Trends

What’s driving investor demand in consumer IPOs?

Jay Broaddus, Head of Consumer & Retail Group and Josh Weismer, Head of Equity Capital Markets
January 20, 2022

Fancy salads in prominent business districts. Sneakers made from recycled bottles. Resale designer clothes. Fashionable hospital scrubs. Cutesy-themed organic diapers. All these have one thing in common—they leapt into the IPO market in 2021 and saw some record first-day performances, as well as participation from fresh retail IPO investors enabled by new investment platforms. 

While “hot IPOs” usually bring to mind tech icons like Rivian and Robinhood, consumer names made their mark this past year as well.

The Consumer IPO Market: Making a Splash

Over the last five years, the consumer IPO market has exploded. At just $4.6 billion in 2017, and $8.1 billion in 2020, consumer IPO volume topped $25.5 billion in 2021. 

While still comprising only 5% of the overall IPO market and dwarfed by perennial IPO sector leaders like Tech and Healthcare, Consumer & Retail has leapfrogged other sectors like Financial Institutions and Energy.

2021 brought the busiest year in IPOs since the internet bubble of 2000. Last year saw many recognizable consumer names making their debut on the IPO market, including FIGS, The Honest Company, Oatly, Poshmark and Allbirds. Recent activity has also been driven by private equity names debuting with companies like Albertson’s and Lifetime Fitness, as well as bellwether company spin-offs of valued assets such as L Brands and J&J.  

Interest in these names has been boosted by the proliferation of small and retail investors buying into IPOs via platforms like Robinhood and SoFI.  These investors are drawn to names they recognize and companies with perceived values that align with their own. They are also driven by organic website traffic and word-of-mouth recommendations. Recognized consumer brands garner significant customer loyalty and repeat business. And many are benefiting from trends and markets created during the pandemic.

2021 Consumer IPO Landscape: Believe the Hype?  

The 2021 consumer IPO after-market has seen a sharp bifurcation of performance whereby several well-known names and much-hyped IPOs experienced a significant “pop” on the first day of trading, only to see their price slip considerably over time. These day-one pops have, in some instances, doubled percentages that were seen last year. Some companies surged as high as 90 percent on their first day, but then declined and leveled out.     

But while the “pop and decline” was prevalent in 2021, not all companies experienced it. One success story was Chicago-based chain Portillo’s, which went public in October 2021 at $20 per share and continued to rise, closing the year at $37 per share.

Despite the fanfare or brand recognition, the numbers reveal that company fundamentals are increasingly important in this market environment. Consumer & Retail companies with proven business models, together with sales growth and established earnings and cash flow, have positively differentiated results in the 2021 IPO class.

2021 Consumer IPO Themes: Click to Add to Cart

Socially Conscious Consumerism

Having come to rise, in part, surrounding (increasingly prominent) natural disasters and activism movements, the market for socially-conscious consumer goods and services has gained dramatically in recent years,1 with socially-conscious buying becoming an entrenched new shopping paradigm for many. Conscious consumers first examine whether they should be buying at all, and then research and seek out businesses and products that are values-based, ethical and sustainable.  

Recent research from Kantarshows that post-pandemic consumers are more conscious than they were before the onset of COVID-19. Businesses are responding to this trend by creating aligned products, being more transparent about sourcing and manufacturing, and putting ethical practices into motion. And increasingly, consumers are focused on shopping local and supporting small businesses.

Additionally, socially-conscious messaging surrounding the launch of an IPO has become key. Many companies are referring to themselves as “mission driven,” highlighting their commitment to the environment, and touting their charitable contributions and sustainable methods. 

Digitization of Retail

One medium that dominated during the pandemic was online retail, and it prevailed in 2021 consumer IPO activity as well. 

Services that were once considered a luxury, like grocery delivery, became essential. With brick and mortar stores shuttered and people confined to their homes, online shopping and delivery was ubiquitous, including more than 150 million first-time online shoppers. Omni-channel spendingbecame the new norm, with 60 to 70 percent of consumers researching and purchasing both in-store and online across many categories. It is estimated that 10 years of expected growth in e-commerce happened in just 90 days at the height of the pandemic. Now, as we begin to emerge from the pandemic, consumers are still expecting digital tools and solutions for nearly every aspect of retail shopping. Direct-to-consumer IPOs have hit an all-time high, and several Consumer & Retail companies that operate largely online have gone public this year, including Poshmark, Allbirds and FIGS.

Investing in the Home

When the pandemic hit, many people were sequestered to their homes, for both work and leisure. Home office equipment became a necessity, and as future office life may remain remote or hybrid, these spending patterns may be changing permanently. People also began to invest in all aspects of their home, from furnishings to décor to functionality. Grill makers Traeger and Weber, both decades-old companies, went public this year, capitalizing on home-investment trends. 

As 2021 drew to a close, almost half of US consumers4 were engaged in activities outside the home, like shopping, dining, and leisure, as compared to only a third earlier in the year. However, with delays in return to the office as we enter 2022, consumers continue to spend on their homes, and expectations5 for home delivery are increasing. 91 percent of online shoppers expect to receive purchases within one week and 66 percent of online shoppers want free shipping for all purchases. Additionally, newly-developed habits are persisting and people plan to spend more time6 on certain home activities, including cooking at home, working on home improvement projects and streaming TV, than they did pre-pandemic. 

The Consumer Market in 2022: Digital is King

While the trends established in 2021 are likely to carry through into this year, IPO investors in 2022 are exhibiting greater scrutiny around more speculative, longer-dated profitability break-even business models, particularly with the specter of higher interest rates looming. While growth attributes are still critically important, established businesses with well-understood metrics, visible earnings and proven operating history will continue to succeed. Private markets appear to remain poised to fund companies through their gestation stages.

However, in spite of recent volatility, public market Consumer & Retail sector valuation multiples remain strong, with significant premiums being afforded on high-growth companies and recent IPOs.  E-commerce capabilities will remain important, as customers have come to expect the ease and access of this channel.  However, omni-channel (offering online fulfillment, in-store, curbside pickup and other customer options) is increasingly seen to be a winning model for Consumer & Retail. The retail experience will continue to evolve to offer more touchless, pickup and digital options. Lastly, socially-conscious consumerism does not appear to be going anywhere; while COVID accelerated the growth of this trend, it looks like it is here to stay. 

A few big consumer names have IPOs on the horizon for 2022, including top-name food delivery, fast-casual dining and meat alternative brands. But after a record year for IPOs in 2021, it looks like the market may be due for a breather. 

 

1 Source: BizJournals, July 2, 2021. https://www.bizjournals.com/bizwomen/news/latest-news/2021/07/number-of-conscious-consumers-increases.html?page=all

Source: Kantar, 2021. https://kantar.turtl.co/story/whocares-who-does-2020-p/page/4

Source: McKinsey, December 14, 2021. https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/survey-us-consumer-sentiment-during-the-coronavirus-crisis

Source: McKinsey, December 14, 2021. https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/survey-us-consumer-sentiment-during-the-coronavirus-crisis

Source: Jungle Scout Q22021. https://www.junglescout.com/wp-content/uploads/2021/06/Jungle-Scout-Consumer-Trends-Report-Q2-2021-3.pdf

Source: Deloitte, June 28, 2021. https://www2.deloitte.com/us/en/insights/economy/us-consumer-spending-after-covid.html

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