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Financial Literacy

How Disruption Pays

It stinks to be on the wrong side of the disruption divide.

Just ask Sears. The Limited stores. Payless. Bebe stores. And dozens others.

They’ve either filed Chapter 11, or they’re closing dozens of stores.

It’s going to get worse before it gets better.

AlixPartners is predicting that this year will bring the highest number of retail bankruptcies since 2009.

A new report just came out from S&P Global Market Intelligence. It names 10 retailers it finds most at risk over the next year.

Wait a minute… Isn’t the economy going pretty strong?

Isn’t job growth soaring?

Isn’t consumer confidence near a 16-year high?

This should be the best of days for retailers.

If they weren’t getting disrupted from all sides, perhaps it would be.

As it is, retailers are in big trouble.

Not all of them, mind you. Some are doing quite well.

You should know which is which.

The Disrupted and the Disruptors

The retail sector is rapidly splitting into two groups.

The disrupted retailers are the older companies – the ones with a lot of stores. They’re fighting for their lives.

The disruptors are the online companies.

They’re asset-light enterprises. Instead of owning stores, they own websites. Instead of running factories, they contract out. And instead of maintaining huge inventories, they use the latest advances in data technology to track customers’ buying trends and keep inventories light.

As you’d expect, the older retailers are developing online operations to battle the newer tech-savvy companies on their own turfs.

Easier said than done.

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How Disruptors Upend Markets

In The Innovator’s Dilemma, Clayton Christensen explains that even the best-run “established” companies can do everything right and still lose market share to younger companies with fewer resources.

Why this is goes to the very nature of disruption and why, as an investor, you need to start paying close attention to these disruptive market conquerors.

The vast majority of mature companies do something that completely makes sense but also leaves them with a potentially fatal weakness. They focus on their biggest and most profitable customers – who are usually at the high end of the market.

Again, as they should. But many do it at the expense of their lower-end customers – either taking them for granted or overshooting their needs. These segments are less profitable… with lower margins… and with a higher likelihood of brand loyalty getting trumped by lower prices.

It’s these low-end segments that are targeted by new companies offering “good enough” products or services. Then, slowly but surely, the young retailers improve their offerings and move upmarket. If they can keep their competitive advantages in things like price and user experience – and many are able to – then incumbent companies like Sears and Macy’s will have trouble keeping even their high-end customers.

A Marker to Exciting Opportunities

Retail isn’t the only place where disruptors threaten older companies. It’s everywhere you look. Healthcare. Financial services. Transportation. Hospitality. Business and marketing.

Investors can look for them as markers to some of the most exciting investment opportunities around.

It works in both directions. Investors should also use disruption to identify those poor companies being disrupted. Invest in them at your own risk.

As someone specializing in startup opportunities, I come across both the disruptors and the disrupted all the time. Startups make great disruptors. A case in point is the recent retail disruptor we recommended to the premium subscribers of our First Stage Investor service…

A Massive Market Ripe for Disruption

The company’s name is DSTLD. It has targeted the massive global premium denim jeans market, a $58 billion per year business.

DSTLD has eliminated stores from its business model. It passes on the money it saves to consumers via low-priced, high-quality products.

For example, instead of paying $253 for a pair of high-waist skinny jeans, DSTLD sells its own version for $65.

DSTLD has already sold more than $3 million worth of its products. And based on its most recent quarter, it’s averaging $5 million in yearly sales.

Since it’s all online, the company has built a database of the 21,000 customers who’ve already spent an estimated $100 each. More than half come back within 12 months to make additional purchases.

The online retailer is not a publicly listed company. It’s probably years away from doing an IPO. It’s strictly a private company.

But under new crowdfunding rules, it recently raised money, and everybody who wanted to invest could. The minimum was $500 – quite affordable. The total worth of the company came in at $15 million – a fair and reasonable valuation.

The hang-up? Well, it comes with the territory. It’s so early, even the best of these companies have a long and hard road ahead. The odds, are quite frankly, against them. If you’re going to invest this way, invest in several startups. Ten is a minimum, and 20 is better. That would increase your odds of investing in a company that hits it big.

At a $15 million valuation, all you need is one. After all, Warby Parker went from a similarly low valuation to $100 million in about five years. Zappos – the online shoe company – increased its valuation from $500,000 to $163 million.

The other hang-up? Your shares aren’t liquid. You usually have to hang on to these shares a long time – roughly five to 10 years.

The opportunity to invest in DSTLD may have come and gone. But I see new opportunities involving exciting disruptors every day. Check out SeedInvest – the website where I found DSTLD – to see what I mean.

Where there’s disruption, there are often great market opportunities at play. And now you can invest in these opportunities via startups listed on specialized websites.

As an investor, it’s a great feeling to be on the right side of disruption.

Good investing,

Andy


About

Andy has three decades of experience in the private and public sectors as an entrepreneur and advisor. The CIA, former Maryland Governor William Donald Schaefer, and Fortune 500 companies such as Lockheed Martin and Dow Chemical have all trusted his advice. Andy founded and ran an international trade and finance company based in Asia. Upon returning to the U.S., he joined a Florida investment advisory service that quickly gained a reputation for recommending companies with outstanding value and fundamentals. Andy has taught marketing and finance courses at local Maryland universities and has written a half-dozen books on global business, published by McGraw-Hill, Frost & Sullivan and others. He now regularly shares his worldly knowledge about investing in startups, cryptocurrency and cannabis with everyday investors in the free daily e-letter, Early Investing.

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