Why Connection Capital backed stock reseller Rowan International

News: Investment News | 10 January 2018

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January tends not to be the happiest time for the retail business. However, Connection Capital is poised to benefit from the malaise with its latest portfolio company.

Last month the firm invested £5m (€5.6m) in Rowan International, a reseller of branded stock. Rowan and companies of its ilk play an important role in maintaining the balance between household brands and major retailers.

Stock resellers exist largely because of the challenges consumer goods companies face in forecasting. Typically, a soft drinks manufacturer may have to begin its summer production run six months prior, unaware of a host of variables, including weather. Should a brand fail to supply enough stock, they will be landed with an invoice from the supermarket for the gross profit of goods not sold. “The cost to a supplier of not having enough stock is much more significant than having too much,” explains Connection Capital partner Pascal Wittet. “Oversupply is endemic in the system and that is just not going to change.”

This is where Rowan steps in. Manufacturers are happy to shift stock at cost, or cost plus a small profit, but where their products end up is vital. Should a bottle of Dove shampoo be available for £1 at a discount store and £2 at a supermarket two doors down, the brand equity suffers. To avoid this, resellers target the so-called tier B and tier C discounters, brackets that include the likes of Poundland, Poundworld and small independent operators. “They are two different customer bases and this suits the brands, who essentially want the stock to disappear,” says Wittet.

Rowan’s competitive advantage within the sector is the fact that it is a genuinely international business, generating around half of its £50m turnover from the continent. The ability to resell UK goods in Europe and vice versa creates even more space between the two customer sets and opens up a wider range of sourcing opportunities.

Friends in high places
After being introduced to Rowan by corporate finance house Quercus, Connection Capital identified a strong business within a promising marketplace. Rowan accounts for around 2.5 per cent of the highly fragmented UK reselling sector, which is growing at around 12 per cent per annum.

In the months prior to completion, Connection introduced John Cleland, a 30-year veteran of the retail industry, as non-executive chairman. Cleland has an impressive CV that includes senior positions at Somerfield, Asda and Wal-Mart, the latter of which as chief operating officer of its Japanese division. Since then he has become a favourite of private equity firms, leading Montagu-backed Maplin and serving as chair of Connection Capital’s Starbucks franchise 23.5 Degrees.

In fact, Cleland had come across Rowan’s chief executive John Place while at Somerfield – Place was cutting his teeth as a junior buyer while Cleland was operations director. “They knew of each other and hit it off like a house on fire,” says Wittet. “In the three to four months prior to completion Cleland helped the management team develop their 180-day plan, their people strategy, helped them think about how to expand the business and really coached them through the process.”

With private equity backing secured, Rowan’s main goal will be to gain more customers in Europe. Current clients include Mondelez, Proctor & Gamble and L’Oreal, all custodians of major brands, but there remains plenty of scope for growth. For example, the company currently works with Johnson & Johnson in ten of its 15 European geographies, and will now attempt to secure the remaining five.

The current dynamics of the retail sector may also play to Rowan’s favour. Wholesaler Palmer and Harvey, one of the UK’s largest cigarette suppliers, collapsed into administration in late November while in possession of a hefty lump of stock. Elsewhere, Poundland has been hit by the accounting scandal unravelling at its South African parent Steinhoff.

“Rowan has been flooded with enquiries about buying stock since we closed the deal, which has never happened before,” Wittet said, speaking a week after completion. “You are seeing a lot of financial difficulty which means there is perishable stock sitting in warehouses that needs to be shifted quickly. That creates a huge opportunity for Rowan.”