Investment Trusts

The Hut Group – transforming the D2C business model?

Companies with the potential to transform how business is done don’t come around that often. Phil Webster talks about The Hut Group – a recent IPO that alongside its own brands is helping others sell online more effectively.
March 2021

Philip Webster

Director, Portfolio Manager, European Equities

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Risk warnings

The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets. If markets fall, gearing can magnify the negative impact on performance.

This does not constitute a recommendation to buy or sell a particular security.

What Philip Webster, manager of BMO UK High Income Trust, looks for in an investment is a question he is regularly asked. It isn’t one with a simple answer but finding something truly unique is a great starter for 10. Unfortunately, it doesn’t happen that often, but when our research unearths a business with the potential to deliver transformative change over the next 5 to 10 years it can be truly exciting.

The Hut Group – home to two leading brands

With ’The Hut Group’ (THG) I feel we’ve found one of those businesses. As a recent IPO many of you may not have heard of THG, but you could well be familiar with their two main brands.

The first is online beauty portal Lookfantastic. It is the largest pure-play online beauty retailer globally, a position they recently strengthened with the acquisition of Dermstore.com in the US. This is a fragmented market in which THG holds a leading position with most of the key brands using them as a distribution channel. THG also own several brands themselves which means they have a vertically integrated proposition spanning design and development through to manufacturing and distribution. This provides a key competitive advantage as they leverage customer information to drive and evolve the product offering.

The second is THG’s nutrition business, ‘Myprotein’. It is similarly vertically integrated and THG have repositioned this component of the business by extending its reach to vitamins and vegan categories which in turn has driven significant growth in key markets, particularly Asia.

 

Ingenuity – D2C solution driving revenue growth

The internally developed infrastructure that sits behind Lookfantastic and Myprotein is now being sold under their ‘Ingenuity’ label. It covers almost every element of a D2C business model. That means web hosting and design, warehousing, product distribution and influencer led marketing.

It is relatively early days, but the contribution Ingenuity is making to THG’s revenue is growing fast. As the transition to online retail continues, the platform is highly attractive to companies like Nestle, P&G and Coke. Why? Because THG has already put in the time, energy and expertise into developing infrastructure that is proven to work.

The potential of Ingenuity is clear. Nestle’s original deal for example, was for £400k but today they are utilising the platform across multiple products and markets with a £140m long-term contract in place. These are compelling numbers and given the lack of direct competitors we believe it’s likely that THG will be playing an important and lucrative role in facilitating a shift in how many consumer-focused companies engage and sell to their customers.

Risk warnings

The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets. If markets fall, gearing can magnify the negative impact on performance.

This does not constitute a recommendation to buy or sell a particular security.

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