Current trends in retail valuations
The retail sector has been seeing a significant increase in the number of IPOs this year - from the traditional McColls, through to the meteoric valuations from ao.com and boohoo.com. What has been very interesting with these trends is the short-term boom followed by their current prices which are all trading below the float value.
Let’s be quite clear; a market bubble is something that is not unusual. From the Dutch Tulip Bubble of 1637 through to the dotcom boom of the early noughties, human nature will create these false values in perpetuity. While I don’t think that the current boom is as bad as either of those examples, I remain rather bearish with regards to the valuations of businesses that are based on turnover and multiples of turnover rather than profits.
One of the things the internet has done is improve value for customers. There are several ‘disruptive’ companies out there which are able to discount the market and grow sales rapidly. Talk to any business and they’ll tell you it’s very easy to give products away, the challenge is building a long-term profitable business model from it. Anyone can disrupt an industry in the short-term. If they are propped up by VC and PE cash and not expected to make a profit in the short-term, it is easier to grow the top line.
On the internet the transient nature of customers and the power of Google for price comparisons mean that as soon as you push margins up, the customer will move elsewhere. Hence, when looking at these businesses (i.e. ao.com) surely the valuation should be as a logistics business rather than a retailer? The value of the organisation is in its supply chain, delivery efficiency and excellent customer service. For example, the Argos/ebay partnership utilises the assets of a large and efficient distribution model and, let’s be quite clear, the unique nature of the Argos stores is not dissimilar to a warehouse anyway!
Over the past few days we have seen a significant drop in the value of Ocado. Ocado has a world class distribution model designed for the internet age. However, increasingly their business model is looking likely to change from a stand-alone retailer to a logistics operation which contracts out its technology and IP out to other retailers like Morrisons. Markets are increasingly sceptical about their ability to survive as a standalone retailer while they price match Tesco.
In the modern retail world the ownership of your intellectual property is what derives value. More and more, internet retailers find much of their true market value is better measured as a logistics and distribution business rather than a value-add retailer.
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