L Catterton: Finding Value in a Tough Market

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How consumers spend their money is a topic Nikhil Thukral and L Catterton watch closely.

The large, consumer-focused private equity fund, which has close ties to LVMH and where Thukral serves as managing partner, regularly tracks nearly 100,000 shoppers online as well as data such as brand awareness and loyalty metrics to determine how well its portfolio companies and their competitors are resonating with shoppers. The information helps L Catterton understand whether customers will keep returning to a brand, despite any economic ups and downs and swings in the market.

What the firm is looking for is long-term value. Among the fashion names in L Catterton’s expansive stable, which ranges from hospitality to consumer-packaged goods, are Birkenstock, which went public in 2023, and fast-growing labels such as Ganni. To Thukral, value doesn’t just mean brands with top-line growth but also a clear identity and pricing power that can drive margins and profitability.

These qualities are set to play a major role in separating leading companies from laggards in 2025, perhaps especially in luxury, where a slowdown is weighing on the sector. At the same time, competition outside of luxury is only growing fiercer as categories such as sportswear see a rise in challenger brands putting pressure on incumbents. With central banks once again cutting interest rates, investors will have opportunities — if they know where to look.

BoF: Over the past few years, we’ve seen changes in what investors prioritise in companies. Profitability has become more important, for example. What will brands need to prove to investors in 2025 to win their backing?

Nikhil Thukral: I will tell you our perspective: First and foremost, it’s not that you need to be profitable, it’s that you need to have a very strong profit formula in the business. We look at that in terms of gross margin. You need to be able to understand ‘why does the business command that gross margin and can it continue to do that?’ In other words, does the brand have pricing power, and if so, why and how.

The opposite is the watchout. How much of the brand proposition is sold on discount? Through what outlets are you selling it? As an investor, it’s not just looking at profitability and EBITDA. It’s looking at the resonance of this brand.

BoF: What characterises winning fashion companies?

NT: ‘Fashion’ is a loaded term, because it can imply a degree of following trends, and trends can be very difficult to call. What wins in fashion in particular is a clear understanding of your consumer, who you’re targeting and why you’re targeting them, where you fit into their world and what [you are] offering them.

Second, the ability to be able to define and be true to your DNA. There are great brands in fashion who are building a beautiful product, but that product isn’t necessarily tied into the DNA of the brand, so consumers have a difficult time identifying how this fits in with what you are about.

BoF: Luxury had been fashion’s big value creator, but it slipped this year. Do you believe that’s purely due to macroeconomic factors, or is the consumer’s view of luxury changing?

NT: Depending on which cohort, there may be an indexing of spend that goes more towards experiences rather than product. In other cases, the dynamic is different. China is going through its first period of [its growth rate] and demand decreasing. As that’s happening, the Chinese consumer is doing exactly what every other consumer does — they think about their balance sheet, and they are deferring whatever they can.

At the end of the day, luxury has a fundamental place in existence. For millennia, people have thought about their place in society based on what high-badge products do in terms of conferring that. The basic need we don’t think goes away.

BoF: In sportswear we’ve seen the rise of challenger brands successfully chipping away at the dominance of incumbents. Is that unique to sportswear, or is that something you see happening in other categories?

NT: You see it happening in other categories as well. In my opinion, it’s lent itself well to sportswear because there’s so much usage and the category was rising, so it’s not atypical that, when you have that happen and you’ve got a few concentrated players, you’ll have new propositions arise, because the juice is worth the squeeze. There’s a market opportunity. In other categories where you haven’t seen that happen, it’s more because, rightly, people are asking, ‘Is the effort worth it? Is there enough tailwind in those subcategories?’ If we were to look across other spaces, luxury and non-luxury, certainly at beauty and personal care, you’ll see similar trends.

For millennia, people have thought about their place in society based on what high-badge products do in terms of conferring that. The basic need we don’t think goes away.

