• Doyen New York

All Change: Doyen x Richard Kestenbaum

The founders of Doyen New York spoke to Richard Kestenbaum, a Co-founder and Partner at Triangle Capital LLC. Triangle Capital specializes in mergers, acquisitions and capital-raising for consumer-related businesses. They discussed how attitudes towards fashion had changed, for both consumers and investors, as well as who the potential winners and losers in the retail space would be. The conversation was originally featured on All Change: Industry Voices on Disrupting the Fashion System podcast and can be listened to here:



Richard Kestenbaum is a co-founder and partner at Triangle Capital LLC, a firm that specializes in mergers, acquisitions and capital raising for consumer-related businesses. His team has sold companies to Amazon, L'Oreal AT&T and many others. Doyen New York talks to Mr. Kestenbaum about how attitudes towards fashion have changed, for both consumers and investors, as well as who the potential winners and losers in the retail space will be going forward.


Let's start with the benefits of investing in fashion. It's a very volatile and saturated industry with little obvious upside for investors. We're curious to hear your point of view on why it's an attractive field to invest in?


Well, it's changed a lot and for the companies that have changed with it, it's very interesting. A lot of companies have not changed with it, and that makes it a lot less interesting. What we're seeing now is the shift from what was to what will be, and there's a lot more visible in the what was category than there is in the what will be, unfortunately. So, what we're seeing is a big shakeout and change from companies that haven't adapted. I've seen other people say that there's a big opportunity to take those old brands and bring them into the future. No, I don't believe that. I think that those old brands are just going to go away and maybe they're brand names are usable for scrap value, but they're not interesting. The interesting thing is who can adapt to the future of the industry - that's where the interest is.


What we've seen is that brands used to be mostly about conveying your success or your status or the quality of your garment right on it. And what they're about now is the brand conveying its most basic value system. How do they feel about the environment? How are they acting towards the environment? How are they treating people in the supply chain? Are they paying a fair wage? What do they think about social justice? And all of those issues are things that consumers now want to hear about from brands. Brands that reflect those values truly can do really well in the future. Brands that don't reflect those values or that are trying to bolt on value systems to a structure that it didn't belong on before - consumers know what's fake, they're smart and they don't want those brands.


We are seeing incredible volatility in the fashion business and in general, less need for fashion and more need for values. The companies that can provide those values are seeing high gross margins, low marketing and communication costs and high profitability. And that's always interesting for investors.


How has investor behavior changed due to recent events? And have you seen movement away from investing in fashion brands and pivoting to more profitable sectors like beauty?


It's become a cliché already to say that the shutdown has accelerated previously existing trends, but it's true. And perhaps the truth of it is why it's become a cliché. One of those truths is that fashion is less interesting and fashion is less interesting because it's conveying less about status and more about value. And people have been buying less fashion for some time. So there has been movement away from investing in fashion brands and more towards sectors like beauty, pet, subscription and retail technology.


You're asking if there's still long-term optimism in the fashion business? No. And there hasn't been for some time. Fashion is less interesting because people are saying, I think I need less stuff. When I look at my closet, I don't know why I don't have half as many things as are actually in my closet. The cultural attitude towards fashion has changed dramatically and now people want less and often better. Not to say that there isn't a place for less expensive fashion. There is, and there's a place for fast fashion, but there's a bigger place for less fashion.


We've seen a string of bankruptcies in the past few months - Neiman Marcus and JCPenney just to name two. In pre-COVID times, we would likely see a buyer or a private equity firm swoop in to restructure a big name like this. Is it simply time to say that investors no longer see department store retail as a bet they want to take?


I'm not sure that we would see people swoop in and take control of these brands and restructure them. You think about Barneys New York and so many other retailers that went bankrupt and liquidated. Brands are more sustainable than retailers. The value of a retailer name is not that great after it goes bankrupt. But the department store model is a questionable model. It's been declining for years. And we were talking about culture and values a moment ago, and department stores have not evolved to what their consumers need. They always viewed their strength as being a place that's big and that offers a wide variety of product, but that isn't what consumers want. And in that way, their scale has gone from being an anchor, to being a ball and chain. Their skill is in merchandising and selling stuff. And smaller formats are more popular, more focused, easier to identify when you walk in the door that it's a place you want to be in and an easier way to convey the values we were talking about before.


That's really hard for a department store that has an encyclopedia of brands to convey. And so it's attracting younger consumers less and less. Is the department store models still a business that can be as big as it has been? The clear answer is no, and, therefore, some players have to go away. And it's not shocking that Neiman Marcus and JCPenney who had among the weaker financial conditions of all the big retailers are first to go. Department stores are not as effective because they're no longer offering what consumers want and they haven't adapted to where the world has been going. So, we're going to see more of that. Not less.


