From £658,989 owed to Thurrock council, to an art shop in east London left £33,804 out of pocket, to 12,000 people whose furniture never arrived, the details of the creditors who collectively lost almost £187m from the demise of sofa website Made.com are a snapshot of the pain caused by the bursting of the online retail bubble.
Made was among a flurry of stock market listings that raised billions of pounds for founders and private equity backers on the belief that the scale of the Covid-19 switch to buying online would be permanent – only to have those hopes dashed.
Between September 2020 and June 2021, a clutch of digital specialists including Deliveroo and Victorian Plumbing floated on the London market, raising almost £2bn for investors and a further £1bn to pump into their companies, despite many of them making a loss.
“There must have been a stampede to get the valuations they got,” says one retail boss. “People bought into the [notion] that Covid had caused a permanent shift in the way people were shopping and a level of excitement built up so that the valuations achieved were absolutely crazy.”
Less than two years on, those stock market darlings have turned to flops. As high streets reopened, along came the cost of living crisis, forcing shoppers to rein in spending. Analysts at GlobalData predict the 26% peak of online sales reached during lockdown will not be achieved again for more than four years.
Made is the standard-bearer for the unhappy troupe of digital dogs. Floated at a valuation of £775m in June last year, it raised almost £98m for selling shareholders and handed £10.2m in fees to its advisers. Just 16 months later, earlier in November, the group dived into administration with the loss of more than 300 jobs.
Having promised at its float that booming trading during the pandemic marked “an inflexion point for the sector” Made admitted on administration that it “could not pivot fast enough” to deal with changing consumer demand, inflation and a more unreliable supply chain.
Among the other pandemic punts offered on the London Stock Exchange, online makeup retailer THG, which at £5.4bn was one of the biggest London tech floats, has held takeover talks after slumping in value to about £814m, with question marks over its growth story. Key shareholder SoftBank of Japan wrote off £450m after selling its stake to founder Matt Moulding and Qatar’s sovereign wealth fund.
At the other end of the scale, minnow Parsley Box, the Scottish ready meals company, is already planning to quit the stock market and is trying to raise cash less than two years after joining the Aim market. Digital DIY retailer Victorian Plumbing, the biggest-ever listing on the junior market when it joined in June last year at a valuation of £850m, is now worth less than a quarter of that after a dive in profits.
Virgin Wines, takeaway app Deliveroo and consumer electronics website Music Magpie have also seen shares dive by 63%, 77% and 88%, respectively, after trading got tougher when pandemic restrictions eased.
Industry insiders say many listed consumer-facing companies are now looking at leaving the public markets if they possibly can – although finding alternative sources of funding is proving difficult. More casualties could follow Made – and not just among those who sell online.
Fashion retailer Joules went into administration last week after over-investing on hopes that its strong pandemic sales would continue, while others seeking new funding include cut-price clothing chain Matalan.
“These [retail] businesses are burning cash and are very fragile in an environment [where] trying to raise cash right now is nigh-on impossible. For a credit committee to lend to consumer business it is just too uncertain and there’s too much risk so it is causing a real hiatus. It is really, really tough,” says a retail expert.
Then there are the punters who fell for the dream of unending growth. Deliveroo coaxed an estimated 70,000 people to buy shares via its takeaway app, persuading them to spend £50m on the stock market debut. Their joint investment would now be worth just over £12m, with the average investor’s stake falling in value from £714 at float to £170 this week.
At THG, cornerstone investors including BlackRock, which bought £300m of stock on flotation taking a 15% stake, and Janus Henderson, which bought £100m in shares, have now slashed their holdings after seeing the value dive.
At Made, blue-chip investors including Majedie Investments, Axa Investment Managers and the NFU pension fund bought into the float, splashing out £50m, £30m and just over £22m, respectively, on shares, according to the prospectus, only to see their investments slump.
There were, however, rich pickings for the small army of lawyers, bankers and accountants who serviced the float. Made’s advisers JP Morgan Cazenove, Morgan Stanley and Liberum Capital, as well as boutique house OGG Consulting, shared fees of £10.2m.
JP Morgan also clocked up a chunky payout as a key adviser on the floats of Deliveroo and THG, where banks and other advisers shared more than £62m in fees. Since then Deliveroo shares have fallen by three-quarters and Deliveroo by 86%. Goldman Sachs was on board at both of those deals, alongside Numis.
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Made.com founders Ning Li and Brent Hoberman’s By Design fund sold almost £8m and £5m of shares each, according to the prospectus.
Moulding, the chief executive of THG, cashed out a hefty £54m and secured rights over properties for which he could collect £19m a year in rent, while Victorian Plumbing’s founder Mark Radcliffe took out £212m and Music Magpie founders Steve Oliver and Walter Gleeson £22m.
Private equity and venture capital firms also did well. Made’s tech fund backers Level Equity from the US and Partech from France cashed out £18m between them on the float – although they went on to see the rest of their investment fall to dust.
At THG, private equity group KKR sold its entire 20% stake in the float for £448m, while a string of private investors also did well including former Tesco boss Sir Terry Leahy, who cashed in £17m of shares. Music Magpie raised £95m for backers led by private equity group NVM, which cashed out nearly £40m.
“Obviously they thought it was a good time to sell. There must have been an element of cynicism,” says one seasoned executive, who says he turned down at least one role on the board of a new stock market entrant as he did not believe in its growth story.
“Anybody sensible would take a view that there is a risk that it is not sure this [kind of growth] is really sustainable and asked if this is a flash in the pan during the pandemic.”
Patrick O’Brien of GlobalData says that while there was “irrational exuberance towards online retail shares” during the pandemic, it was a confusing time for companies and investors. “It was really difficult to understand how consumer behaviour was going to change at the time. We didn’t have any visibility on how long [the pandemic] was going to last.”
He says that the current collapse in online retail share prices is based on another misplaced belief, that the high street will permanently grab back sales from the internet.
One senior retail figure agrees that investors should be wary of learning the wrong lessons from the collapse of the pandemic punts.
“One of the huge mistakes of all bubbles is that they lump lots of very different businesses together. There are some brilliant pure plays and some terrible ones. The fact they trade mainly online is not going to be what distinguishes them [as] being good or bad.”