The retail growth delusion

Amidst so much discussion of retail and hospitality businesses desperately looking to shrink (through store closures, CVAs or even administration) it is worth reflecting for a while on how they got too big in the first place. There is a cautionary lesson here for those brands which are currently small and fast-growing but which might be the ‘troubled retailer’ stories of 2025.

The psychology of over-growth is pretty easy to understand. You started a retail business with family or friends and found an audience. Your business grew and you built a management team around that growth. Now you have 50 or 60 outlets around the UK, you turn over nearly £100m and you are generating a decent positive cashflow from the business. What next?

There are plenty of people around with ideas about what that next step might be. Corporate finance advisors, dealmaking lawyers, industry analysts and potential investors are all telling you that you have a winning model and that you should double down. If 50 stores is a good business, what would 100 be like? Or 200?

It’s fashionable these days to blame Private Equity investors for a lot of the over-extension we’ve seen from retail businesses, and it is true that the PE investor naturally looks for step-change growth opportunities and will be much less interested in a ‘steady as she goes’ business. But I’ve seen plenty of IPOs in recent years where businesses sell their equity onto the public stock markets which are based on the same tantalising glimpses of step-change growth.

And before we comfort ourselves by blaming investors of any variety, how much press and analyst coverage of retailers begins with how many stores they have and how many new ones they have opened this year? It’s no wonder that growth becomes a beguiling topic for founders and business leaders.

And at some level, that might be a good thing – investing capital in a strong brand in order to make it bigger and take it into new markets can be very profitable, create many new jobs and bring the brand to lots of new audiences. I see brands in the retail and hospitality sectors which are absolutely ripe for that kind of expansion, even in today’s challenging markets.

But there are a couple of pitfalls that founders and early investors should watch out for:

1) Your growth plan might make complete sense to you, but if you are one part of an industry sector where everyone is chasing the same growth, you can’t all win. The Casual Dining sector is a salutary warning about what happens when everyone has the same ‘open 100 restaurants’ plan.

2) There is, obviously, a significant executional challenge in growing a business, and most particularly when that growth is into new territories overseas. Even though your business has grown already to what it is today, you may need different skills, resources, advisors and networks to take the next step.

3) Finally, there is the reality of your brand – can it actually stretch to the bigger scale you are considering. Brands based on design, or with particularly niche target markets or with strong regional roots just might not stretch to a bigger scale. Some of the high street CVA and restructuring stories emerging in 2019 look awfully like businesses which should have stopped at 50 to 100 outlets and have simply expanded beyond their market.

So is growth a bad thing? Not at all. But as a founder or shareholder in a business which is considering an IPO or a sale to a PE investor based on the allure of doubling your store-count, you are choosing to forgo the cash the business generates today and instead to invest some of that in the growth plan. Just like any other investment, it is worth considering that choice carefully.