Coefficient Capital co-founder Franklin Isacson describes himself as a cautious investor, especially in times of uncertainty like today. That comes in handy during a time of crisis.
For Isacson, this has been a good time particularly to invest in certain companies, especially in grocery and consumer goods that can weather a recession.
“The new funds that are being deployed over the next 24, 36 months are likely to be very good vintages, much like the ’09 and ’10 funds were excellent vintages,” Isacson said on the Modern Retail Podcast.
Isacson lists four big lessons derived from 2008: rethinking how demand will be impacted (“consumers are going to trade down to private label during times like this”); creating backup in supply chains given the possibility of supplier bankruptcy; honesty in leadership about the uncertain times ahead; and liquidity. “Private capital markets are not always going to be there to fund your business even though you as a business might be doing well. Or even if they are, the terms just might not be as attractive,” Isacson said.
Here are a few highlights from the conversation, which have been lightly edited for clarity.
The last ten years in retail
“The last 10-15 years, what’s happened in consumer is that we’ve all been buying different kinds of products. What we’ve been buying has changed. I’m sure you’re buying organic yogurt or plant-based milk, clean beauty, craft whiskey. That’s a relatively new phenomenon of the last decade. And as we know the big strategics have been slow to innovate, slow to take advantage of these consumer trends, and that’s created opportunity for new brands. What we’ve seen over the last three to four years, and that’s really been accelerated now by corona, is not just what we’re buying has changed but also how we’re buying has changed. How do we discover a brand? Is it a sampling station in a Costco? Is it an endcap at Wegmans? Or do we discover that brand on Instagram? And how we buy the product — do we buy it at Sephora and then replenish on Amazon, do we buy it online, and even at the end of that consumer journey: how do we talk about that brand? How does it go viral? You’re probably more likely to leave a review on Amazon than to tell a friend about a product.”
Double the risk
“Today there’s inherently more risk because we don’t know how consumers are going to behave, we don’t know long this coronavirus is going to be around for, we don’t know how soon the economy will bounce back. If in addition to all that you’re taking fundraising risk — meaning I’m investing in a company that is going to have to raise another $50 million to break even, well then in addition to all the business risk I’m also taking risk that the private markets are going to be there to fund the business like that. It so happens that we never were investors in those kinds of companies, so we always invested in businesses that could get to break even with the capital that we were providing.”
A tipping point in online retail
“The data is only now coming out. I think what we are seeing is, some of our work shows that roughly one-third of Americans now over the last six weeks has ordered groceries online. That’s a huge number. Is that all going to stick? No. I myself am very much looking forward to going back into my favorite grocery stores and perusing the aisles and discovering new products. But at the same time, my parents and many people like them have discovered the convenience of being able to buy groceries online, and even if they continue to do so sometimes, that’s still a meaningful percentage of online groceries sold. I don’t think it’ll all stay at current levels. But at the same time we’ve definitely reached that tipping point. Again, if you’ve discovered the convenience of being able to get your favorite store delivered through Instacart or whatever it may be, my guess is that you’re going to continue to use it, albeit not as frequently as during a pandemic.”
Brand discovery in the age of (wise) germaphobia
“That’s how a lot of new brands got trialed. As we think about a world where either that’s not allowed, lie now, or even when it is allowed, consumers are just not going to feel comfortable taking toast with cheese off a plate at Costco with their fingers… we’re going to have to rethink how you accomplish awareness-building and trial. Is there a way you can do that online or differently? That’s something we’re thinking about a lot. A second example of that is the beauty store. Would you feel comfortable going into a beauty store, sitting down on a stool, it could be a department store, or Ulta or Sephora — and having someone apply makeup to your face using a brush that was just used on someone else’s face?”