What do Peloton, Express, Urban Outfitters and J.Crew all have in common? They have items for sale on their websites that aren’t actually theirs. Each of these retailers has taken a page out of Amazon’s playbook and decided to build a 3rd party marketplace of brands to complement their core offering. The main objective is twofold – increase traffic to their site while providing an opportunity to create a new revenue stream.
The WSJ had a piece recently on the rise of virtual brands in the restaurant space. Such a novel idea. Given the rise of super delivery apps (DoorDash, UberEats,GrubHub, etc), legacy restaurants such as Chili’s and Applebees can quickly develop new brands that cater to a digital audience. In one such example, Chili’s was able to spool up a completely new virtual brand with no physical stores called ‘It’s Just Wings’ and grow it to $150m in one year – that’s roughly 5% of Chili’s total business. Furthermore, they can keep their costs to a minimum with no massive advertising budgets, additional leases or significant overhead. Even after accounting for fees tacked on by the delivery apps this business is likely highly accretive. In fact, the majority of customers had no idea that this food was even being prepared at a Chili’s restaurant which shows having a virtual brand can help create new, non-cannibalistic revenue streams, and serve as an incubator for new food concepts. Startups and ad agencies should take note as there is ample space to create new businesses around this changing landscape.
What’s at stake is a massive TAM expected to hit $1T by 2030 made up exclusively of virtual brands and ghost kitchens. Similar to the private label business in grocery, get ready for a crowded, opaque market where it’s harder to tell where or by whom your food was created.
When I was at Jarden (now Newell Brands), we always had clear acquisition criteria when it came to M&A.
- Strong cash flow characteristics
- Category leading positions in niche markets
- Products that generate recurring revenue
- Attractive historical margins / or margin expansion opportunities
- Accretive to earnings
- Post earnout EBITDA multiple of 6-8x
This strategy allowed us to grow from one brand (The Ball Jar company in 2002) to over 50 brands and ~$8b in sales by 2015 when the company merged with Newell Rubbermaid.
I continue to see the surplus of food delivery companies and F&B marketplaces on an impending crash course. Is DoorDash a retailer, a logistics company, a brand, a restaurant or even a media/data company? Their vision is likely to be a bit of each and this will be accomplished under a build, partner, buy framework. Like numerous other industries, the idea of a horizontal play has turned vertical and we’re starting to see each encroach the other’s territory. The challenge in the future will be how to become the super app that customers interact with daily. This fight for share is not without challenges. The average smartphone user has 80 apps on their phone, but they only use ~9 apps per day and 30 apps per month. This means that 62% of those apps don’t get used much, if at all.
When Twitter ($TWTR) announced last week that they were permanently suspending the President’s personal account I was surprised – but I really don’t think they had an option. It’s very clear that Twitter’s growth has been heavily influenced by Trump and I expect the company will see user attrition as a result. Already, over the last few days, their stock has been falling. That said, there was no way out here. The simple fact is that Twitter makes money from advertisers and this cohort is about as risk averse as can be. Brands don’t want to be next to controversial rhetoric so they often will blacklist platforms or services that could be considered threatening. During my time at Jarden when I was overseeing our global advertising, we were constantly tweaking our buys to avoid anything that could be considered controversial. If Twitter had done nothing, while their user base would likely have remained robust, their earnings would have fallen precipitously as advertisers abandoned the platform. This, also likely would have been a jolt to the stock – and ultimately their business model.
I spent 10 years in corporate America before making the leap to the startup world. I wasn’t actively trying to make the switch but during my last few years in a big company, I was yearning to be involved with something more nascent where I could have a seemingly sizable impact on the outcome. I felt like I was just another number among thousands of employees at a F-500 and was at a point in my life where I felt I could take the risk. It’s worth clarifying as well, “startup” can mean very different things. A company that just raised a few million dollars will be very different from a late stage pre-IPO startup. Most individuals who do make the switch from corporate to startup typically join the company during later stages as its less of a culture shock. I’ve heard from numerous founders that they are leery of bringing in a hire from the corporate world in the early days of the business for fear that they won’t function well in a world that isn’t yet defined and lacks a matrix org structure. To be sure, it’s not for everyone but here are my thoughts on making the change.
If you have a startup and you’re venture backed, then you ultimately need an exit. Historically, this has been through M&A or by going public. However, with the exception of some SaaS deals, there’s not been a lot of M&A activity recently in the consumer space. Strategic buyers often feel many startups are overvalued and aren’t interested in paying the premiums. The alternative is an IPO and there’s a lot of new innovation to look forward to here. Earlier this year, there was growing support for direct listings among some high profile VC’s, namely Bill Gurley, who felt many startups were leaving “money on the table” by going through a traditional IPO. Slack and Spotify are two examples of companies that have done direct listings. His argument is that in a traditional IPO the bankers engineer the deal to get a pop for their institutional clients and ultimately the company doesn’t get to keep any of the upside. Case in point is Snowflake (SNOW) that went public yesterday via a traditional listing. The stock jumped 111% on the first day and as a result left $3.8b on the table. The downside with doing a direct listing has been the inability to raise capital as has been the case in a traditional IPO. That said, the NYSE has been working with the SEC on a way to do a primary raise concurrently with a direct listing that was recently approved but has since been rescinded as other parties pushed back. More to come here.
Investing in airlines has never made sense. As Warren Buffet once said “if a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” Buffet never liked airline stocks, but did see a possible entry point after years of consolidation to make an investment in Delta which he followed through on. That’s now a distant memory as Berkshire recently cashed out their holding following the pandemic. It’s for this reason that you haven’t, and won’t, see startups getting into the airline business; it’s too competitive and capital intensive with meager margins to make the business attractive to growth stage investors. But you are seeing aviation tech on the fringes of the industry attract VC money. Jetblue Technology Ventures, for example, has made numerous investments in the travel sector.
A landmark case against Uber and Lyft is playing out in California courts that could fundamentally challenge their business model. Proposition AB5 would require companies like Lyft and Uber to reclassify their drivers from independent contractors, as they are today, to employees. As a result, both companies have threatened to pull out of California altogether as they simply cannot comply with the ruling. Their business model isn’t built for that structure. The economics of ride hailing don’t contemplate having W2 employees. If this was the case, fare’s would rise substantially across the board, and demand would likely fall. That said, they are already prepping to lose this fight and this will require a radically different approach to how their business functions moving forward. It’s been surmised that they will pivot to a franchise model whereby independent franchisees will license the ride hailing companies software as well as brand IP while making drivers now regular employees. If you think this is a step backwards, you’re right. Under this model, you’ll end up with potentially thousands of black car and taxi companies using the software. This is exactly how the model existed before the Uber’s of the world came around and, I’m afraid, won’t even address the larger issue.