SHAKEN CONFIDENCE

Can Death & Co. Sustain Its Ambitious Growth Amid Financial Hurdles?

The Punch Drink article published in May on Death & Co.’s expansion offers an enthusiastic portrayal of the bar’s evolution from a celebrated New York institution to a national chain. However, from an investor’s perspective, the article overlooks fundamental concerns about the sustainability of this growth strategy, particularly regarding its finances, macroeconomic factors, and underperforming revenue streams. The romanticized depiction of Death & Co.’s expansion sidesteps critical financial realities that could jeopardize the business in the near to medium term.

Financial Strain: Growing Deficits, Slower Revenue

A key issue the article fails to address is the financial strain that Gin & Luck — the parent company of Death & Co. currently faces. According to the latest SEC filing, the company posted a net loss of $3.5 million for the fiscal year ending December 2023, with a cumulative deficit exceeding $7 million. Despite the upbeat narrative surrounding its expansion into cities like Denver, Los Angeles, Savannah, and Washington D.C., these figures reveal that the company’s expenditures are far outpacing its revenue growth. The underlying financial health of the company, as reflected in its mounting deficits, poses significant risks to the long-term viability of the expansion of Death & Co..

Crowdfunding, while offering a quick injection of capital, does not mitigate their fundamental problem – burning through cash at a faster rate than it is generating it. The company’s reliance on this type of financing[i], could be signaling an inability to secure more traditional institutional capital, a warning sign for potential investors. Typically, institutional investors would avoid companies with such a trajectory unless a radical restructuring plan was in place to control the cash expenditure.

Additionally, the underperformance of Gin & Luck’s secondary revenue streams is significant. The merchandise and consulting services posted profits in 2022, but have become unprofitable in 2023 and posting a combined loss of over $250,000. Despite efforts to diversify income through these ventures, neither has effectively offset the mounting deficits. The continued reliance on bar operations as the primary revenue driver also raises serious doubts about the company’s ability to scale profitably, particularly given the current economic climate.

Discretionary Spending Pressures

The broader economy environment also presents further challenges for Gin and Luck and its subsidiaries. According to Deloitte’s Consumer Pulse report, despite the inflation rate has dropped, 53% of consumers still citing inflation as a top concern, significantly impacting disposable income and discretionary spending.[ii] McKinsey’s latest research on consumer sentiment also suggests that 76% of consumers, especially younger demographics like Gen Z, are “trading down”, looking for better value.[iii] This suggests Gin & Luck may need to pivot, better defining its target audience to maintain profitability outside key markets like New York, LA, and DC.

McKinsey has identified that high-income, experience-driven consumers remain willing to splurge on dining. However, catering to this demographic will require significant investment in infrastructure to align the venues with their expectations and preferences, potentially increasing operational costs.

Will Death & Co. Become a Destination Location?

One of the key questions investors should consider is whether Death & Co. and its sister venues can evolve into true destination locations for both locals and tourists in new markets. Competing in cities like Denver, Los Angeles, and Washington D.C., where established cocktail bars already enjoy loyal followings, Gin & Luck must deliver a compelling offering that draws both locals and visitors.

The challenge lies in maintaining the brand’s exclusivity and signature experience while appealing to a wide enough audience to sustain operations. In these markets, simply being a well-known New York brand will not suffice. The company must prove that its locations can consistently attract locals seeking a go-to spot and tourists craving a unique experience. Investors should assess whether Gin & Luck can repeat the same kind of successes through strategic location selection and diversified revenue models.

Growth by Debt or Demand?

The most significant concerns for Gin & Luck lie in its financial structure and approach to capital raising. The company has turned to crowdfunding as a key means of raising capital. While this may appeal to their loyal consumer base, it signals potential difficulty in securing stable, traditional financing, such as private equity or debt. In contrast to more mature, financially disciplined brands in the food and beverage industry, Gin & Luck appears dependent on non-traditional funding to fuel its growth—a strategy that may not be sustainable in the long term.

Institutional investors, accustomed to thorough due diligence and disciplined financial management, typically seek companies with a clear path to profitability. However, Gin & Luck’s current trajectory suggests that, without a substantial increase in revenue or major cost restructuring, the company is likely to continue operating at a loss. Unlike institutional investors, crowdfunding investors may lack the experience or patience to endure extended periods of unprofitability, which could lead to friction and unrealistic expectations regarding returns.

Furthermore, the company’s deficits are growing at a faster rate than both revenue and equity, placing significant strain on its balance sheet. This raises concerns about how long Gin & Luck can continue expanding without addressing its fundamental liquidity issues. Relying on an ever-increasing number of venues to eventually drive profitability is a risky strategy, particularly in an industry already grappling with rising costs and weakening consumer demand. In this environment, the company’s ability to manage these pressures while achieving sustainable growth is uncertain.

The Path Forward

Gin & Luck must fundamentally reassess its growth strategy to avoid becoming a cautionary tale of overexpansion. The company’s financials indicate that, without a substantial cash infusion, the current model is unsustainable. The deficits continue to outpace revenue growth and the reliance on crowdfunding since 2018, is not a long-term solution. To restore investor confidence, Gin & Luck needs a significant capital injection—either from private equity or strategic investors—along with a clear plan for cost control and more focused expansion aligned with market demand.

References:

[i] Gin & Luck Inc. Form C filing

[ii] State of the US Consumer: August 2024

[iii] An update on US consumer sentiment: Consumer optimism rebounds – but for how long?