty services. “It’s going to make a difference in people’s lives, make them feel gorgeous and confident and look hot on all their dates,” Hilton told WWD. And while the DJ and entrepreneur is already involved with several businesses — including a fragrance line with Parlux that will release its 25th scent in a few months — Hilton plans to be deeply involved with The Glam App, too.

 

Discounters & Department Stores

Dollar Tree to close up to 390 Family Dollar stores, reports $2.3 billion loss

Discount retailer Dollar Tree plans to close 390 Family Dollar stores this year while renovating 1,000 other locations, the company said in releasing its fiscal fourth-quarter earnings Wednesday. “We are confident we are taking the appropriate steps to reposition our Family Dollar brand for increasing profitability as business initiatives gain traction in the back half of fiscal 2019,” CEO Gary Philbin said in announcing the results.

How Hudson’s Bay CEO Helena Foulkes Is Getting the Retailer to Focus

Since taking the helm at Hudson’s Bay Co (HBC) just over a year ago, Helena Foulkes has been busy streamlining the department store operator’s business. On her watch, HBC has made big moves like shedding online flash site Gilt Groupe, selling a large stake in the company’s struggling European business to a rival, shelving plans for further Saks expansion in Canada, closing the Lord & Taylor flagship in Manhattan and selling it to WeWork and most recently, announcing it would close up to 20 Saks Off Fifth stores.

Instead, HBC is putting its energies into its best performing businesses—and those with most potential. “I’ve trying to get the organization to focus more,” Foulkes tells in a recent interview at HBC headquarters in New York City.

Kohl’s, With Help from Planet Fitness, Is Making Sure It Doesn’t Get Stuck In The Middle

The woes of Sears and J.C. Penney highlight the challenges facing the mid-priced department store sector, but Kohl’s is determined to buck that trend. The retailer’s shares jumped 7.3%, making it the biggest S&P gainer on Tuesday, after the company reported better-than-expected fiscal-fourth-quarter results. It also said Planet Fitness would open up to 10 locations next to its stores this year as part of Kohl’s move to shrink its stores and lease or sell vacant space to other businesses, including German discount grocer Aldi, that it hopes could bring shoppers to its stores next door.

J.C. Penney’s turnaround headwinds now include a weaker economy, S&P says

J.C. Penney’s turnaround efforts are coming up against strong headwinds this year, which S&P Global Ratings said Wednesday includes slower U.S. economic growth.

S&P lowered its credit rating for Penney with a negative outlook, even though the firm said Penney’s liquidity is adequate. It cited Penney’s “persistently negative operating trends” in the just-concluded fourth quarter. And the retail landscape will only get more competitive, S&P said.

 

 

Emerging Consumer Companies

Bright Cellars raises $ 8.5 million Series A

Bright Cellars, the Milwaukee-based wine subscription startup, raised $8.5 million in Series A funding. The investment was led by Revolution Ventures. Founded in 2014 in Boston, and later moved to Milwaukee in 2015, the company has previously raised a total of $5.2 million from investors.

Bandier raises $34.4 million

Bandier, the New York-based activewear brand founded in 2014, raised $34.4 million to fuel growth. Eurazeo, the French investment firm, led the round with a $25 million investment, and was joined by C Ventures. As part of the investment, Bandier is adding new chief executive, Adrienne Lazarus, who previously led footwear brand Frye Co. and Intermix. Bandier operates out of seven locations in the U.S., in addition to Studio B, a fitness studio.

Cleancult introduces plastic-free refill cartons

Cleancult, the home cleaning product startup, introduced milk cartons to replace plastic in its refills of products. The products are initially sold in plastic containers, with any refill subscriptions purchased arriving in milk cartons. Cleancult currently sells laundry detergent, dishwasher tablets, dish soap, hand soap, and all-purpose cleaner refills, with all refills in milk cartons. The products are available on its website and at the Container Store

 

 

Grocery & Restaurants

Kroger caps off fiscal year with earnings miss

The Kroger Co. fell short of Wall Street’s earnings projections and turned in lackluster sales results for its 2018 fourth quarter and fiscal year. Chairman and CEO Rodney McMullen, however, called 2018 an “investment year” for Kroger, as the supermarket giant saw digital sales and own-brand volume surge and made strides in strategic efforts to expand online grocery, alternative profit streams and cost savings from process improvements.

 

Meal kits continue to show strength

Meal kit sales continued to show strength in 2018, according to new data from the market research firm the Nielsen Co. LLC. Nielsen said the growth in meal kits has been fueled in part by online subscription companies partnering with brick-and-mortar groceries, supermarkets offering their own packaged options and even restaurant brands dipping their toes into the market. Nielsen data indicated meal kits had seen a 36% growth in just under a year.

