Why Investors Are Shopping for Consumer Retail

The consumer retail IPO market in 2021 has reached record-breaking levels, with $14 billion in issuance, representing 3.5 times the volume of the record-setting 2020 and a 115% increase in deal count compared to the 13 deals seen in 2012.

Goldman Sachs led Olaplex's $1.8 billion IPO, noted as the largest U.S. consumer retail IPO in over two decades.

A total of 28 consumer retail IPOs have occurred year-to-date, surpassing the previous record of 13 set in 2012.

Primary drivers for the surge in IPO activity include pent-up consumer demand, high household savings rates, strong wage growth, and strong post-IPO secondary market performance.

Recent market volatility has softened, with choppier performance observed in the days and months immediately following the IPO period, a trend the firm is monitoring.

IPO activity has been broad-based across multiple sectors, including:

• Apparel and footwear (On Running, Warby Parker, AAK Brands).
• Beauty and wellness (Olaplex, European Wax Center).
• Home goods (Traeger, Weber).
• Fitness and wellness (Exponential Fitness, X45, Lifetime Fitness).
• Food, beverage, and restaurant (First Watch, Dutch Brothers, Krispy Kreme, Sovos, Dole, Zevia).

Direct listings are emerging as a primary alternative to traditional IPOs, exemplified by Warby Parker being the first consumer company and public benefit corporation to utilize this route.

Companies favor direct listings when they have no immediate need for primary capital, possess a broad pre-existing shareholder base, and hold significant cash reserves (average of $500 million in recent direct listings).

Direct listings offer immediate liquidity for shareholders and employees without lockup periods and utilize market-based pricing rather than underwriter-led price discovery, eliminating the typical "IPO discount."

11 direct listings have occurred as of September 2021, with the firm expecting continued but limited adoption relative to the overall IPO market.

Public market valuations offer a significant premium over private markets, with the S&P 500 trading at approximately 22 times forward P/E compared to a long-term average of 17 times.

Mergers and acquisitions activity remains robust, with deal volume and count up over 200% year-over-year, leading many clients to explore dual-track processes to maximize optionality.

The sector faces significant near-term headwinds, specifically labor shortages, supply chain disruptions, and potential non-transitory inflation.

Shipping rates for retail clients have surged to 800–1,000% above pre-pandemic levels, exacerbating supply chain constraints.

Factors such as infection-related reluctance to return to work are suppressing labor market participation and further straining supply chains.

The retail landscape is defined by "blurred lines" between online and physical channels, with companies prioritizing omni-channel strategies to maximize customer ubiquity and reduce acquisition costs.

Successful firms are leveraging technology to enhance brand and customer experience rather than operating as pure technology entities.

Notable shifts in distribution models include On Running's 60/40 wholesale-to-direct-to-consumer split and Nike's increase in direct-to-consumer sales from 15% in 2010 to approximately 40% currently.

Streaming services, such as Disney Plus, have reached 115 million subscribers within two years, illustrating the speed at which digital channels can scale.

Four key megatrends are shaping the 2022 outlook and beyond:

• Digitization: Continued growth of e-commerce requiring investment in front-end and back-end infrastructure.
• Health and Wellness: Acute focus on food, fitness, and home/office modifications.
• ESG: Increasing corporate and consumer focus on climate change, sustainability, social equality, and governance.
• Casualization: A permanent shift in consumer buying habits driven by changing work and lifestyle patterns.

The market is experiencing fragmentation and specialization as consumers demand personalized products, creating a robust opportunity set for IPOs and M&A among large, cash-rich incumbents.

Goldman Sachs expects the linear trend of activity in the consumer retail sector to continue despite macroeconomic "stops and starts," driven by the need for capital to scale specialized companies.

The podcast was recorded on October 12, 2021, and all market data and forecasts reflect conditions as of that date.