Beyond Tech IPOs
Technology darlings like Uber, Pinterest and Airbnb may be taking their time on the way to exit, but that doesn’t mean IPOs aren’t happening. They’re alive and well in the consumer space — from food brands like Shake Shack and Papa Murphy’s (up 71 percent since its IPO last spring), to premium pet food like Blue Buffalo and retail establishments like Party City. So why are these companies pursuing IPOs — and finding success in the markets — while tech companies are dragging their feet?
Consumer And Retail Brands Are Growing, And Fast
Today’s consumers are looking for personalized brands that resonate with the things they consider important — like health and nutrition.
Take Chipotle, one of the most recognizable and successful restaurants in the fast casual space, offering a fast, higher-quality alternative to traditional fast food. Chipotle has built its brand on Millennial sensibilities, highlighting its use of non-GMO vegetables, pasture-raised dairy and antibiotic-free meat, playing carefully curated music in its stores and adorning cups and bags with short essays from authors and actors.
It’s an entirely different approach than, say, Taco Bell, and it has paid off: Since its IPO in 2006, shares have increased more than 1,600 percent, compared to just 66 percent for the S&P 500 over the same period.
You can see the same focus on quality ingredients in fast casual restaurants that have gone public more recently, including Shake Shack, and even in today’s trendiest pet food brands, like Blue Buffalo, which started trading on the NASDAQ last month, with a $677 million IPO — the fifth-largest of the year.
Meanwhile, large food brands are losing ground — they lost share to small brands in 42 of the top 54 most relevant food categories in the past five years, according to a report from banking firm Jefferies entitled “Food: The Curse of the Large Brand.”
Social media has also given consumer brands a big boost. GoPro is a great example here — it has cultivated an enormous following on YouTube, with more than 3 million subscribers, and more than 900 million total views.
There’s often a perception that technology is the sole driver of IPOs, and it’s simply not true.
Today’s up-and-coming consumer brands are speaking to their customers in new ways — meeting them where they are, and making it easy for them to advocate on their behalf via social networks. New distribution channels — for example, the monthly subscription box that’s worked so well for Birchbox — allow up-and-coming brands to reach consumers at a lower cost than was possible even five years ago.
Why Consumer IPOs Are Alive And Well
So why are consumer brands beating tech companies to the stock market? First and foremost, these companies are making money — something many of technology’s biggest unicorns can’t claim.
Take Pinterest for example — it’s valued at over $11 billion, but isn’t turning a profit. For a sharp contrast, look at Amplify Snack Brands, maker of SkinnyPop Popcorn, which listed on the NYSE this month. After just four years in business, Amplify reported $43 million in operating income last year.
Simply put, there’s no bubble in consumer. Because there is less sensationalizing the consumer industry, as compared to technology, young consumer and retail brands are valued on fundamentals, like revenue and profit, rather than nebulous future growth. As a result, there is less vintage risk and no disconnect between public and private markets, unlike what we have recently seen with technology.
How Investors Can Profit
The nearly $1 trillion consumer market represents a huge opportunity for investors. The key is to identify the next Shake Shack or Chipotle early. Here are a couple of ways:
- Look for companies that are tapping into the changing consumer landscape by focusing on health and nutrition, offering highly personalized products (e.g., paleo, gluten-free) and finding new ways of delivering great products (think the online-only model of Casper, or subscription products like Blue Apron).
- Pay attention to the products your friends love — and the ones you love, too. Chances are, if your social circle is buzzing about a new brand, you aren’t the only ones.
There’s often a perception that technology is the sole driver of IPOs, and it’s simply not true. There’s a whole world of opportunity for savvy investors willing to look outside the technology box.
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