Bloomberg Línea — Brazilian online furniture and decoration sales platform MadeiraMadeira announced Monday that it is buying Casatema, a children’s furniture retailer.
This is the third purchase by the Softbank-backed marketplace, which last year acquired iTrack and this year bought IguanaFix in April.
According to CFO Carlos Eduardo Annibelli, MadeiraMadeira is looking to carry out mergers and acquisitions (M&As) with businesses that are complementary to the marketplace and that somehow increase the competitive advantage of the startup.
Talks with Casatema began last year, according to Annibelli. The company was already one of MadeiraMadeira’s largest sellers in the children’s and youth furniture category.
“MadeiraMadeira is a very relevant sales channel for them, it was natural this conversation would come about because we have had a commercial partnership for a long time, and it is a company that has values and pillars very similar to ours,” said Annibelli.
What did MadeiraMadeira see in Casatema?
Founded in 2011, Casatema develops its products with its own design. “It is a know-how that we do not have, we never focused on this category of children’s and young people’s furniture, and the idea is precisely to strengthen this pillar in a category where we are not positioned”, Annibelli said.
Casatema designs products in its technological center and makes production contracts with suppliers.
“One of the great validations of the quality of their products is that they have also started to export to the United States, a market that has a standard with several necessary certifications,” he added.
The company has had a small operation in the United States since 2019. According to Annibelli, there is potential for growth in the US market for both Casatema and MadeiraMadeira.
MadeiraMadeira did not disclose the value of the transaction, but says that the money for the acquisition comes from the company’s cash reserves.
In recent days, the Brazilian unicorn has cut 3% of its staff.
“Nobody is happy to make that kind of move, 3% is small in scale, but we know that for each of those people impacted it is very hard,” Annibelli said, explaining that the cuts were due to the difficult macroeconomic environment, which meant the company needed to focus on some projects to the detriment of others.
“With Casatema we started negotiating already a year ago, it is a very complementary business,” he said.
“We were serving adults but not the children of our clients. Now the idea is to be able to participate more and more in this journey of how the family sets up the house and the house changes as time goes by, children come along, and the cradle becomes a bed. There is a journey in the life of the client in which we want to be more present.”
Even with a macro scenario that Annibelli classified as “challenging, especially for retail”, the CFO says that the company is growing, and MadeiraMadeira has a more efficient business model than traditional retail because it does not carry stock, operating by drop shipping.
Although MadeiraMadeira has invested in brick-and-mortar shops, the showrooms have a smaller showcase and lower operating costs. “We have a physical structure with much lower fixed costs than other retailers,” he explained.
Asked about the slowdown in the growth of e-commerce in relation to what Brazil saw in the pandemic, he said that “obviously it is always easier when you have tailwinds”, but that Brazilian e-commerce “changed levels” after Covid-19.
“When we talk about furniture, we went from a pre-pandemic level of below 10% of online penetration and today we should be between 11 or 12%. So our strategy is to have physical shops, to accelerate customer conversion. Many of the customers that come to our shops already know MadeiraMadeira, but for some reason they were not yet comfortable making the purchase online. Physical shops are still 80% of furniture retail. Aligning that with our online growth is important for the company to continue to have a sustainable growth avenue.”
Sustainability is the word of the moment for investors and entrepreneurs at a time of rising interest rates, and Annibelli explains that Casatema already generates positive results. “Very well managed, with good margins, it that acquisition will add value and is not something that will consume much more cash,” he said.
While operationally Casatema is a profitable business, MadeiraMadeira still generates losses. “We are still in a moment of conquest, naturally we make more investments and this implies a result that is not yet positive,” Annibelli says.
Even so, MadeiraMadeira has already experienced four years of positive results between 2016 and 2020.
“We have been investing in technology, marketing, and logistics improvements. We have a negative result precisely because drop-shipping is a working capital model, the more I grow revenue, I can generate cash, even though we have a negative accounting result.”
According to the CFO, ordinary retailers carry stock for about a month, which, with interest rates on the rise, makes the cost of physical structure large.
“MadeiraMadeira is a company that has always been cautious, due to the history of its founders, who came from a very difficult experience with the collapse of their family business. We have always been very cautious with our cash flow. We make investments, but always seeking a great balance within the operation”.
One of the things that MadeiraMadeira has been investing in is the range of products, including construction materials such as flooring, cladding, doors, and windows, as well as the core business of furniture, decoration, beds, tables, and bathrooms.
“Our idea is to have a portfolio that covers the house as a whole so that we can have the customer stay with us more and more frequently. People don’t buy a sofa every year,” he explained.
According to Annibelli, the investment in selling building materials online makes sense because it is a sector that has a much smaller online penetration.
While the logistics for selling cement are much more complex - MadeiraMadeira does not yet sell that category - the delivery of a door or a window is not very different from that of a wardrobe, according to the CFO.