While we're on the topic of retailers not adapting to the new wants of the consumer, we'd like to get your opinion on the state of the luxury mall in America. Billions of dollars were poured into the development of both Hudson Yards and New Jersey's American Dream. What do you see the future of these developments being?


I think Hudson Yards and American Dream are so different from each other that they're at opposite ends of the spectrum. So let's talk about them each individually. Hudson Yards is beautiful, but Hudson Yards is the past of retail. Hudson Yards is: let me take high-end finishes and put expensive stores with your luxury brands in them into a mall and put it in a place where a lot of tourists are hopefully going to come. We've seen that all over the world, a million different times.


American Dream is different concept. American Dream is: I'm going to take the majority of my space and I'm going to make it entertainment and food. And I'm going to model myself on Las Vegas and Disney World, where people go, not with shopping in mind, but with having a tourist or fun or family experience in mind. And while I'm there, I know I'm going to buy some things, but is not what I'm thinking about, and it's not what's bringing me there. What's bringing me there, what's going to make me come back is all of the fun things that I can do with the people that I care about in my life. And while I'm there, I may see some stores and I'll buy some stuff there because I'm having fun. That's what Disney World is about. It's what Las Vegas is about. And it's what American Dream is about.


So, why are they both failing now? Well, the pandemic has shut stores, so of course, but there's more to it than that. Hudson Yards is the past. And once you go there, do you really need to go back or can you find those luxury products in so many other places in the world? American Dream had a number of unique obstacles in front of it. First of all, it's location. It needs to attract tourists from the New York area, and particularly from New York City. No one knows if they're going to do that. It's not in a good traffic location. It's in the one county in America, I believe, that still has blue laws - laws that say retail must be closed on Sunday. It's next to Giants Stadium, where there's unbelievable horrendous traffic before and after games. It's got a number of challenges and it never fully opened because the pandemic came around and ended its opening.

The concept of American Dream, very exciting, because if you can put it in the right location and put in the right attractions, you're going to sell a lot of stuff to people who came there without the intention of shopping, and that's really interesting. And we know that works when it's done right because we've all seen Las Vegas and Disney World.


Hudson Yards is really complicated. Why does the world need another mall? Now, one of the things we're seeing is that A-malls, which Hudson Yards certainly is, can continue to succeed. It's the B-malls and C-malls that are really the problem where we are going to see wholesale, no pun intended, wholesale shutdown of those facilities and watch them being turned into completely other kinds of facilities, demolished and rebuilt. What will happen to Hudson Yards? I don't know. Do we need Hudson Yards? I don't think so. Will it be able to prosper in the future? Maybe. There's a lot of people who work in those offices and once people go back to offices, there's a lot of tourists once we have tourists again. So maybe they'll wander in and maybe Hudson Yards will continue.


One of the things we saw is that, like in American Dream and so many other places, the food stores in Hudson Yards were very successful, always busy, if you walked around, and the stores were empty. We don't know about American Dream because circumstances conspired to not allow it to ever really begin. But the concept of American Dream has already been proven out in different resorts around the world. And we know that that will work, whether American Dream is one of those or not is hard to say. But American Dream is the future because it gives consumers a fun experience with the people they care about in their lives and shopping comes along in the bargain. When you make shopping the primary thing, it's much more questionable.


Lululemon recently acquired Mirror, the exercise hardware startup, in a bid to cement their status as a lifestyle brand. For a brand like Lululemon, itself an indie brand not too long ago, is growth through acquisition the best way forward, or does it compromise some of their authenticity?


No, I think acquisitions are a valid way to grow. I don't really understand the Mirror acquisition. I mean, I understand it on paper. What I don't understand is: we're in a moment where exercise clubs and health facilities are closed so home exercise is exploding, but the data says that consumers want to go back to health clubs. And if that's true, is there still a place for a Mirror? And does it have the value that Lululemon paid for it? People like the engagement and the obligation, right? Sometimes exercise is a chore, and if you feel like you must go to this place or you have a trainer or a class that you're obliged to, it's a motivator for people to go, because they feel an obligation. When it's in your house, it tends to wind up being a thing that you use to hang your clothes on and it gets less used.


So, is Mirror a fad or is it enduring? I don't know the answer to that. The data for that in my observation is not encouraging. So I don't know that that's the right acquisition, but I think, if I was Lululemon, or any brand, I would say: what should I acquire? What should I acquire that's going to grow? What will give my existing legacy business new skills that are transferable? That will enable my business to grow, not just from the earnings of the thing that I'm acquiring, but from the skills that that thing can bring into my existing business? That's a great way to make an acquisition.


Will Mirror do that? I don't know. I don't see how it does. They may have a way of making that happen, but I don't see it. Will they sell Lululemon product to consumers who are using the Mirror? Maybe, but is that worth $500 million? I don't get it. How do you get a return on $500 million by putting an exercise machine in people's house and trying to sell them product? It's fine, but I don't know the economics of it. It seems like a big question mark to me.


