December 11, 2019

M&A: An Antidote to the Upheaval in the Outdoor Space

Small- to mid-sized brands are looking to consolidate to better compete in a market favoring scale and direct-to-consumer strategies; many are discovering that the buyer matters

Jim Gianladis, CEO, Vertikal Brands Acquisition Corp.

The outdoor space has long provided one of the more consistent backdrops for companies and investors. Over the past two years, while the secular trends driving demand haven’t changed, the sector has gotten a taste of the volatility experienced elsewhere across the consumer landscape. To some operators longer in tooth, the market has become nearly unrecognizable thanks to a string of bankruptcies and consolidation activity that reflect both the change occurring in the sector and the industry’s reaction to that change.

This is not to say that the outdoor space is any less attractive than it was five years ago. Long considered a safe haven, Americans spend approximately $887 billion on outdoor activities annually. To put that into perspective, the annual spend on travel and outdoor recreational products exceeds that of motor vehicle sales, according to the Bureau of Economic Analysis. Moreover, customers in the sector tend to be more reliable than in most other areas of the economy. They’re not just loyal to their favorite brands, they’re generally passionate about the sports they participate in, which provides a recession-resistant quality.

These characteristics, however, have made the emerging threats seem that much more acute or at least surprising to those who had grown comfortable amid the inherent stability. Bankruptcies, for instance, have hit the two-step distributor channel particularly hard, forcing many manufacturers to rethink altogether how they can reach certain end markets. And consolidation across retail, driven by the “Amazon effect,” has only accelerated in recent years, occurring parallel to supplier consolidation trends that have tilted the playing field toward manufacturers with economies of scale. It also doesn’t help that these dramatic shifts are occurring as global trade tensions and political dissension fuel further uncertainty. For independent operators, though, the key is to make these trends work in their favor — a task that can seem overwhelming to those unfamiliar with the direct-to-consumer (DTC) model.

Finding Cover Amid a Perfect Storm

The outdoor space is generally split between the traditional camping, backpacking and water-sports segment and what has colloquially been referred to as the “hooks and bullets” segment, encompassing fishing and hunting. While the near-term geopolitical headwinds are affecting each specific category differently, the challenges created by end-market consolidation are being felt across the entire outdoor sector.

Consider, for instance, Camping World Holdings’ acquisition of Gander Mountain. The Chapter 11 bankruptcy sale, versus a Chapter 7 liquidation, allowed Gander Mountain to continue operating as a going concern, while trimming its portfolio of unprofitable stores in the process. The catch for manufacturers was that Gander Mountain’s go-to-market strategy transformed from a firearms “superstore” to an active lifestyle brand. The transition may have created opportunities for some, but it also had a cascading affect on the retailer’s existing suppliers.

The consolidation activity doesn’t just make it difficult to keep up with retailers’ evolving merchandising strategies. The bigger hurdle, beyond breaking into and staying relevant within a supply chain, is in meeting the complex demands of national retailers once they do. It’s often overlooked, but the amount of work that goes into accommodating the technical pricing structures, packaging protocols, and shipping and EDI requirements commands dedicated resources. For smaller manufacturers, the bandwidth and capital required to manage these logistical components can seem disproportionate to investments made in other areas of the business. End-market consolidation on its own generally has an immediate affect on sales. But these mergers also upend processes and make obsolete existing systems that were designed to serve these customers. The added costs and distractions can thus have an outsized impact on smaller suppliers.

To be sure, a growing number of manufacturers have turned to consolidation, themselves, as a solution. This is often a good alternative, but also represents uncharted territory for many. Among the positives, multi-brand entities enjoy advantages in reaching a shrinking and more discriminating retail universe, as more SKUs yield cross-selling opportunities and, generally, “stickier” relationships. With size, suppliers also benefit from economies of scale that can augment and help fund marketing activities, design and engineering capabilities to drive innovation, and sourcing strategies.

Crossing the Digital Divide

Of course, retailer consolidation isn’t occurring in a vacuum. The primary catalyst, as most well recognize, has been the growth of e-commerce at the expense of traditional brick-and-mortar stores. But the Amazon threat is not exclusive to retailers. Among brands, the risks are just as material and often more nuanced.

For instance, manufacturers that aren’t on Amazon run the risk of seeing resellers step in to market and sell their products without consent, often at a markup and typically at odds with a brand’s preferred merchandising strategy, display preferences, or desired marketing language. Those that do sell on Amazon, however, may see the platform turn into a direct competitor. Amazon, with access to the sales data, is rapidly expanding its private label business, which makes Jeff Bezos’ famous quote — “your margin is my opportunity” – all the more menacing.

A brand’s survival blueprint, in many ways, aligns with the broader transformation trend in which every company either has to become a tech company or risk obsolescence. For consumer-products manufacturers in any segment this means embracing and innovating around a direct-to-consumer model. L.E.K. Consulting, in research published in July, found that across all consumer goods categories, 65% of brands sell directly to customers on their own websites. Still, success in effecting a DTC strategy entails much more.

Beyond just offering products and customer service online, manufacturers have to figure out the SEO and paid search tactics to drive traffic. Data science capabilities are also becoming a differentiator to continually optimize the digital-shopping experience and improve conversion rates. And a social media presence and strategy is crucial to appeal to influencers and younger demographics. As platforms such as Instagram begin to offer “in-app” shopping the savviest brands will continue to disintermediate traditional distribution channels. Some brands, such as Nike, are even testing the subscription model first championed by Software-as-a-Service vendors.

All of this, of course, is in addition to what is required to compete on Amazon and other notable online marketplaces. Brands need to understand the technical components of the system, policies and fee structures, all of which continually change. They need to optimize product listings and “search” strategies within the site, while dedicating resources to increase and manage shopper reviews – all key ingredients for success. Competitive surveillance to inform pricing strategies is also more important in an omnichannel world. And operations executives will need to reimagine inventory management, particularly for brands selling through multiple marketplaces. Not to be overlooked, Amazon, Google, and many of the other prevailing digital channels often restrict certain products and imagery related to guns or hunting, which makes DTC marketing strategies all the more important to ensure a brand’s intended message reaches its target customers intact.

To get up to speed on these capabilities and then keep up with the evolving trends is a lot to ask of any business, but it borders on unreasonable for smaller enterprises with as few as 20 to 30 employees.

This again is where consolidation can provide an answer. In the past, it was the large legacy retailers acquiring digital expertise to counter the decline of brick and mortar. The acquisitions of Sierra Trading Post by The TJX Cos. and by Camping World represent two such deals premised on acquiring omnichannel capabilities.

This trend, however, is now being inverted. Smaller brands and manufacturers are seeking out prospective partners who can bring the resources, scale and skillset required today. But the buyer matters. And for entrepreneurs and founders, a cultural fit will be what keeps interests aligned to grow the combined business and develop a more comprehensive strategy to compete and thrive in a rapidly changing landscape.

Jim Gianladis, the CEO of Vertikal Brands, is an avid outdoorsman whose passions include competitive bass fishing, big game bowhunting, long-range rifle shooting and fly-fishing. Prior to helping form Vertikal Brands in 2017, with backing from private equity firm Clearview Capital, Jim served as CEO of Battenfield Technologies, and before that served in management and merchandising roles at Cabela’s and Sportsman’s Supply. Vertikal Brands is an innovative platform that specializes in strategic growth strategies with business investments in the “Outdoor Lifestyle” category.

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