Nikhil Thukral, managing partner of private equity firm L Catterton, discussed how changes in consumer behavior are impacting deals in this space.
In an interview at the WWD Apparel & Retail CEO Summit, Evan Clark, deputy managing editor at WWD, recalled that five years ago Thukral told him, “The global consumer is going to look very different in the next 10 years than it did in the last 20. That’s already turned out to be more than true.”
The new question is: “How has the rate of consumer behavior changed now that the pandemic’s faded?”
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“What’s going on with the consumer is of upmost importance to us,” Thukral said. He said 30 or 40 years ago was really a moment for brands. Mass media and Procter & Gamble would tell consumers what they should buy. Fast forward 20 years, and it really became a time for retailers. Companies like Walmart and others controlled what would be on the shelf. It was distributors, the department stores, that would determine what products consumers would have access to.
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“What changed pre-pandemic and has accelerated through that period is a balance in power gone from the brands and retailers directly to consumers,” Thukral said.
“The reason why that’s true is because of the smart phone,” he said. “Now trends that used to take 15 to 20 years to get from one region to another are instantaneous for consumers and that world is very frictionless. Increasingly you’re seeing the ability for brands to go not just west to east, but east to west,” he said.
He said the biggest change that’s happened during pre-pandemic and accelerated during the pandemic was the ability for brands to access cohorts of consumers not just in their home geography but all over the world — to be able to activate them and engage them cost-effectively in the digital medium and get the product to them, either in digital or physical.
Pre-pandemic, 90 percent of consumer packaged goods companies were losing market share to young upstarts. “That phenomena is one we wouldn’t have expected 30 to 40 years ago,” he said.
During this period, there was a lot of government stimulus, and a lot of choices that consumers made as to where they shop. If they had no option, they would go online. There was a rising tide toward the e-commerce channel and the spend level. During the pandemic, the brand funnel felt like a rectangle. Consumers didn’t need to make the kind of choices that they were making pre-pandemic. Post-pandemic, you’re back to a typical funnel.
Which brings up L Catterton’s acquisition of Birkenstock in 2021, and why was it the right deal then? “The reality was Birkenstock would be the right deal at any time,” Thukral said.
“It’s when it became available. It was a 247-year-old brand that had never been owned by private equity and had only been owned by a family,” he said. “We think we’re at our best when we have the opportunity to take over and lead a brand and steward it through its next generation of growth.”
He said it was a unique business and they are “category investors” first. At L Catterton, they can change capital structure and management, “but you can’t change the fundamental nature of category that you’ve invested in.” He said footwear is not the most attractive category in which they allocate capital but what they loved about Birkenstock is it’s a very functionally driven product.
“The most important thing we’ve found, what we loved in a brand, and is true with Birkenstock in spades and more generally as well, when we do our work and consumers say they love the brand because it’s such a good value for the money, and counterintuitively we run.” He said there will always be someone with a better cost proposition. “We’re looking for something different.”
What they’re looking for is a brand that sits at the intersection of functional benefits and also has an emotional benefit which gives you pricing power. L Catterton surveys 5,000 consumers every week. “To the extent that a brand like this or a product like this didn’t exist, how would it change their lives? Is there a reason to be, and what’s the substitute products?” he said.
The average consumer in the U.S. has almost four pairs of Birkenstocks, and there’s a lot of repeat of the product. “There’s a lot of brand love. There’s a lot of brand heat. People aren’t searching for open-toe shoes but they are specifically searching for Birkenstock,” he said. He said when you look at full-price sell-throughs in their own channels and wholesale channels “this looks like a luxury business” with very little promotion. “There’s clear resonance for today’s consumers,” he added.
Today’s consumers have an evolving set of values, and they value the quality of product, how environmentally friendly it is, how fair trade it is. “This is a brand that has been true to that for now 249 years.” More than 95 percent of the product is manufactured in Germany and all the materials are natural — cork, latex, jute.
L Catterton bought Birkenstock in 2021 and expanded the valuation by more than $1 billion or $2 billion. “But the stock fell in the introduction. What was the disconnect there?” Clark asked.
“We’ve owned the business for a little over two years. In two years, we have more than doubled the company’s earnings. The company did a little over $500 million in U.S. dollars in EBITDA,”
Thukral said, adding their promise to the family and their partner was always to get the company public.
“The question is, when is the right time to do that?” He said when they’re a financial sponsor, one of the things they have to be very careful of is “an IPO is not a liquidity event. An IPO is the start of journey. We still own 68 percent of the company. We are very aligned with our public shareholders. What we are trying to do is to make sure we season the business, that we don’t create what’s called an overhang, because we own so much stock that all the public investors are constantly worried about the timing in which we’re going to sell more stock into the marketplace. That puts a ceiling on the stock price. The fact that we’re only two and a half years into it gives us a long runway in which to be able to monetize our remaining position,” he said.
“If you said, in the last 10 years, how many companies that have gone public have three characteristics: scale, $1 billion or plus of revenue, how many companies have a better than 20 percent growth rate over a decade, and how many companies have better than 25 percent of EBIDTA margin, we have 35 percent? Zero, not one company that has gone public in the last 10 years has those characteristics.
“We look at this as a great business that was able to go public even in what was a very difficult environment. In retrospect, we didn’t count on what was the start of a war over the weekend before we were about to go public,” said Thukral, referencing the Israeli-Hamas war.
Discussing how he evaluates the next deal, Thukral said, “The environment over the last year has been much different for private equity than it has before. If you think about the number of deals people are doing, capital has been allocated down 60 to 70 percent for an industry. The nature of what they do sometimes keep you up at night. As an investor, you’re in one of three situations. You’re either a buyer, a seller, or you’re holding. The flip side is we look at this environment and where you read the headlines and it’s very scary around consumer discretionary. We see a huge sell-off in the public markets. The public markets, despite looking like they’re pretty resilient, are really driven by a handful of seven or eight stocks, which are largely tech-oriented stocks. That means there are a number of very large, very attractive public businesses in the consumer sphere that we think are very, very attractively valued.”
The first thing they’re doing is thinking where is there a misunderstanding of the fundamental business that isn’t quite being appreciated by the public markets. “Generally, we’re finding more of an opportunity on large public to privates, than we are on the private side. For 43 years we’ve had declining interest rates, and that’s led to the ability to be able to sell companies on and on.” He said that’s no longer true today. “Now we’re going to have to separate the wheat from the chaff. Now we’re going to lean in and help. We’ve been through these cycles before, we feel like we are well-positioned to go do that. We’re going to apply that opportunity set, against the biggest sources of capital, which arguably have never been better valued if you’re a buyer.”
In an audience question about the public to private path, Thukral was asked if that implies the companies are broken and you have to fix them, or are they just undervalued by the market?
“It could be either-or. Our business model is not necessarily to go after the broken businesses to fix them. We just think there are lots of great categories, lots of great businesses that during the last three or four years period were overvalued and went out. These are companies we looked at and we think there are opportunities to acquire them in valuations that are very fair, but also to be able to bring in that unique set of capabilities that we have to then accelerate that. And ultimately, re-rate that business and get it re-recognized.”