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5 Questions with Triangle Capital’s Richard Kestenbaum

As a founding partner at Triangle Capital in New York, investment banker Richard Kestenbaum has more than 30 years experience advising clients through mergers, acquisitions, and equity financings in the merchandising space, with a focus in Apparel, Retail, and Consumer brands.

Kestenbaum’s vision for what consumer businesses need to do to survive and thrive the onslaught of disruption is to embrace change, so he encourages more big players investing in startups. Triangle’s deals typically fall in the $10 to $200 million range, which he says is where a lot of creativity takes place—making it interesting for large, legacy consumer companies.

While Unilever and its 2016 deal to purchase Dollar Shave Club for approximately $1 billion are too large to fit these goal posts, he admires Unilever’s vision in buying the direct-to-consumer startup, which has changed the game for P&G’s Gillette and other established brands.

“Unilever associated themselves with authenticity and customer-centric design, which they couldn’t easily develop in-house,” says Kestenbaum. “By taking an investing mindset rather than building from scratch, Unilever preserved Dollar Shave Club’s brand, culture, organization and capabilities. The deal sets Unilever up to learn from Dollar Shave Club—and help them scale up.”

Indeed, the deal represented the start of a bigger transformation across Unilever and series of acquisitions which has boosted its direct-to-consumer sales.

As Kestenbaum told us in a Q&A, a willingness to learn from (and invest in) disruptors can give legacy brands a big advantage:

We’ve seen the commercial impact of e-commerce and direct-to-consumer on legacy businesses, but what’s been the impact on consumers?

Consumers now choose brands that relate to their values—attitudes on the environment, brands that pay their staffs a fair wage, brands that are locally-sourced, brands that have local production, and many other values. Legacy brands that do not espouse unique values and a specific, admirable culture are being commoditized. E-commerce contributes to this because e-commerce is driven by social media, where all these values are expressed. If brands try to fake it, social media makes it obvious immediately.

Will consumers give legacy brands a second chance?

Consumers want their value systems, they want to admire the companies they buy from—and they want a good price. If a legacy company can deliver that, then consumers will buy. But so far, we haven’t seen legacy companies be able to make that transformation. It’s remarkable that so many changes at retail have been accomplished by so many large companies. But these cultural changes have them totally stymied. We’re seeing the barriers to entry fall and small, young, nimble companies chip away at the market positions of companies that have many thousands of times the financial strength of those younger, more agile players.

What are the barriers to evolving for legacy brands? Couldn’t they invest in talent, e-commerce, experiences, etc.?

In a recent blog post for Forbes, I profiled young brands. In each case, you get a real sense of the value system of the company founders. You understand what they care about personally and how they transmit that through their company. In the case of Brilliant Earth, it’s clear that they care about producing conflict-free products. In the case of La Ligne, the founders came out of Vogue and you can take pleasure in the enjoyment they get from empowering women with fashion.

You couldn’t make the La Ligne brand into a food company, just as you couldn’t make an equivalent founder-driven jewelry business into a fashion apparel brand. These businesses are specialized and specific, and for what they are, they’re very real. My message to a legacy company is, you can’t be what you aren’t.

We’ve never seen so many historically successful, strong brands be unable to adapt as we’re seeing now. It’s a slow-motion car crash. We’re also seeing the structure of organizations changing. Successful companies used to have an organization chart that was primarily vertical, something that would fit on paper in portrait orientation. Now we’re seeing new companies’ organization charts are much more horizontal—they fit better in landscape orientation. They are much more collaborative, flexible and much less hierarchical. Converting from a vertical organization to a horizontal one is almost impossible; I can’t think of one company that’s done it successfully.

So if it’s almost impossible for legacy companies to transform their businesses, what criteria should they use for investing in or acquiring disruptors?

If you’re a legacy company I think you ask yourself, ‘What kind of customer do we aspire to have and what kind of product do we aspire to make?’ Once you identify the characteristics of what you want to be, you identify those companies that are doing what you aspire to. Then you approach those companies and you offer to invest.

If legacy brands can align themselves with disruptive companies, they can learn and benefit from the growth and they can take in the profit from their allocable ownership share. I believe that investing 40-60% could be an opportunity for entrepreneurs who need to scale but don’t have the resources and still want to benefit and contribute to the growth of their business after a transaction.

One thing to consider is closing an acquiree’s wholesale business if they have one. Wholesale is a lower-margin business and the communication of brand values is less effective at wholesale. And there’s a magic moment when the consumer makes a purchase decision. Brands should control that and not leave it in the hands of third parties.

How else does brand factor into Triangle’s transactions?

A great deal of value of the companies we sell is intellectual property. It’s rare these days for a transaction to be driven strictly by what’s on the balance sheet; the intangibles are where the value is. We look at factors like growth and margins. Those numbers are proxies for brand strength because they answer the question, ‘Do consumers want this brand? Will they pay full price for it? Do they want more of it this year than last year?’ To us, answers to these questions reflect brand value.

In sum, retail is at an important crossroads. The legacy brands that are flexible and can do different types of transactions than they tried in the past—and who can develop cultures with values that consumers find appealing—will succeed. Those that can’t will continue to struggle.

This interview originally appeared on brandchannel.