Retail Is Your Business · 2021-10-27 · 12 min
Key moments - from our scoring
Substance score
35 / 100
Five dimensions, 20 points each
Richard Kestenbaum of Triangle Capital LLC examines the structural inefficiencies exposed by pandemic disruptions to the pre-pandemic just-in-time supply chain model. He explains that while supply chain problems interact with inflation, they're not the primary driver - citing rent increases as a major inflation component disconnected from logistics. Kestenbaum expects single-component failures (missing chips, glass shortages) to resolve within 12-18 months through capital redeployment, technology, and ingenuity, but doesn't anticipate product design changes; instead, companies will hold more inventory buffers for critical low-cost components. On M&A activity, he identifies three key drivers: economic conditions, equity market valuations, and interest rates - all currently aligned favorably. The market is experiencing unprecedented deal activity as buyers and sellers gain confidence amid strong business performance. However, he cautions that highly valued companies without economic justification will eventually correct, particularly when economic growth slows. He also addresses SPACs and alternative capital vehicles as cyclical fashion trends that experience shakeouts when returns disappoint. Kestenbaum concludes that retail faces unprecedented uncertainty - but that uncertainty creates outsized opportunity for operators who accurately read consumer direction while competitors remain uncertain.
The pre-pandemic supply chain prioritized efficiency over flexibility using expensive assets; when the world changed suddenly, it proved poorly suited to new demands. Fixing this requires time for capital redeployment, new asset creation, and behavioral change across the system, which Kestenbaum expects will take 12-18 months.
No; while supply chain issues contribute to inflation, they're not the primary driver. Rents, which have nothing to do with supply chain, are a relatively large component of inflation measures, and inflation has multiple causes beyond logistics.
Three factors aligned simultaneously: economic growth, high equity valuations in both public and private markets, and low interest rates. These create confidence among both buyers and sellers, making their businesses perform well and appear valuable.
They will correct because companies paying high prices expect strong future returns; when that doesn't materialize, values decline. This typically happens when economic growth slows and confidence weakens across the market.
Retail faces unprecedented uncertainty about where consumers are heading, but this uncertainty creates significant opportunity for operators who can accurately predict consumer direction while competitors are still figuring it out.
Our reviewer’s read on each dimension, with quotes from the episode.
There are a handful of useful observations - pre-pandemic supply chains were efficient but inflexible, just-in-time inventory must give way to buffer stock, M&A confidence tracks economic/rate/equity trifecta - but the density is low for a 12-minute episode, with long stretches of obvious macro commentary and no actionable depth.
The supply chain that we had pre-pandemic was highly efficient, that uses very expensive assets, and therefore not flexible.
retailers may need to have more inventory in their system to account for the ways in which things can back up
Almost every take is a standard macro observation - high valuations must eventually correct, M&A follows economic cycles, SPACs go in and out of fashion - with no contrarian or first-principles argument anywhere in the episode.
there is an aspect of fashion to it in that certain types of investments go in and out of fashion
No, they have to come down because, you know, why do people pay a lot for a company? They pay a lot because they think that the company will grow
Kestenbaum is a genuine M&A practitioner with retail-sector focus and a Forbes contributor, so he has real deal-making experience; however, the conversation never surfaces proprietary deal data, named transactions, or depth that would distinguish a top-tier operator from a knowledgeable commentator.
Your absolute core and your sweet spot, Richard, is mergers and acquisitions.
What do buyers of companies want? They want growth and margins.
The episode is almost entirely abstract: no named companies, no dollar figures, no deal counts, no sector breakdowns - just one rough timeline estimate and a passing inflation anecdote about rents, which is the closest thing to evidence in the whole conversation.
what I'm told is that we're going to see these problems continue for the next 12 months. But somewhere between 12 to 18 months from now, they'll probably get gone.
one of the measures of inflation a relatively large component is rents And rents are rising now And that has nothing to do with supply chain
The hosts ask broad, multi-part questions that often contain the answer ('do you think it'll drive market share or shake out?'), never push back on vague claims, and the episode ends with a soft closing before any topic gets meaningfully interrogated.
Do you think that that's going to have engineering and impacts down the line on design of products? Or do you think that, again, that's just going to shake out and people will treat this as a large glitch?
is the confidence coming from we were just in this super dark place and now we're getting back to business
Computed from the transcript - who did the talking, and the words that came up most.
