The issues facing the retail industry are well known. Consumers are spending less, demanding greater convenience, shopping online and are increasingly value savvy. 

The issues facing the retail industry are well known. Consumers are spending less, demanding greater convenience, shopping online and are increasingly value savvy. 

Against this backdrop, a number of established retailers need to manage the burden of excess store numbers and long leases with high rents. At the same time, the convergence of technology, changing consumer habits and the greater availability of property on the high street are all lowering barriers to entry. 

In contrast, these same factors are generating significant opportunities for companies with innovative business models that put in place the capital and support they need to succeed. These mould-breaking companies typically fall into two categories.

Firstly, those that can reshape a traditional retail offering to provide a highly differentiated consumer proposition (think Poundland, Card Factory, Pets at Home, Jimmy Choo).  Secondly, multichannel businesses that distinguish themselves with unique or bespoke products, deep domain authority and an optimally sized network of stores (think Jack Wills, Chain Reaction, Cath Kidston, Hotter Shoes).

In particular, it will be those retailers offering differentiated products or a valued service proposition that will be able to compete most effectively in a multichannel world where price comparison is immediate. 

These innovative, high-growth companies have a number of natural advantages.

They have been built to match the needs of the new market environment. In many cases, the internet is facilitating international expansion at a pace and on a scale that would have been inconceivable in the past.

In addition to retailers, these market trends are also creating opportunities for the sector’s service providers. These companies, covering areas such as fulfilment, data analytics and retail IT, should also experience substantial growth, particularly those that enable retailers to provide a point of consumer differentiation.

Appropriate funding for these mould-breaking companies and service providers will be essential to support their continued growth.

Historically, private equity involvement has been skewed towards the use of debt capital in more mature companies. However, we believe the emphasis will be on the ‘equity’ component of ‘private equity’ as the more appropriate form of funding for high-growth companies operating in this new retail landscape.

While capital is important to finance growth, private equity brings more than money to the table. Financial, strategic and operational advice, together with international reach, are components that private equity firms can provide.

Despite the unprecedented changes and challenges facing the retail industry, we believe the sector will continue to offer interesting opportunities. Private equity can play a role not just in remodelling existing businesses but also providing growth capital to support innovative retailers and service providers to pursue their ambitions and expand both domestically and internationally.  It is a sector with an exciting future that we are keen to support.

  • Steve Coates and Paul Best, managing directors, Warburg Pincus