Private equity firm Next Capital wanted to tap demand for advisory services arising from e-commerce-driven supply chain transformation. Within weeks of the investment, COVID-19 upped the ante.
COVID-19 triggered a supply shock as China, a key cog in many industrial value chains, shuttered factories to contain the pandemic, and then a demand shock as global economic activity cratered. Companies liquidated inventory only to find themselves short when demand rebounded. Costs soared as retailers and wholesalers rushed to restock. By mid-2021, container rates were up fivefold.
“They just started over-ordering on everything, inventory was all over the place,” said Travis Erridge, CEO of TMX Transform, a provider of integrated supply chain, property, and project management advisory services that has expanded from Australia into Asia and from there to Europe and North America.
“Since then, we’ve had a secondary major change to the market – demand drop, discretionary spend drop, inflation, and a cost-of-living crisis. Most retailers are now carrying way too much stock and storing it. They are effectively holding capital on balance sheet and not getting sales growth.”
Next Capital acquired a majority stake in TMX in January 2020. Its ownership has coincided with a 340% growth in revenue and a 400% growth in headcount as more multinationals have sought TMX’s counsel on how to build stronger supply chains. It’s not just that COVID-19 exposed vulnerabilities in existing systems; issues such as China-US tensions are forcing them to contemplate a redrawing of those systems.
Since the onset of the pandemic, annual surveys by McKinsey & Company have tracked how supply chain professionals are addressing disruptions. In 2020, nearly all respondents were looking to boost supply chain resilience through dual sourcing of raw materials, increasing inventory, near-shoring supplier bases, and regionalising supply chains. Most expected to develop in-house digital supply chain talent.
By 2023, a majority had realised those resilience objectives, but there was greater divergence in thinking as to the long-term value of inventory buffers. And while investment in technology had enabled two-thirds of respondents to achieve supply chain visibility, only about half had good data and fewer than 40% were running scenario planning. Over 70% admitted to weaknesses in planning and governance.
“A lot of plans that were going to take years to deliver have to be delivered more quickly, especially on the supply chain diversification side,” added John White, a founding partner at Next. “We needed to be very focused on where our markets were and who our clients could be. The ones with a sense of urgency – multinationals that operate across different jurisdictions – have probably been easiest to deal with.”
Trend spotting
COVID-19, which escalated into a global pandemic within weeks of Next completing its investment, gave the business additional impetus, but the rallying point for the two teams as they got to know each other was an earlier supply chain transformation: the rise of e-commerce and the notion that fulfilment must run to the consumer rather than to the store.
Erridge describes the evolution in terms of pallets. Previously, pallets comprising identical versions of a single line item were shipped to a distribution centre where the contents would be repacked into mixed pallets of items of different design and colour based on demand at the store level. E-commerce turns that on its head because single items must be shipped to multiple individual addresses.
The network that does this is completely different. In 2018-2019, a client might have been doing 5% of sales online. During the pandemic, it went to 20%-30%, and now it has levelled off at 15%-20%. Most supply chains built in the five years before that were outdated in terms of fulfilment,
Even without the pandemic, you were looking at 5-10 years of the fastest moving supply chain changes because Amazon, Alibaba, and JD.com are revolutionising the way that customers think about product.
TMX initiated discussions with potential investors in 2019 on the advice of a business advisor who was hired to establish how an already fast-growing operation could scale. There was interest from strategic buyers but Erridge and his co-founder, Milan Andjelkovic, preferred a partnership with private equity. However, relatively few firms were a good fit.
About 50% of the ones we spoke to didn’t care to understand the business or missed the fact that supply chain was becoming a significant driver in retail and didn’t appreciate how supply chains influence customer experience and price.
“John got it straight away. He understood the business drivers and he saw on a human level what we were trying to do, not just numbers on a board.”
Next’s familiarity with the concept largely came through real estate exposure in other deals, according to White. These were primarily investments in operators rather than asset owners, but they offered insights into supply chain needs, consumption habits, and Australia ’s changing urban footprint. After further due diligence on TMX – then known as TM Insight – Next was convinced it was onto something special.
"I hate the word unique. I'm always tempted to throw out investment papers that say, 'unique business model' because few of the models we back are truly unique," said John White.
But the more we looked at TMX, the more we saw a kind of end-to-end consulting that’s very different to what people were doing in the Australasian context.
Next acquired a majority stake at an enterprise valuation of around AUD 50m (USD 32.6m), committing capital from its fourth fund, which closed on AUD 275m in 2019. The private equity firm applied its typical people-process-systems formula to TM Insight based on an internal diagnostic to locate gaps in the organisational structure and discussions with management as to how these could be filled.
The underwriting case was further strengthened by a recognition the company could expand internationally. Next has overseen Asia rollouts by numerous Australia and New Zealand-based businesses. TM Insight was aware of the opportunity as well, but it had struggled with execution.
Growing pains
The company owes its origins to Goodman Group, a leading developer of industrial property, conducting a wide-ranging purge of its Australian portfolio to ease its debt burden amid the global financial crisis. Erridge and Andjelkovic were among the casualties. They turned to consulting work, soon finding that enough ex-clients needed supply chain assistance to justify turning their expertise into a business.
