ITAD: Opportunities in a circular economy
We have recently worked with businesses embracing the circular economy in IT Asset Disposal (ITAD), telecoms hardware, and grocery. These sectors are new and exciting, but low on data and correspondingly difficult to get comfort on. In this article I look at ITAD, which continues to attract the attention of investors and shares many of the challenges facing businesses operating in the circular economy.
ITAD is a sector that meets ESG investment criteria, looks fast growing, and seems to be an accessible market for investors to go into. However, if you look a bit closer you quickly realise that it’s a far more mature and complex market than it first appears. On top of that, a significant challenge for investors is that reliable data on the sector is hard to come by – it’s particularly opaque because there are so many different business models.
What’s the attraction?
Refurbished electronic goods are attractive to consumers both for economic and environmental reasons, with the global market forecast to grow by 8.8% CAGR. A recent IDC report forecasts that the adjacent market for refurbished and used phone shipments will reach 351.6 million, globally, by 2024 – growing at an annual rate of 11.2% from 2019.
It’s also attracting significant investment, at the beginning of the year the French start up Back Market, a company that operates as a marketplace of refurbished electronic devices, announced a $510 million Series E round, which valued the company at $5.7 billion.
Another attraction is that ITAD businesses can expand into adjacent services, e.g. data storage, cloud services, as they try to provide a full service to their customers.
Collection through to resale
Any business which is maximising its potential in the ITAD sector must have a range of skills. IT assets need to be collected from customers, and once collected these assets need to be sorted, stored, and disposed of. Some assets can only be broken down for scrap, some can be recycled for parts, and the rest can be resold. Good quality kit can be resold either via wholesale or retail in the UK and abroad. Resale is a key revenue line, particularly as it’s often rebated to collection customers, so ITAD businesses must have strong online and physical sales channels.
Really successful businesses will be good at every stage of the process, which requires focus and strong leadership. They’ll also successfully navigate multi-faceted relationships with other market participants who may switch between supplier, customer and even competitor. This involves tracking which customers have which sort of kit, what their replacement cycle is, and where this kit could be re-sold to.
One challenge for all these companies is how to scale. Customers are sticky, supply can be lumpy, and resale relationships are transactional; people want to buy the right kit at the right price. They’ll need to be able to forecast how much they’ll get from disposal to meet future demand for their refurbished products and have a well thought through strategy for meeting any gaps. Customers will typically be more loyal but only as long as they can access the goods they require. A key question for any potential investor is, how well does the business plan respond to lumpiness in the market?
Buy and build in a fragmented market
There are many small providers of ITAD services in the market, so a buy and build approach is one way companies can acquire new sources of product and customers to help them scale.
Investors will need to be able to quantify the potential synergies / risks and be confident the company is able to support a buy and build strategy. You can find out how we help clients to successfully execute a buy-and-build, from origination of targets to research requirements and avoiding the potential pitfalls of these deals in our article for Real Deals magazine.
Common challenges, different solutions
We’ve worked on several businesses leveraging circular business models successfully, for example, Neighbourly which redistributes food. We’ve found they share common challenges, even though the solutions were very different. As a principled purchase, customers don’t tend to switch so it’s difficult to gain market share. Another is reliability of supply and how to scale up to satisfy the demands of a growing customer base in line with ESG credentials.
Please speak to myself, or a member of the team if you would like to hear more about the opportunities and considerations when investing in a circular economy.
Rupert Cookson, Senior ConsultantEmail Rupert