Online retail added to basket

Mareen Goebel
15 March 2010

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The retail sector has seen increasing dealflow of late with the online sub-sector remaining largely unaffected by economic woes. Mareen Goebel investigates

One emerging trend in private equity at the moment is its renewed interest in investing in the retail sector, which may be surprising to many given the current economic backdrop. But while the retail sector at large is dependant on consumer spending and earning power – and thus confidence in the job market and the economy on a larger scale – the "e-tail" sub-sector of retail has remained largely resilient to the economic woes.

The overall trend of shopping migrating to the Internet remains intact, and continues to be driven by convenience. Why physically visit a store only to learn that the preferred size or colour is sold out?

And while most fashion houses already maintain online presences to present their collections to reach a larger audience than ever before, a huge sub-sector has developed that offers the same branded and premium-positioned goods for cheaper, online. Private equity houses have recognised the trend and acquired the current and future players in the market. One concept is that of the "closed" shopping club, which recruits new members virally, with existing members acquiring additional members, which then gain access to heavily-discounted branded goods. This gives apparel retailers an online outlet and the ability to sell overstock without damaging the brand's reputation for luxury and exclusivity.

This model was pioneered by French company Vente Privée, which, by now, has triggered a slew of "me too" companies. For example, Mangrove Capital Partners acquired an initial stake in German shopping club Private Sale GmbH for €5m, which then received €10m in another round led by Partech International alongside Holtzbrinck Ventures. The Berlin-based company has used the firepower to acquire Triphunter, an events and trip portal, and has just announced its launch in Japan, continuing its explosive growth course. Another similar investment is Swiss-based eBoutic.ch, which raised CHF 1.5m from French venture capitalist Alven Capital.

The case for such investments is strong indeed. These companies already have a high cash-flow, grow virally and become large very quickly. Thanks to the internet, the models are easily scaleable without the risks involved in launching a "real world" outlet chain.

Despite several of these deals being later stage deals done by venture investors, online fashion retailers are not just a venture story. Palamon Capital Partners acquired a majority stake in German retailer Dress-for-Less, which serves as an online fashion outlet (but does not function as a shopping club). At the time of the acquisition, Floersheim-based Dress-for-Less had grown in excess of 30% per year.

Similar transactions on a European scale include UK-based M and M Direct backed by TA Associates, Italy-based Yoox supported by Benchmark Capital and Soros-backed US-based Bluefly, which all highlight the fact that private equity houses see online retail as a sustainable and indeed superior sector.