You are an advocate for large legacy brands embracing change and acquiring startups, that it can be a win-win growth strategy for both. What are some of the most desirable qualities a startup can have to be an attractive investment?


I think it has to bring skills to the parent that the parent doesn't have. For example, not long ago, we sold a hair-dye company called Pulp Riot to L’Oréal. And one of the things that was so interesting about Pulp Riot is that they had a social media following that was as large as any of their major competitors, who were much older and who were much bigger. Being able to capture all those social media followers and get them engaged and active with the brand is a real skill. It's part of what we were talking about before, about conveying values. When you convey values to your consumers, they become engaged. And when they are engaged, they want to associate themselves with your product. They identify with it and price is no longer the number one criteria. All of those aspects are critical for brands to succeed now and in the future.


If L’Oréal can learn some of the skills from Pulp Riot to build its authentic social media following and engagement, it can increase the value of its mothership business by many, many times, just by making that acquisition. And that makes an acquisition like that very valuable. Will Lululemon be able to acquire skills from Mirror? I don't know. I don't see it from the outside looking in, but maybe it's there, but I think that's what you're looking for. Something that's truly synergistic isn't just because you can save on warehouse and operating costs and having two CFOs turn into one. That's valuable for sure. And it's a little more immediate, for sure, and it's more certain, but in addition to that, a great acquisition brings benefits and skills to the parent.


Now what's critical about that is that the parent needs to be open to change and openness to change is a cultural thing that can only come from the top, from the very top. So if the CEO and the board are encouraging, the cultural changes are consistent with the character of an acquisition, then it can work really well. When that doesn't happen, it's almost impossible for those kinds of changes to happen. You can't just bolt it on and expect the graft to take. It has to be part of the entire biosystem of the parent.


There have been a lot of big growth predictions when it comes to the future of the secondhand and resale markets. Do you see the growth of these markets as sustainable, or do you predict it will be more of a short-term trend?


This is my second interview of the day that has turned into a discussion of resale. If there's an index of questions about resale, that's an indicator it's exploding. But the reason that's happening is because, yes, resale is here to stay. Resale is huge. Resale is a big opportunity and it's a big opportunity that a lot of brands are not capitalizing on yet. Why is it a big opportunity? Well, we were talking early in the conversation about why fashion is or isn't an opportunity and how it has changed from being a product that displays your status to a product that you aspire to because of values. And that's a key driver for resale. Why is that? Because sustainability is very important. Economic value is very important. And being able to show that you paid a lot of money for a product is a lot less important than it used to be. And that brings people into the market.

Why isn't resale bigger today than it already is? There's a lot of reasons. First of all, the existing infrastructure and culture in brands does not encourage resale. Many brands view resale as their enemy. They see the resale customer as being younger and less affluent than the customer that they want to be seen carrying their brand around. And they view the resale product as directly competitive to their ability to offer new products, but consumers want it. And like the music industry with downloading, it's going to happen because it's a value to consumers, it makes their lives better. It actually expands the market, and there's no way to fight it.

There's an interesting brand called Nudie Jeans. In their store, you can walk in with your torn Nudie Jeans and they will repair it for you in the store for free. And if you get tired of your jeans, they will buy them back from you, and they will clean them and put them on a rack in their own store next to their own products on a rack for resale that are sold for materially less than a new brand. And they welcome the customer who wants new and they welcome the customer who wants resale. There are a number of things that are interesting about that. First of all, of course, it's about sustainability. Second of all, it's that they see both consumers as their customers and they embrace them both. And third of all, not as relevant with jeans, but it is with other products, particularly handbags, they're the experts in authenticity. No one will ever be as expert in authenticity as the brands that make the product, because they have the library of information and the cultural knowledge to identify what's real and what isn't.


You may have seen the article I wrote on Forbes.com about the Christian Dior bag I bought on The RealReal for $3,600, that was fake. I had experts who helped me identify the fakeness of that product. Consumers can't normally do that. The resale market is plagued by high-margin product -the product that's normally high margin when it's sold the first time - and that margin encourages fakesters to spend time creating fake products that look very real to the normal, informed person. Only the brands have the most expertise on those products to identify and getting those fake products out of the market is critically important to the sustainability of the resale market itself.


We are seeing resale get a lot of traction and it's going to get a lot more. There's a very interesting resale store inside of the New Nordstrom's on 57th Street in New York, where there's a company called Yerdle that created the store by sourcing the products. They work with a lot of brands, themselves, to authenticate the products and curate high-end stores for other companies. Not doing it themselves like The RealReal, but doing it for the brands because brands aren't accustomed to taking in old product, rehabilitating it and marketing it again. That's a really interesting partnership because the expertise of the brands is very helpful to the credibility of the authenticity.