Richard is a co-founder and Partner of Triangle Capital and has been an investment banker for over 35 years. Richard has a great deal of experience advising clients in merchandising businesses, particularly in the Retail & Consumer sector. Richard sits down with Rob and Rebecca to talk about the supply chain issues and merger and acquisitions. See omnystudio.com/listener for privacy information.
Transcribed and scored by The B2B Podcast Index.
From New York City, you're listening to Retail is Your Business, covering the intersection of innovation and business in the retail industry. This is part two of our conversation with Richard Kestenbaum, partner of Triangle Capital, LLC. Here's Rob Sanchez and Rebecca Fitz. One of the biggest impacts right now that we're seeing in retail, anytime you go into a store and you see empty shelves, it's kind of a shocking thing that that's happening.
And a lot of that is attributable to the supply chain disruption that we're seeing. And there's so many causes to that right now. So I'd love to get your thoughts on what's happening inside of supply chain and resiliency. And where do you think the future is going to go?
Do you think that fixes inside of the supply chain and new solutions showing up there are going to drive market share? Or do you think this is a group-wide problem that eventually will resolve? The supply chain that we had pre-pandemic was highly efficient, that uses very expensive assets, and therefore not flexible. So when the world changed suddenly, the supply chain was not as well suited as previously to what we needed.
And that's reflected in many different ways. So there's a need for capital to be redeployed, for big assets to be created and some to be gotten rid of, and habits and practices. Now, part of that efficiency was a just-in-time aspect to the way retailers thought about their industry to reduce the amount of capital. So retailers may need to have more inventory in their system to account for the ways in which things can back up.
But over time, capital is going to get redeployed. There'll be an appropriate number of ships in the right places and resources to send them and greet them and the ability to move the right products in the right way. But it takes time for people to adapt. So I think the problem gets solved.
It'll get solved with ingenuity, with technology and with capital. But all those things take time. And what I'm told is that we're going to see these problems continue for the next 12 months. But somewhere between 12 to 18 months from now, they'll probably get gone.
Just like a Southwest flight schedule. Well, hopefully Southwest problems get resolved before 12 to 18 months from now. So it's inflation and at its best. in many ways, and that we'll be able to resolve some of that in the next 12 months.
Inflation and supply chain, they interact with each other, but I don't think that supply chain is necessarily driving the issues with inflation, although it's a part of it. For example, one of the measures of inflation a relatively large component is rents And rents are rising now And that has nothing to do with supply chain So the increase in cost because of increased cost in supply chain is part of inflation but inflation has many causes. When you're looking at the supply chain issues that are now, a lot of them seem to be single component failures.
I would say that that's a category that we're seeing, either not enough glass to fill bottles or a missing chip, etc. Do you think that that's going to have engineering and impacts down the line on design of products? Or do you think that, again, that's just going to shake out and people will treat this as a large glitch? No, I don't think it will have an impact on design.
It'll have an impact on how much inventory people keep. It's very common in manufacturing where you have a low-cost component that's critical to your supply. And that's an opportunity to have a longer supply of a longer time's worth of supply of that low cost product that's critical to a facility or production line on hand. And when you see that happening across companies, across industries, that's not a design issue.
That's a supply chain issue. And only fixing the supply chain will solve that problem in the long run. Sure. Your absolute core and your sweet spot, Richard, is mergers and acquisitions.
And what are you seeing or what may we see in the next 12 months as far as mergers and acquisitions? There are a few things that generally drive activity in the mergers and acquisitions market. One is the condition of the economy. Is it growing?
The other is the values of equity in the public markets and in the private markets. they move together, but the public markets are more visible. And the other is interest rates. All of those things are aligned right now.
When the pandemic started, the mergers and acquisitions business froze. And about halfway through the time of the pandemic to date, the mergers and acquisitions business came back alive again. And when I say froze, I mean died. And halfway through it came back alive.
And it's maybe more active now than it has ever been. It's incredibly busy in the mergers and acquisitions business now. There's a tendency for people who are not in that business to say, well, are there more buyers than sellers? Are there more sellers than buyers?
It doesn't really work that way. Buyers and sellers tend to come into the market at about the same time. And that defines the level of activity. Mergers and acquisitions requires confidence.
