Retail Reboot: Investors Snatch Up E-Commerce Services
It's been 20 years since Jeff Bezos introduced the world to online shopping with the launch of Amazon.com Inc. (Nasdaq: AMZN), but most retailers are still struggling to leverage the Internet and, more recently, mobile devices. In the meantime, consumers are embracing online and mobile innovations enthusiastically. Rather than fearing the transformation, savvy investors in the retail sector are snatching up e-commerce companies.
Sterling Partners is one of the private equity firms capitalizing on e-commerce. The Chicago firm paid $109 million to take e-commerce services company Innotrac Corp. private in January. Innotrac provides e-commerce fulfillment, reverse logistics, call-center support and digital technology integration to retailers globally. (See video below.)
"It's no secret to anybody that the space continues to grow in double-digit rates, and we were trying to figure out the best way to invest," says Sterling senior managing director Rick Elfman (pictured). "Fulfillment seemed like a good place to start because of the recurring revenue - It's a very steady revenue source."
"We're big believers that e-commerce provides solutions for customers and retailers, and will continue to experience strong long-term growth," says Sterling vice president Todd Miller. "The overall industry to e-commerce is growing rapidly, and these fulfillment businesses are growing rapidly as well," says Miller.
Innotrac is growing organically because of an increase in customers, says Elfman. Big-name retailers including Ann Taylor, J. Crew, Zara, Michael Kors (NYSE: KORS), Charlotte Russe, Target, Asos and Groupon (Nasdaq: GRPN) use Innotrac's services.
The rise in e-commerce comes as consumers are shopping smarter than ever. E-commerce technology allows shoppers to browse online before buying in-store, browse in stores before buying online, price check or compare via mobile devices and check customer reviews of products in store.
"Most customers do check online before they go out to the stores. It's a combination of both, and it can really aid purchasing and transparency. Everyone has to have their 'A' game and price product properly because of the transparency of the e-commerce platform," says Jane Hali (pictured), vice president of Planet Retail Investment Research, part of London-based trend forecasting company WGSN. "If you're not using mobile and e-commerce I don't think that the Gen Y consumer is going to find out."
According to the U.S. Census Bureau, e-commerce made up 6.6 percent of total retail sales in the third quarter of 2014, up from 6.4 percent of total retail sales in the second quarter and 6.2 percent for the first quarter. However, retail sales in the U.S. declined more than they were forecasted to in September, by 0.3 percent, following a 0.6 percent gain in August.
The increase in e-commerce sales means that private equity firms need to pay attention - not just in terms of investment opportunities, but in making sure that portfolio companies are equipped for the current environment. "In a world where onsite shopper visits are down and Internet purchases are up, any company in our portfolio has to have an Internet strategy," says Andrew Richards, managing director at consumer-focused private equity firm Swander Pace Capital. Swander Pace owns brands including baby-ware group Aden & Anais Inc. and apparel company Kooba LLC.
Customers are looking for convenient shopping options. The retail industry, which is often hit harder than other sectors by shifts in consumer behavior, has struggled to keep up with the pace of change. Companies that aren't online need a website, but also a mobile strategy, and a way to make sure that all buying channels, including in-store sales, are linked to monitor inventory and sales.
"The customer demands to be able to buy and return products however they want to," says Elfman. That includes buying online and picking up in store, buying online and shipping to the home, buying online and returning to a store, and more.
"It's not going to fly to just have an e-commerce site but not have the ability to go mobile," says Maria Watts, director in Baird's consumer investment banking group. "Now everyone wants to look at their smartphone and look through the products just as they would on their laptop."
That omnichannel part of the equation has never been more important, experts say. "The issue is that a lot of retailers are still treating the different channels separately, and the channels aren't speaking to each other," Watts says.
"Omnichannel has one inventory that all of these channels are utilizing. That is really a godsend to retailers," says Hali. The method allows a retailer to have just one inventory that all shopping channels - brick and mortar, online, mobile - pull from for easier stock management.
An omnichannel strategy can also allow retailers to store goods in a few warehouses and not in scores of retail locations. "It's a tremendous opportunity for retailers on the supply chain side - think about how much less inventory you need," Elfman says. "I heard someone use the phrase 'having the right product, in the right place, at the right time.' If you're a retailer, having a strong e-commerce channel allows you to maximize the productivity of your inventory," Elfman says.
As it becomes clear that the e-commerce shift has a strong foothold in the retail sector, investors are betting on e-commerce companies and service providers.
New York private equity firm Siris Capital Group agreed to pay $840 million for e-commerce services provider Digital River (Nasdaq: DRIV) in October. Digital River's clients include HarperCollins Publishers Inc., Lenovo Group, Mattel Inc. (Nasdaq: MAT), Spotify, Adobe Systems (Nasdaq: ADBE) and Microsoft (Nasdaq: MSFT).
In August, PetSmart Inc. (Nasdaq: PETM) agreed to pay $130 million for a provider of e-commerce information services, Pet360 Inc. PetSmart says the move allows it to better serve customers across distribution channels. The announcement came right before PetSmart announced it was working with JP Morgan Securities LLC and Wachtell Lipton Rosen & Katz to explore strategic alternatives, including a potential sale.
In June, social commerce company Chirpify Inc. bought Measureful Inc., a provider of e-commerce information services. Chirpify allows people to make purchases through hashtags on Twitter, Facebook and Instagram, and Measureful provides analytics reports that are customizable. The buyer planned to integrate Measureful's technology into Chirpify to provide customers with analytics reports.
