Why 2023 was the year of the retail fire sale
The past year has proven that more startups were willing to sell amid economic pressures and the venture capital well drying up.
A number of prominent e-commerce brands unexpectedly exited this year — many at a price far less than previous valuations. These include underwear brand Parade, founded in 2019 and bought by lingerie manufacturer Ariela & Associates International for an undisclosed figure in August. The Gen Z-geared brand was sold for “peanuts” in comparison to its peak valuation of $200 million, according to a former Parade employee who spoke with Business Insider. Closing out the year, WSJ reported that debt-ridden apparel brand Something Navy is getting sold off for just $1 to the IHL Group and commercial real estate company the Amirian Group.
Similarly, pandemic darlings Winc and Haus also scrambled to find new owners. After filing for bankruptcy at the end of 2022, wine club startup Winc was eventually acquired twice; In early 2023, the company was bought by spirits company Amass. Then in October, the brand was scooped up by Wine Insiders’ parent company Drinks, and rolled up into a new company. Meanwhile, apéritif brand Haus put itself up for sale in 2022 as a way to avoid bankruptcy and was ultimately able to find a buyer in June of this year.
The wave of sales also comes at a time when a number of retail companies are filing for bankruptcy to stay in business, like DTC sleepwear brand Lunya and multi-brand retailer Showfields.
Access to investor funding is more scarce than previous years and interest rates high on borrowing capital. According to Crunchbase data, in 2023, VCs invested just about $130 million in e-commerce and consumer product startups. That’s a 97% decline from 2021, when over $5 billion of venture capital went to these types of companies. As such, the brands that didn’t have a year-plus of runway either had to sell or go bust.
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It wasn’t just startups being sold off at a steep discount either. Bed Bath & Beyond, for example, filed for bankruptcy in April and rushed to sell its assets; online retailer Overstock won the bidding in August for Bed Bath’s assets and data for $21.5 million. Similarly, rapid delivery company Gorillas, after raising more than $1 billion since launching in 2020, was bought by Turkey-based Getir in a deal valued at $1.2 billion — a far cry from the $3 billion Gorillas was valued at its peak.
Kirthi Kalyanam, a professor and executive director of the retail management Institute at the Leavey School of Business at Santa Clara University, said the recent fire sales are a reflection of the current challenges e-commerce is facing. “I saw a similar phenomenon with pure-play e-commerce companies a few years ago, with the most famous example being Walmart buying Jet.com,” Kalyanam said; Walmart acquired the shopping platform for $3.3 billion in 2016, only to shut it down in 2020. “This wave of sales seems very similar,” Kalyanam said, especially among direct-to-consumer brands. “From the beginning of the current DTC craze, we knew not many of these companies are going to survive.”
Mark Williams, chief revenue officer of the Americas at Datasite, an M&A deal making platform, said there are several current factors that are driving M&A activity. This year, Williams said, two factors have had an outsized impact on the market: buyers and sellers aren’t agreeing on prices and the availability of financing to extend business runways.
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“However, in this second half we’ve seen buy side deals jump on Datasite,” Williams said. The platform, which facilitates about 14,000 new deals annually, saw deals jump 37% between January and October 2023 compared to the same time last year. “This is a bullish sign that buyers are taking advantage of softening market conditions and lowered seller expectations to pursue one-on-one acquisitions with vigor,” Williams said.
For small businesses that took on investment early on, Kalyanam said, investor pressures are likely swaying founders’ decisions. Along with the expensive challenges of scaling a brand across physical retail and rising marketing costs, a quick exit becomes enticing. In many cases, Kalyanam said, a young startup is usually too small to restructure on its own – especially if it isn’t yet profitable and struggling with customer retention. On the other hand, Kalyanam said, fire sales are a great way for large legacy companies to grow their portfolio relatively cheaply.
There have been a few positive acquisitions too. Brands in categories like CPG are also getting scooped up by the big conglomerates; These include skincare company Naturium, founded in 2019, purchased by E.l.f cosmetics for $355 million in August and textured hair care brand Mielle Organics, which Procter & Gamble acquired in January.
Aron Bohlig, managing partner at boutique investment bank ComCap, confirmed some categories are more appealing than others to prospective buyers. For instance, “CPG and cosmetics brands continue to see robust M&A interest due to their scalability and the fact that they address large addressable markets.”
On the other hand, Bohlig said, “direct-to-consumer fashion brands as well as consumer services like Winc have been challenged in a high interest rate environment by consumers shifting discretionary spending to other categories.” Additionally, he said that “equity investors have shied away from discretionary non-consumables as there have been few heroes that have resulted in a successful M&A transaction or IPO.”
Bohlig doesn’t think the fire sales are going to stop in 2024. “Many of these companies have exhausted previous funding rounds and have few options to drive unpaid customer acquisition.” As such, Bohlig continued, they are in a vicious cycle where a lack of funding means a lack of growth, which means a lack of funding or M&A interest. “In many cases they may go through bankruptcy and being sold at a discount may be the only viable and best option for them.”