06 Aug 2019
Home pureplays struggle to provide investors with a long-term sustainable business model due to high start-up and marketing costs, says GlobalData
Stellar sales growth and significant potential have long been synonymous with home pureplay* start-ups, fuelling high early valuations for these retailers. Pureplay retailers have increased their share of the furniture market by 2.6 percentage points between 2016 and 2019, making it the fastest growing channel over this period, accounting for 10.4% of the market in 2019. However some companies within this channel are struggling to provide investors with a sustainable long-term business model due to the high start-up costs and continuous need to invest in marketing, says GlobalData a leading data and analytics company.
Matt Walton, Senior Data Analyst at GlobalData, comments: ‘’The owners of Victoria Plum looking to sell for a fraction of its initial investment underlines the challenge of turning rapidly expanding home pureplay start-ups into sustainable businesses. While some home pureplays are delivering exceptional rates of sales growth, the costs of doing so, especially in relation to marketing, call into question their ability to scale and maintain a sustainable business model over the longer term.”
Eve Sleep was valued at £140m when it floated in May 2017, while TPG, an American private equity group, bought Victoria Plumb for £200m in 2014. High start-up costs, along with the recent challenging economic climate, has led to these businesses struggling to achieve profitability. This led to some online pureplays needing frequent and significant investment to cover losses and aid its day-to-day running.
Further to reports that Victoria Plumb may now be sold for “the low tens of millions” despite raising £26m in equity between February 2015 and February 2017, Eve Sleep’s market cap is now sitting at just £13.6m. In addition, fellow mattress brand Simba is reportedly worth just £20m after raising £27.6m in investment during its FY2016/17 as these retailers have struggled to keep costs under control.
Walton continued: ‘‘Beyond the high costs associated with international expansion, which significantly backfired on Eve Sleep, investing in marketing to establish and maintain brand awareness has been a significant burden for the pureplays.’’
This problem is further exacerbated for retailers that specialise on a single room, such as the mattress-in-a-box brands, due to the infrequency of purchase. With customers only buying every five to eight years, these businesses must continually recruit customers rather than relying on repeat purchases for other rooms.
This is not to say that there are not success stories among the home pureplays. Made.com became cash generative in 2017 while Loaf.com and Victorian Plumbing have both been consistently profitable over the last four years, although the latter benefits from its greater trade presence.
Walton observes: ‘‘some retailers will find it challenging to wean themselves off requiring consistent investment to become more sustainable businesses. With investors cutting back due to concerns about future returns and the general economy heighten, some pureplays will be forced out of the market as they run out of cash.’’
*Pureplays are defined as any retailer where the transaction can only be completed online or over the phone, including Amazon, Littlewoods and Very, as well as Made.com and Loaf. The overall online market includes the online sales from pureplays and from multichannel retailers such as DFS, IKEA, ScS and Oak Furniture Land, so there is a separation between online pureplays and the overall online market.