 

Mario Batali out at B&B Hospitality Group

More than a year after allegations of his sexual misconduct made headlines, Mario Batali has been bought out from the B&B Hospitality Group that he ran with Joe Bastianich and other family members over the past two decades. In an email sent to employees Wednesday at the New York-based hospitality group’s 16 restaurants, Joe Bastianich and his sister Tanya Bastianich Manuali, said they had acquired all of Batali’s interests.

 

John Schnatter to exit Papa John’s board

John Schnatter, founder and former CEO of Papa John’s International Inc., on Monday reached a settlement with the pizza company, agreeing to leave the board after he has helped to name a successor, according to a settlement filed with the SEC. The agreement, which comes after months of legal battles and a war of words between the two parties, said Schnatter has dropped all legal claims against the Louisville, Ky.-based pizza chain, and will be replaced with his successor following the annual shareholders meeting. Schnatter will remain the largest shareholder at Papa John’s and still retains about 31 percent of the company’s stock.

Home & Road

Instant Pot’s Parent Company Is Merging with Corelle

That Instant Pot in your kitchen will soon be a Corelle product. Instant Brands, the company behind the popular Instant Pot, has announced plans to merge with Corelle Brands, the company behind things like Pyrex and CorningWare as well as its name brand. Financial terms of the deal have not been announced, but combined together the two companies are expected to have a value of more than $2 billion, The Wall Street Journal reports. Beyond the popular Instant Pot, which works as a pressure and rice cooker as well as a slow cooker, Instant Brands also sells a sous vide machine and a blender that cooks food.

 

The Home Depot Springs into Hiring

The Home Depot is applying a high-tech solution to its need for more employees. The home improvement giant is hiring 80,000 associates for its busy spring season with a new technology built by the company’s in-house engineers. Approximately 2,000 U.S. stores and more than 100 distribution centers have seasonal, part-time and full-time positions available. The new technology is designed to help hiring teams move candidates through the hiring process faster. Last spring, the company launched Candidate Self Service, another in-house-developed technology that allows store and supply chain candidates to schedule their own interviews. Since its launch, nearly one million candidates have used the solution.

West Elm partners with Rent the Runway

Starting this summer, retailer West Elm will partner with clothing rental company Rent the Runway to offer curated West Elm items to RTR subscribers. “We know that clothing is often a vehicle to help people feel confident and expressive, and this new partnership will unlock that feeling through West Elm’s home decor,” said Jennifer Hyman, co-founder and CEO of Rent the Runway. This is the first time West Elm has made products available for rent and the first time RTR has expanded its offerings beyond apparel and accessories. The West Elm bundle consists of a curated selection of new and seasonal textiles for the bedroom and living room. Bedroom bundles will include a tailored mix of a quilt, coverlet, throw or blanket, shams and decorative pillows to perfectly dress a bed while living room bundles will include a stylish pairing of decorative pillows and a throw.

Jewelry & Luxury

Weak Demand Weighs on De Beers Sales

De Beers’ sales fell for the second consecutive month, as high rough prices and slim midstream profits softened demand from buyers, sightholders reported. Sales of $490 million in February were 13% below a year ago amid weak interest in lower-value goods, the miner said Tuesday. De Beers mainly kept prices steady, prompting concerns from clients, many of whom had been hoping the company would make adjustments to ease pressure on the market. “Prices should have gone down, because the margins are not there for the manufacturers, but still they were quite firm,” an India-based sightholder told Rapaport News. “Already it’s been almost one year that it’s been difficult to make money. That’s not just with us, but with most [cutting firms].”

 

DPA Puts Synthetics Detectors to the Test

A synthetics detector costing less than $7,000 is one of only three machines that conclusively identified 100% of lab-grown diamonds in a recent industry-wide study. Yehuda’s Sherlock Holmes, priced at $6,495, correctly spotted all synthetic diamonds in a “deliberately challenging” sample, according to a report the Diamond Producers Association (DPA) and Signet Jewelers released Tuesday.

Frederick Goldman Buys Lab-Grown Brand Love Earth

Frederick Goldman has bought Love Earth, a lab-grown diamond brand founded by Daniel Schneider. As part of the acquisition, founder and CEO Schneider will join Frederick Goldman as vice president of sales. Schneider is a former director of Stuller and CEO at Gregg Ruth/KGK Group. Frederick Goldman CEO Jonathan Goldman says that the company is setting up a factory in Mexico to produce jewelry for the Love Earth brand.

