Equal’s POV on Investing in Retail
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Today, we’re publishing the last of Equal’s Product Owner perspectives on retail, a sector that makes up almost 20% of U.S. GDP (see previous posts on supply chain, insurance, and climate). Despite a massive TAM, the sector’s structurally low margins suggest that not only is getting to economies of scale critical, but also investment into technology is limited. These dynamics set the stage for the current state of investing within retail:
VCs made a huge bet that the future of commerce was digital-first: Over the last decade, $25B of VC dollars poured into DTC brands (with $17B more into the picks & shovels of ecommerce enablement) and the hypothesis that digital-first would fundamentally change retail margins. As we’ve previously outlined, this led to a significant disconnect between Commerce Flows vs. Capital Flows and many VC-backed DTC plays remain unprofitable despite ecommerce acceleration over the last few years. While DTC still remains a critical and valuable channel, rising CAC & return rates have put intense pressure on margins.
Broader retail conditions exposed the inventory problem: COVID sent the broader retail sector into total disarray from supply chain disruptions to volatile consumer and channel demands and increasing return rates. The inventory problem has emerged as retail’s most challenging AND public crisis over the last two years. Retailers went from having not enough inventory to sell to having too much of the wrong inventory, sitting in warehouses, depreciating as months went by. Inventory management has always been a top challenge for the retail industry — that’s why TJ Maxx’s market cap is $90B — but COVID really exposed the scale of the problem and how important inventory is to margins.
Refocus on fundamentals and margins: Overnight, profitability became important again for both public and private investors. Brands and retailers of all sizes are renewing their commitment to profitability and fundamentals. Platforms that are focused on enabling brands to expand through omnichannel strategies (like Equal portco Leap, a retail-as-a-service platform enabling brands to go brick & mortar) and optimize margins (like another portco Ghost, a managed marketplace for excess inventory) are seeing strong pull from the market.
Our full perspective is summarized in a deck here. We remain incredibly excited about investing in the Unbundling of Retail and the New Commerce Stack. As always, any founders, operators, industry watchers, or other investors interested in chatting further should feel free to reach out to chelsea@equal.vc!