How TPG Growth Looks for ‘Passion’ in Retail

TPG has a long track record of investing in the retail sector, which is under pressure thanks to online shopping and a drop in foot traffic to physical stores. Sanjay Banker, who leads retail investing for TPG Growth, says he remains bullish for retailers that generate passion among their customers, and that offer unique experiences. 

Privcap: Since TPG has separate teams pursuing retail and consumer deals, respectively, how do you define “retail” versus “consumer?”

Sanjay Banker, TPG: Consumer tends to be packaged goods—health and beauty, food and beverage—whereas retail, broadly, is brick and mortar, restaurants, experiential concepts like fitness or entertainment that are location-based. The line between e-commerce and brick and mortar retail is blurring, in any event. Ten years from now we won’t be talking about a strict delineation between physical and online retail.

How does the TPG Growth retail team formulate its investment theses?

Banker: We have advisors and management teams that we speak with routinely. We stay abreast of trends that are gaining traction and concepts that are doing well. In the process of evaluating a particular target, we travel the country, go to stores, shopping centers, and along the way we see other concepts. The thing I love to do most is just traveling the country. We’re looking at a restaurant chain right now and my team and I have been to 15 out of 17 of their locations. And as we travel, we have a tick list where, for example, next time we’re in Dallas, we’ll visit a particular shopping center and these five concepts.

How do you come up with a plan of action for the companies that you invest in?

Banker: The first step is to take the time before you’ve inked a deal to learn the business, to do very thoughtful due diligence and, ultimately, to be able to be valuable to the management team. We want to really do our homework. We do extensive, proprietary primary research surveying thousands of consumers to get a deep sense of what customers think and how they’ll behave over time.

We don’t pretend to know more about a business than the management team. They’re the experts, we’re the students. Oftentimes there are things that come out of these efforts that are actually new insights. Sometimes we learn things that are different or challenge conventional wisdom, and that’s where we really become a valuable partner to the management team.

In the retail business, do there tend to be common barriers to growth that management teams face?

Banker: It really varies across types and life stages of a business. A lot of times businesses have grown incredibly well from being very small to hitting a level of success. They’ve had success in their home region or in their particular type of demographic. But oftentimes that next leap is hard because it might involve connecting with a different demographic or getting out of your home region. The proverbial example is something that works in New York and LA, but will it work in the next segment of the market?

Over 25 years, we’ve certainly seen every mistake get made, and we have the benefit of having learned a lot from those mistakes, and helping teams navigate through that next stage.

Last year TPG Growth bought Taco Bueno, a quick-service-plus restaurant chain. What did you like about the business and how did the deal come together?

Banker: We’ve been looking at regional concepts that can travel to a broader geography as well as regional concepts that may be under-appreciated. Taco Bueno falls into the latter camp. The core insight underpinning our investment in Taco Bueno that emerged from our extensive primary research was that the consumer base in their markets in Texas and Oklahoma said Bueno was hands-down their favorite on taste, on service, on value—which is not the same as price. Across the board, consumers in their markets have a passion for the brand.

We looked at how they’d been operated for multiple generations. If you’re from the North Texas-Oklahoma markets, this is the place you grew up going to and the place you have nostalgia for. Despite that, the brand had really been neglected until recently. And the brand had fallen behind in putting outposts in all those new suburbs.  We concluded there was long-term value by reinvesting in the brand.

TPG Growth recently announced an investment in Philz Coffee, a Bay Area favorite. What did you like about that business?

Banker: I could talk about Philz Coffee all day. I don’t know if you’ve had the chance to be in a Philz, but I’d say the consumer excitement and loyalty for Philz is almost unprecedented. People are waiting in long lines. When I was outside one of the stores I saw the founder of the business mobbed by customers wanting to take selfies and shake hands.

We put together a lot of data and research supporting this excitement. It’s not just special because it tastes better or that it’s somehow fancier coffee. They have a very authentic feel in each and every store. They hire and train baristas to be themselves and focus on consumer engagement. Every time you order Philz coffee, you’re asked to taste it and make sure it’s perfect and to your liking. That level of personalization is a big theme across a lot of our consumer businesses.

What are some other macro themes in the retail sector that you’re excited about?

Banker: We strenuously argue that it’s still in its early days, and that there is a long runway of continued growth in e-commerce. But ultimately, the winners, the exciting investments, will be ones that are doing a lot more than just commerce. They’re adding value through some form of curation for the customer, some form of community and content for the consumer.

On the physical retail side, we’ve been spending a lot of time on what we’d call experiential concepts. We’re firm believers that people still want places to go, and that shopping is a big element of what people do socially when they go out. We’re looking at concepts that make shopping or dining a form of entertainment or way to connect with others.