 

Office & Leisure

Office Depot partners with Alibaba to focus on small to medium-sized businesses’ needs

Office Depot, one of the many big box stores feeling the impact from Amazon’s e-commerce dominance, announced a significant partnership with Chinese e-commerce site Alibaba.com, which will see the companies working together to better serve the needs of U.S. small to medium-sized businesses. The deal includes a co-branded e-commerce site on Alibaba.com, and will give Alibaba access to Office Depot’s customer base and sales agents. Meanwhile, Office Depot customers will be able to tap into Alibaba’s supplier network, the companies said. The new online destination, www.alibaba.com/officedepot, will provide U.S. business customers a way to access Alibaba.com’s global supplier network, in addition to online and in-store offers for Office Depot’s products and services.

Barnes & Noble books best comps in years

Barnes & Noble on Thursday reported its best quarterly comp sales in several years, a rise of 1.1%. Total sales in the third quarter of fiscal 2019 were flat from the prior year, hitting $1.2 billion, according to a company press release. Consolidated third quarter operating income was $79.2 million, compared to an operating loss of $34.9 million last year. The results included a $22.1 million asset impairment charge and non-recurring professional fees of $5.1 million. Barnes & Noble had its best holiday in years. That’s a big deal for a company that in the past blamed the fading of the short-lived coloring book fad for lackluster performance. This year, executives took advantage of the void in the toy market left behind by Toys R Us, which liquidated ahead of the holidays. Through a pilot program, 91 stores were remodeled to feature toys.

Multi-national stationery chain Paperchase could close up to 28 stores

Stationery retailer Paperchase begun a restructuring program that it expects will see at least five stores close – and potentially many more. The retailer has launched a company voluntary arrangement (CVA), which will see it ask landlords for reduced rents and walk away from some locations. The chain is asking landlords for rent reductions at the locations, and if they don’t agree the stores could be closed. Paperchase is set to ask for a 50% reduction of rent on 28 of its shops for three months, after which a small number are expected to close. The exact number of closures has yet to be confirmed. In a statement, the company said: “While the majority of the 145 store estate will continue to trade as normal, Paperchase expects a small number of loss making stores will be closed as part of the process.

Technology & Internet

Amazon Suppliers Panic Amid Purge Aimed at Boosting Profits

Amazon.com Inc. has abruptly stopped buying products from many of its wholesalers, sowing panic. The company is encouraging vendors to instead sell directly to consumers on its marketplace. Amazon makes more money that way by offloading the cost of purchasing, storing and shipping products. Meanwhile, Amazon can charge suppliers for these services and take a commission on each transaction, which is much less risky than buying goods outright.

 

Pinterest’s latest updates seek to make the platform more shoppable

Pinterest has long been a platform built around the concept of inspiration. And with the platform planning an initial public offering later this year, it is increasingly focusing that inspiration around shopping. The social network last week rolled out a number of updates to its platform aimed at helping retailers drive more sales via the platform.

 

EBay appoints two new directors to initiate its turnaround plan

EBay Inc. said it has reached an agreement with Elliott Management Corp. and Starboard Value, appointing two new directors and paving the way to potentially carving off some of its businesses. Under terms of the deal, Elliott partner Jesse Cohn and Matt Murphy of Marvell Technology Group Ltd. will join the board. EBay also said it would undertake a strategic review of its portfolio of assets, including StubHub and the Classifieds Group.

 

Finance & Economy

U.S. trade deficit hit a 10-year high due to record shortfall with China

The U.S. trade deficit surged to a 10-year high in 2018, with the politically sensitive shortfall with China hitting a record peak, despite the Trump administration slapping tariffs on a range of imported goods in an effort to shrink the gap.  The Commerce Department said that an 18.8 percent jump in the trade deficit in December had contributed to the $621 billion shortfall last year. The 2018 deficit was the largest since 2008 and followed a $552.3 billion gap in 2017.  The trade deficit has deteriorated despite the White House’s protectionist trade policy, which President Donald Trump said is needed to shield U.S. manufacturers from what he says is unfair foreign competition.

US households see biggest decline in net worth since the financial crisis

Americans’ net worth fell at the highest level since the financial crisis in the fourth quarter of 2018 as sliding stock market prices ate into the household balance sheet.  Much of the slide came due to Wall Street’s woes, as the stock market suffered a precipitous decline that started in October and briefly reached bear market status. Equities skidded as investors began to fear that the Fed would keep raising interest rates even as economic conditions began to deteriorate.  By the time the market drop ended in late December, households saw $4.6 trillion worth of equity value deteriorate. The decline was offset somewhat by a $300 billion increase in real estate value.