Babyshop and the high cost of rapid growth

The once fast-growing and prized online retailer of clothes and accessories for babies and kids has been put into financial reconstruction in October of 2022. The reason for the reconstruction was stated to be ”geopolitical reasons.” Other reasons included the all-familiar inflation and the difficulty of raising capital.

Babyshop was founded in 2006 by Linn and Marcus Tagesson. Over the years, the company has grown rapidly and received multiple awards as one of the best e-commerce companies in the Nordics. That is probably why the news of the reconstruction was such a surprise.

The company's revenue growth (according to the financial statements found at allabolag.se) has been rapid between 2015 and 2019. In 2019 the company crossed the one billion SEK barrier (almost 100 M€). Since then, the company has not been able to grow notably.

At the same time, the losses have deepened significantly. During the growth of 2015-2019, Babyshop reported almost 400 million SEK of EBIT losses. That was accelerated in 2020 and onwards.

Between 2020 and 2022, Babyshop reported a total of 460 million SEK of losses in three years.

Despite the slowdown in growth and deepening losses, Babyshop had a 2 100 million SEK valuation in 2021. A year later, the company was in reconstruction.

Despite taking the valuation down to 195 million (from 2 100 MSEK), the company was not able to raise further capital. The need for further capital was for further 100-125 million SEK. Taking into account the big losses during the previous three years, it is questionable whether that would have made any difference. During the previous year (2021) the founders, Linn and Marcus Tagesson, decided to step down.

Babyshop is not the only casualty in the kids wear business in Sweden. Also Babyworld has been put into administration.

The times are very difficult for fast growth companies. Maybe they should take some pages out of the palybooks of the more conservative growth companies, such as Costco or IKEA. Little slower, but more profitable growth, is not necessaily a bad thing.

As Warren Buffett has emphasised multiple times, time is the most important growth leverage.