BoF: Do you have a sense of what’s allowing challenger brands to compete against the incumbents?

NT: Today, cohorts of consumers are consuming media from such fractionalised sources that you’ve got these tribes that emerge, and we live in a world where technology has enabled brands to find and activate these tribes in a cost-efficient fashion, in digital in particular. So you can build a brand cost-effectively, there’s a virality to the brand because you’ve got endorsements from existing customers and you can expand the brand to a level amongst these tribes in ways you couldn’t before. What On has done against Nike in that space is a good example. It still has relatively low awareness but very strong traction amongst a particular consumer [demographic].

BoF: With banks now cutting interest rates, how do you expect that will change investor strategies?

NT: Any time there are rate movements, it has the propensity to create a mispricing of risk. Sometimes a rise in rates can create opportunity, because businesses that otherwise are sound businesses end up becoming under-priced relative to their long-term potential. The converse is also true. As rates come down, the biggest risk we see is a tendency to paint everything with the same brush. Separating what’s truly unique and differentiated from what is otherwise a rising tide and category, that’s where the science comes in. We would look at this rate environment and say, generally, that’s going to be good for investment. The watchout is you’ve got to be able to separate the wheat from the chaff.

BoF: Do you think we’ll ever go back to the days of valuations like we saw with, say, Allbirds again, or are those days over?

NT: I think the nature of what drove valuations is different. You were talking about a cohort, many of them going public with growth but not a business model or inherent profit formula that was enduring. Those days are gone. I think what it’s going to turn to is, ‘Okay, what’s the nature of the business? What kind of profitability do you have? And can we believe that profitability is going to be sustainable?’ That’s, I think, where we see value move towards.

BoF: Given the current market environment and the backlog of overdue exits, how do you see exit strategies playing out in the year ahead?

NT: It’s dynamic. On the positive side, there is a much more rational set of expectations between buyers and sellers now than three, four years ago. If you’re a seller, you’ve been through some existential risk, including the pandemic, and maybe the world that you had and the valuations you had will never come back. You’re more inclined to say, ‘We should de-risk, when we can, at something reasonable.’ That allows you to be able to transact between buyer and seller.

We also see more strategic activity. For the right brands, there will always be interest. In time, you will see financial sponsors come back into this category as well. There needs to be more category health, more predictable demand and you need to have more market participants here. But it will come back.

All cohorts of consumers, both older and younger, are increasingly valuing experiences over traditional asset accumulation.

BoF: When you look to 2025, what are the big themes in consumer behaviour shaping the firm’s investment strategy?

NT: You have to know which segment, which price band, are you talking about, because they behave quite differently. We tend to focus on the top 30 to 40 percent of US households. That’s where the disposable income is created. You contrast that with Asia, where you’ve got a rising middle class powering the consumer economy.

We will also continue to think very carefully around ‘who is the consumer, where does this brand fit in, what’s the emotional connection the brand has?’ We’re looking for things that are more than just functional in terms of why consumers buy. Everything has got to be supported by some sort of secular growth driver. We’re not trying to time the economic cycle.

BoF: Are there any trends or shifts you think are under-appreciated by the market?

NT: All cohorts of consumers, both older and younger, are increasingly valuing experiences over traditional asset accumulation. This is particularly true for the luxury consumer. We think about luxury travel, we’ve seen a lot of secular growth in those categories.

Two, I think as you’re building brands today, the days of business models that were monolithic around trying to scale in digital and single-channel, increasingly we’re seeing the need for distribution, omnichannel growth and development. Wholesalers are great partners and distributors. They help build awareness. They valorise your brand for you. We’re coming back again to that world. There are parts of luxury that haven’t needed to do that, because they already control the distribution. But we think for younger brands, as they grow and scale, particularly in luxury, you’re going to need to get comfortable having a broader channel strategy.

This interview has been edited and condensed.

This article first appeared in The State of Fashion 2025, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company.