“The GFC [global financial crisis] was like a big fire that goes through and burns everything out, and then the green saplings grow back. It forced us to start our own business because capital constraints meant there was no other developer to work for,” Erridge said.
They identified a gap in the market for an advisory offering positioned further up the value chain than CBRE, JLL, and Savills. Clients had internal property management divisions, but they tended to be focused on retail rather than industrial. The increasing complexity of supply chains, with the rise of e-commerce and automation, exacerbated this deficiency.
From 2014, TM Insight was peppered with questions about the sizing and siting of facilities – from capacity needs in end-markets like Australia and New Zealand to whether product should be shipped directly to those markets from southern China and Bangladesh or consolidated in Singapore. The company’s services naturally expanded from property management into supply chain solutions.
Traditional property consultancies arrived with acquisition bids, which led to what Erridge described as “the boldest move we ever made.” Rather than sell to one of these behemoths, TM Insight would take the fight to them by launching a real estate transaction business and creating an end-to-end solution from sourcing through execution of distribution networks for retailers and wholesalers.
Growth was rapid, so the company decided to repeat the trick in Asia. It picked up a contract for a multi-level warehouse in Singapore for Schneider Electric but failed to get traction. TM Insight thought its business model was the problem; it turned out to be the project’s on-the-ground leadership.
“In Asia, each country is its own market – trying to run a fly-in-fly-out model isn’t possible,” said Erridge. “It had resulted in a lack of oversight and governance, and our failure to grow the business over a 12-month period. We had to invest ahead of the curve, ahead of the revenue, by moving key people from Australia to Asia and building local teams around our capabilities. And we needed capital to do that.”
Aiming higher
Next presented a proposal to make that expansion happen. As part of market mapping efforts, it had identified XAct Solutions, an older Australia-based supply chain consulting firm with a more established Asian footprint. The two businesses were nearly the same size, largely complementary, and they could be combined – at an additional cost of AUD 12m to IM Insight’s shareholders.
“We found out about the XAct guys because they had done some work for private equity firms in Australia. It was the middle of COVID – the worst time ever to conduct due diligence – but the business case was so compelling, we were keen to accelerate the roll-up opportunity,” said White. “We landed the merger less than six months after the original investment.”
As a result of the merger and some organic growth, headcount went from 50 to 250, spread across 15 offices on four continents. There are 360 projects currently underway for 152 clients. Erridge credits Next for enabling investment in business intelligence tools that have enhanced decision making and in technology that has upgraded the company’s service offering in areas like data and analytics.
The client base has evolved as well. TMX built a blue-chip Australian customer base anchored by the likes of Wesfarmers, owner of K-Mart, Bunnings, and Coles. In the past six years, multinationals have become more prevalent, often through referrals. Through Coles it got Marks & Spencer, facilitating UK expansion; a relationship with Swire, Coca-Cola’s Hong Kong-based bottling partner, took the company into the US.
Key themes include diversification and digitalisation. On the former, which primarily involves broadening supply chains to ease reliance on China, TMX hasn’t seen as much movement as expected. Erridge puts it down to the complexity of transplanting a huge manufacturing and skilled labour capability to other geographies, especially locations in Asia that are lacking in terms of governance or infrastructure.
The challenge of digitalisation is applying it across different networks. For example, when TMX first worked with Coles, there was a single-store fulfilment network. This remains but it now comprises multiple sub-networks with replenishment happening on a push basis (based on sales projections at the store level) and a pull basis (the store requests immediate shipment of certain line items).
There are also two additional networks: one for same-day or next-day delivery, which is fed by the e-commerce channel; and another for micro-fulfilment, or fast B2C, a China-pioneered model that leverages dark stores and hyperlocal delivery to complete fulfilment within a few hours.
We use AI and predictive analytics to generate demand and work out what we produce, when we produce it, and in which stores we sell it. Traditionally, that was business strategy. Now, you have business strategy, channel strategy, and customer profiling.
Prime position
Three years on from the depths of the pandemic and with supply chain firmly entrenched as a priority for multinationals, the competitive landscape remains fragmented. Other supply chain consultancies have emerged, some with private equity support, but TMX was the first to combine supply chain, property, and project management advisory, and Erridge still sees this as a distinct characteristic.
Each business unit has competitors, but in terms of an end-to-end offering at scale – 50% of our business is supply chain and 50% is construction and project management – no one else is anywhere near that.
“The core business of the major real estate companies is still selling and leasing property. While some have joint ventures with supply chain consultancies, it’s a disconnected approach.”
The major real estate companies are expected to become keen acquirers once again when Next decides to exit. Equally, TMX might appeal to all manner of strategic investors with an interest in supply chain and logistics, as well as larger private equity firms.
While the private equity firm is nearing the end of its typical holding period, White refused to be drawn on the prospect of an auction in the next 18 months. TMX doesn’t necessarily need to add new geographies or clients, he observed, but there is still work to be done in terms of ensuring systems and processes are entrenched throughout the entire organisation.
“We’ve only been in the US for six months. You don’t snap your fingers and count to five. We must ensure the disciplines and the efficiency of business offering in Australia is replicated internationally so we can deliver the same customer experience no matter where we are,” White said. “But I agree that this will be a broadly attractive business.”
This article was written by Tim Burroughs and originally published by ION Analytics on March 6, 2024.