Selling up or selling out?

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Modcloth

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ModCloth suffered a barrage of criticism when it was sold to Walmart

Does selling up mean selling out? Trendy independent firms can face a customer backlash when their founders sell to a big corporation. But many of these brands keep their cool and cachet – although it requires careful management.

When the Camden Town Brewery was bought in 2015 by Ab InBev, the world’s biggest beer firm, rival craft brewery BrewDog published a lengthy blog attacking the move.

It accused Camden and other small brewers of selling out to “mega corporations, the ones who destroyed… and commoditised beer”.

It also said it would stop selling Camden beer at its BrewDog pubs, because it didn’t want to put money in Ab InBev’s pockets.

But in April this year BrewDog raised a few eyebrows when it sold a minority stake to US private equity firm TSG Consumer Partners for £213m.

Does this mean BrewDog itself sold out? “First of all, no-one has taken over BrewDog, we’re still majority-owned by myself and Martin Dickie,” co-founder James Watt tells the BBC.

Consumer backlash

As part of the deal, TSG agreed “100%” to protect the firm’s independence and the way the beer is made, he says.

“This deal gives us the firepower to compete globally with the mega beer corporations and their faux ‘craft’ beers, whilst remaining fiercely independent.”

From craft beer firms to organic food businesses, ethical fashion labels to beauty brands, many small firms have sold up to bigger ones only to be accused of selling out.

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BrewDog

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BrewDog founders Martin Dickie and James Watt have promised never to sell up to a corporate brewer

But is such criticism fair, and why do small businesses sell up in the first place?

Mark Ritson, a professor of marketing at Melbourne Business School, says most consumers are “completely ignorant” about who owns their favourite brands. But in a small percentage of cases it can create bad publicity because the firms involved are “so contradictory”.

This happened when retailer Walmart acquired the trendy US online fashion firm ModCloth in March.

ModCloth, which sells vintage-style clothes for women, had built a loyal following of socially liberal customers who identified with its brand values.

But many of them thought Walmart was an unsuitable new owner, questioning its business practices with regards to workers’ rights.

Walmart tells the BBC it has invested billions of dollars in training and higher wages for its workers. And at the time of the deal, it stressed that ModCloth would continue to operate as a standalone business after the deal and get help to grow.

However, that didn’t stop customers complaining on a blog on the ModCloth website.

Comments such as “congratulations, you have lost my business forever” and “today marks the death of ModCloth” sum up the reaction.

Not so Innocent?

According to Prof Ritson, the negative response to such deals is often more about perception than reality.

He gives the example of Coca Cola, which in 2010 took a controlling stake in Innocent, the British smoothie-maker famed for its natural ingredients and quirky branding.

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Innocent

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Innocent claims its values have “absolutely not” changed after Coca Cola took over in 2010

Like ModCloth, Innocent’s founders stressed the firm would retain its values, in this case a commitment to natural, healthy food. But the deal had its critics.

“You had the contradiction of this mass, American, sugary brand with the British, healthy brand, and it did diminish the firm in the eyes of many of its loyal followers,” Mr Ritson says.

But seven years on, Innocent claims its values have “absolutely not” changed.

Innocent says it has increased sales across Europe by harnessing Coca Cola’s expertise and resources.

Turnover rose from £114m in 2009, when the US giant first took a minority stake, to £247m in 2015, Innocent’s most recent audited accounts.

“Coca Cola has remained hands-off and let us get on with running, growing and developing Innocent in an Innocent way,” says a spokesperson.

Phil Howard, an associate professor at the Department of Community Sustainability at Michigan State University, says it is understandable that small firms should want to be bought up “as the system favours bigger firms”.

Investors in small firms often want an early pay-back, while the costs of expanding a business can be heavy.

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Ben and Jerrys

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After buying Ben Jerry’s, Unilever set up an independent board to protect the ice cream firm’s core values

However, he says that while founders will see sales growth and “get a pay-off”, most are “deluded” if they think their values will be protected.

“If you talk to founders three or so years after the acquisition – you find most are disillusioned,” he says.

Buyer’s remorse

William Kendal, one a group of investors who took over Green Blacks in 1999 – and was also its chief executive – says he now regrets selling the ethical chocolate brand to Cadbury in 2005.

The entrepreneur tells the BBC the deal was driven by a desire to harness Cadbury’s reach – particularly in the US – but that the brand did not take off in America as planned.

He says the firm had regularly spoken out about political issues – such as whether the UK should adopt the euro and the limitations of the Fairtrade system – but Cadbury put a stop to that.

“We were a campaigning brand, and occasionally we put people’s noses out of joint, but that was part of the marketing.

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Sim Photography

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William Kendall says, with hindsight, he could have done more with Green Black’s

“But Cadbury were nervous about that and it watered down the personality of the brand.”

Mondelez, which now owns Green Black’s, says it is committed to the brand’s founding philosophy of delivering “great tasting, ethically-sourced chocolate” and has invested significantly in its growth.

Natalie Berg, an analyst at Planet Retail, says takeovers of craft brands can work, as long as the acquiring firm takes a hands-off approach.

She cites Ben and Jerry’s, the US ice cream firm bought by Anglo-Dutch consumer goods giant Unilever for $200m in 2000.


More stories from the BBC’s Business Brain series looking at quirky business topics from around the world:

‘I turned my dad’s erotic novel into a hit podcast’

Would you carry something abroad for a stranger?

Nine-month stretch: The rise of prenatal exercise classes

Can’t find the right handbag? Just design it yourself

Why you need to question your hippo boss


From its founding in 1978, the firm prided itself on its environmentalism, ethical ingredients and outspoken social advocacy – and since Unilever took over little has changed, say experts.

This is partly because from the outset, Unilever agreed to establish an “external board” charged with overseeing Ben Jerry’s culture and social mission.

“Some big firms have core competence for buying and maintaining small brands, and some don’t,” says Prof Ritson.

Nonetheless, Mr Kendall’s advice to small brands that are growing fast, but feeling the urge to sell, is to hold on.

“Cadbury didn’t do a bad job with Green Black’s, but in hindsight we could have done a great deal more with it,” he says.

“It’s a British disease – we validate success by the exit rather than achievement of the business.”


Follow Business Brain series editor Will Smale on Twitter @WillSmale1


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