Unlocking business resilience through diversification

Recently, Superdry announced a massive restructuring project which will see the company implement a range of cost-cutting measures, including delisting from the London Stock Exchange.

The brand's former chairman has gone on record to attribute its decline to a failure to capture a newer market segment of younger shoppers – having experienced a peak in popularity amongst an older generation of customers in the early 2000’s.

There is logic in the position being put forward by Superdry’s former chair, in that, brands failing to keep up with trends and adapt to changing markets and consumer preference – by choosing instead to stick purely to their core business offering – fall to the wayside in terms of profitability.

Now, more than ever amidst the backdrop of high inflation and the ongoing cost of living crisis, companies should be seeking out opportunities to migrate from their core business model to seek out new ventures – capitalising on low acquisition costs and market realities to secure sustainable growth.

At Stryber, we recently issued our Diversification Dividend report, which analysed 738 listed companies across Europe to assess how total shareholder return developed over the turbulent COVID years and beyond. It showed that stocks from diversifying companies delivered 53% higher annualised shareholder returns in that time. However, a staggering 60% of companies fail at doing so, which means Superdry is in good company, unfortunately.

The pandemic itself accelerated significant change in how businesses operate – whether using emerging technologies or adopting new hybrid and remote working practices. Looking at the total shareholder revenue of businesses during this time, there is a clear outcome separating the ‘winners’ from the ‘losers’.

There is a well-established theory from the world of finance, which has been empirically proven many times over, called Modern Portfolio Theory. It formalises the concept of ‘don’t put all your eggs in one basket’, which translates to: ‘when we are looking to invest money, we shouldn’t plunge all our wealth and life savings into one stock or share.’

We can apply the same hypothesis here for businesses – ensuring you hold different businesses with various sources of value and income streams, will drive success in multiple market environments. While your primary revenue driver can be a strong platform to build from and provide funds to create new revenue streams, it usually will not sustain itself indefinitely.

Top performing companies are those seeking opportunities and securing new revenue streams through Mergers & Acquisitions or building new business models, which reward them with a higher total shareholder return. It clearly shows that diversification is not only a strategy for growth but also a hedge against market volatility. Those businesses are better positioned to weather economic uncertainty and deliver long-term success.

For example, Drax Group, a UK-based renewable energy company, had successfully diversified its core business to move away from fossil fuels towards zero-carbon fuels. It has invested heavily in pellet plants and biomass sales, further acquiring Pinnacle Renewable Energy and reinforcing its position as a pioneer in sustainable biomass energy. This resulted in a significant growth of its total shareholder return – increasing from 1% between 2010 - 2019, to 21% in 2020–2023.

Another example of diversification in the UK, is ANTOFAGASTA PLC, a copper mining company. When the business had committed to – and started to implement – a strategy towards ‘mining for a better future’ through sustainable and efficient practices, it was able to position itself as a preferred partner in the global mining industry and attract new business. Through successfully diversifying away from copper mining, adding sustainability to its core business model, the business shifted operations towards renewable energy and exploring green hydrogen initiatives. These changes over time brought a total shareholder return increase from 4% between 2010–2019, to 25% in 2020–2023.

But, where there are examples of success, there are also examples of failure. Sometimes, ill-advised diversification efforts could lead to growth stagnation and significant total shareholder return underperformance, which highlights the need for strategic experience, the right governance, and skilled planning in driving revenue diversification.

A lack of diversification can be disastrous for shareholder value. It is essential for ensuring long-term business success, especially during uncertain times. While some newer companies may have struggled due to their age, the main issue lies with established firms facing a different challenge – a lack of organisational ability to execute diversification strategies effectively. Looking back at Superdry’s struggles with capturing younger audiences, it’s clear that businesses must overcome this limitation, as it prevents their ability to reap the benefits diversification can provide.