In May, United Stationers (Nasdaq: USTR) agreed to pay up to $40 million for CPO Commerce Inc., a provider of e-commerce retail services. United Stationers said the deal expanded its digital resources and capabilities to support resellers as they transition to an online environment. The target, headquartered in Pasadena, California, is an e-retailer of power tools and equipment, and has experience building online businesses.
In March, Thoma Bravo paid $930 million for TravelClick Inc., an e-commerce software focused on travel. The firm also bought Sparta Systems Inc. from HGGC, in July. Sparta has a service called TrackWise that aims to help manufacturers handle challenges, including supply chain complexity. "Our feeling is that the industry consolidation process is all centered around finding industries that started 20 years ago, and then you jump ahead 20 years and they've started to mature," says Carl Thoma, managing partner. (For more of our conversation with Thoma, watch the video interview at www.themiddlemarket.com/video).
In January, Demandware Inc. (NYSE: DWRE) bought Mainstreet Commerce, which provides cloud-based order management services, including payment processing, order processing, shipping management and fulfillment. The buyer provides e-commerce services, and it expected the acquisition to simplify order orchestration between online and in-store shipping. The two companies already served about 20 of the same customers, including clothing retailer Vineyard Vines. Demandware went public in 2012, raising $88 million in its initial public offering with shares priced at $16 each, more than the expected $12.50 to $14.50 price range, underscoring investor demand for the technology.
In addition to deals for e-commerce service providers, some buyers are picking up e-commerce retailers to expand capabilities.
Los Angeles private equity firm Brentwood Associates, which focuses on consumer investments, announced an investment in Z Gallerie, a retailer that sells home goods. Z Gallerie, headquartered in Gardena, California, sells furniture, artwork, lighting, tabletop items, textiles and accessories. The company has a rapidly growing e-commerce business - Brentwood says it plans to increase the company's store base, plus direct marketing efforts online and offline.
In September Neiman Marcus Group Ltd. LLC agreed to buy Mytheresa.com, an online luxury retailer based in Munich. In addition to the company's flagship store in Germany, the deal should help Neiman, which only has stores in the U.S., reach Europe, the Middle East and Asia by accessing luxury shoppers without opening more physical stores. The move could help Neiman compete with online luxury retailers like Net-a-Porter. The buyer is owned by Ares Management LLC (NYSE: ARES) and Canada Pension Plan Investment Board, which paid $6 billion for Neiman in 2013.
In July, Karmaloop LLC bought Soletron LLC, a provider of social networking, e-commerce and advertising services. Soletron, headquartered in Coral Springs, Florida, is a streetwear e-commerce and information website. Karmaloop is an online streetwear retailer headquartered in Boston. The buyer says the deal helps it not just sell streetwear, but become an active part of consumer content consumption.
In July, Canadian merchant bank Hardy Capital Partners and other investors agreed to buy OnlineShoes.com, an online retailer of shoes, and ShoeMe.ca, to create a large online footwear company.
In 2011, department store giant Nordstrom (NYSE: JWN) acquired flash-sale website Haute Look in a deal valued at around $270 million. That deal gave Nordstrom access to the flash-sale market, but it also gave the company access to loads of customer data, which is more important than ever.
"They learned much more about consumer behavior, about big data, about consumer movement across brands - to me, that's a strategic investment," says Andrea Weiss, founding partner of retail consulting firm O Alliance.
"The synergy is what's under the hood - it's the big data," Weiss says. "If you make an acquisition of one of these digital assets or capabilities, you're buying a huge amount of predictive insight into where the consumer is today and where they may be going," Weiss says.
Sterling isn't the only firm interested in picking logistics companies related to e-commerce. In September, UPS agreed to buy I-Parcel LLC, which provides e-commerce retail shipping and transaction services.
There is still runway for consolidation of these smaller logistics providers, says Brian Graves, managing director at Chicago investment bank Dresner Partners.
Many e-commerce companies are horizontal - focusing on providing general services to all types of retailers. For example, Hybris Software, which was acquired by SAP AG (NYSE: SAP) from backers including Palo Alto, California, private equity firm HGGC in June 2013. The Zug, Switzerland-based company develops software for businesses to track data and manage orders, including search, merchandising and web-content management. Hybris had also received funding from Meritech Capital Partners and Greylock Israel.
Though the Hybris build-out led to a successful transaction, private equity firms looking to build up e-commerce businesses today may want to use a different strategy.
After the sale of Hybris, HGGC, which focuses on technology investments, acquired and started building another e-commerce company - MyWebGrocer - a Winooski, Vermont-based provider of digital marketing services to grocery retailers and consumer packaged goods companies. In February, HGGC closed an add-on acquisition for the business - Dublin-based Buy4Now Technology Group - to expand the group internationally. MyWebGrocer powers grocery store websites, including ShopRite's online site.
The next shift in e-commerce M&A may come as firms focus on sector verticals instead of broad e-commerce services. HGGC's focus on building up a grocery e-commerce company with MyWebGrocer is an example of that strategy.
"It's a difficult industry unless you know it," says HGGC CEO Rich Lawson. MyWebGrocer provides specialized services to grocers, which are dealing with many more different products than other types of retailers, says Rich Lawson.
"Today the opportunity for private equity is in the 'verticalization' of e-commerce technology," says Rich Lawson, CEO of HGGC.