The retail software market is not a single field in which large scale, generic products thrive. It’s a series of niches; some larger than others, in which sector specialists with deep domain knowledge and long term customer relationships prosper. Universe Group, which reported last week, is one of these. Shareholders will be hoping it can translate strategic intent into profit although the share price itself seems a little stuck.
Universe has pretty much cornered the market for independent petrol retail, boasting Valero, MFG and MRH among its customers, amounting to over 1200 sites. Under the HTEC brand, Universe provides a full turnkey solution of POS, payments and loyalty software, hardware and support. Excluding acquisitions (of which more below) revenues grew 16% to £16m in 2014. It has invested in updating its software and, most importantly its payment service, to the latest standards including P2PE.
Deep domain knowledge makes Universe hard for any competitor to displace. In part, this is about long-term client relationships which which were highlighted by its rather unexpected win for the technology platform underpinning Morrison’s Match & More loyalty scheme.
Beyond customer intimacy, Universe also has all the necessary integrations into petrol forecourt software and fuel card schemes, many of which are awkward to replicate. It’s not that new entrants couldn’t make the necessary investments, it’s more that the business case looks rather speculative when you’re considering moving into a relatively small market characterised by dominant and entrenched suppliers. In addition to Universe, there’s Torex Micros Oracle to bargain with.
Universe’s management recognise the limited growth potential in petrol and have been bulking up with acquisitions in convenience and CTN’s. The first was Indigo Retail in 2013. This business supplied point of sale and loyalty software to convenience stores and generated sales of £2.1m sales with £0.43m EBITDA. The purchase price in a cash/shares/performance deal was worth about 1 x sales.
It’s hard to make any money in IT services these days but the capability is essential for traditional software vendors to win and keep customers. Universe next bought 40-strong Retail Service Team (£3m turnover, no profits) for just £150K. Management says that this acquisition improved group margins so evidently some significant synergies have been made since the transaction.
Then last week Universe acquired Spedinorcon, another specialist retail software business that services 1500 CTN’s. Spedi’s financials are not disclosed but couldn’t have been too healthy either. The purchase price was just £30K up front plus performance related fees expected between £150K and £250K. Spedi’s special assets are software that mangages newspaper distribution (not very exciting in 2015) and integrations to the order management systems of about a dozen leading wholesalers.
Wholesaler integrations can be tough for competitors to copy too but the CTN market hasn’t had much technology innovation for years and is likely to be relatively open to the new wave of cloud based products (Vend, Revel etc) coming on to the market. Universe is in a good position to win but will need to increase Spedi’s R&D spend to ensure its products are up to date. This screenshot from the Spedi website shows the scale of the challenge.