When your next door neighbor loses their job, you don't feel as comfortable taking a risk on an acquisition and your company's probably not performing as well because that next door neighbor and others like him aren't being as expansive with their spending. So we see those factors, the economic activity, interest rates and equity values driving activity. And when they're up the mergers and acquisitions business gets very hot Is there a specific core right now where where you seeing the most activity or do you think that it kind of across the board the timing is right Well you know companies that are there are always going to be companies that are more interesting than others right What do buyers of companies want?
They want growth and margins. And to the extent you can convince a buyer that a company will have high growth and high margins in the future, that's going to be a really hot property. So that's always true. And there are more companies now where that's a reasonable story and who are having good growth and high profitability now.
And that makes every it's one of the things that makes everybody more confident. Well, and it's interesting. Do you think some of this kind of the same thing I'm feeling in retail real estate, which is we went down to zero during the pandemic, obviously, you know, folks weren't even obviously operating. And then there's been this huge influx of dealmaking going on on both sides of it.
So is the confidence coming from we were just in this super dark place and now we're getting back to business and it's turning up a ton of M&A? Well, it comes from economic activity. The economy is growing, interest rates are low and equity values are high. So sellers' businesses are doing well and they're growing and they're valuable.
and buyers are not seeing lots of bankruptcies and their portfolio companies are doing well too. So everyone feels confident about the future and that's what drives the mergers and acquisitions business. You had mentioned earlier that we're seeing fairly high valuations in some of these newer markets. Do you think that we're going to see some of those values stay high or do you think there's going to be a correction there and will that have an impact in the overall M&A market?
No, they have to come down because, you know, why do people pay a lot for a company? They pay a lot because they think that the company will grow and they'll make a lot of money and get an economic return. When time comes or enough time passes and they realize, wait, this isn't going to work out for me, then the value declines. And so there's a lot of companies that are very highly valued and they aren't going to pencil out over time.
And sometimes or very often that has an effect on overall valuations. If enough people are in it, if it's notable enough, then people say, oh, this is going to this is a very highly valued company that will be another blankety blank. And so we're not going to pay as much as we would have paid a year ago for it. That does happen.
Usually that happens at about the same time as the economy stops growing as rapidly. All those things tend to happen at the same time. People stop believing. They see signs of weakness or downturn.
And the companies that were high flyers without economic justification tend to flatline as well. And so all those things happen at once. And they feed each other as well. When you see a giant bankruptcy, you have a little less confidence in the economy You not willing to pay as much for what you were willing to pay a lot for the day before So all those things tend to move together at approximately the same time.
Now, right before the pandemic and a little bit during, we were starting to see people going public using different strategies than we've seen before. And I don't know the exact term, but there were people basically going without underwriters inside of public IPOs. Has that continued? And is that having any impact at all on the markets?
What we tend to see about special purpose acquisition companies and other forms of capital is that eventually there's a shakeout because not everybody can form a pot of money, make an investment, and have it do well. And when they start doing poorly, people get disappointed and that form of investment goes out of fashion. And I use the phrase go out of fashion deliberately because, you know, Wall Street is thought of as this very navy blue pinstripe conservative place. But in fact, there is an aspect of fashion to it in that certain types of investments go in and out of fashion.
And that's so often, it's surprising to me how surprising that is to investors generally. I think that's a good place to start wrapping up. Richard, do you have any final thoughts that you'd like to share with the audience? The most important thing about retail right now is uncertainty.
There is probably a more uncertain future to the retail universe today than there has been in my lifetime. And I'm a pretty old guy. And that's one of the things that makes it scary, but it's one of the things that makes it so interesting and so rife with opportunity. So if you can see where consumers are going, there's so much opportunity to take advantage of that and give them what they want while other people are still trying to figure that out.
And that makes retail so exciting right now. Richard, why don't you share with us the best way that people can get in touch with you and in touch with Triangle? The best way to reach me is on our website. That's trianglecapitalllc.
com. And you can also follow me on fords.com. And if you just Google my name, if you can spell it, it's K-E-S-T-E-N-B-A-U-M, Richard Kestenbaum.
And you Google me, you'll find an easy way to connect to me. Yeah. Thank you for sharing your thoughts with us. I really appreciate it.
Well, thank you guys so much. So for Rob Sanchez, thank you so much. And we'll continue the conversation. This has been Retail is Your Business, produced by Mouth Media Network, copyright 2020.
Your brand message can be on this show. Email us to find out more at podcast at mouthmedianetwork.com. Thank you for listening.
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