Investors have poured almost $1bn this year into companies that are buying up successful brands on Amazon to try to build digital consumer goods conglomerates akin to Unilever or Procter & Gamble.
Independent merchants on Amazon’s vast marketplace will make more than $200bn of sales this year, analysts predict, and tens of thousands of them have revenues of more than $1m a year, according to industry experts.
That has created an opportunity to roll up dozens of the emerging winners and scale up their businesses. “Amazon is the new mall,” said Frederic Court, tech investor at Felix Capital. “It’s just gigantic.”
Just as 20 years ago, big corporations started to consolidate local independent gyms, dry cleaners and coffee shops into chains and franchises, “we think that same phenomenon will take place in the digital world”, said Billy Libby, whose New York-based investment firm Upper90 offers debt-financing to such start-ups. “I don’t think people realise how big this will be.”
The roll-ups benefit from more financial muscle, better marketing, and greater bargaining power with factories and potentially even with Amazon.
Several of them were founded by veterans from the wave of “direct to consumer” start-ups such as Warby Parker, Casper and Dollar Shave Club that were the darlings of investors over the past decade, but which have mostly failed to build enduring businesses.
Instead of trying to build new consumer-goods brands from scratch, the new ventures each plan to buy up dozens of small merchants that have already proven successful on Amazon. Their targets could be selling anything from dog leashes to dietary supplements.
During 2020, seven start-ups in the US and Europe raised a combined $950m to buy sellers trading on Amazon marketplace. Most of them — including Berlin-based SellerX and Razor, London-based Heroes and San Francisco-based Heyday — did not even exist at the start of the year.
All hope to emulate the model of two-year-old Thrasio, which itself took on $360m in new financing this year, and Anker, the Chinese electronics accessory maker and “Amazon native” brand that listed in Shenzhen in August at an $8bn valuation.
“We want to be something like the digital Procter & Gamble,” said Malte Horeyseck, co-founder of SellerX, which raised $118m in November from investors including Cherry Ventures, Felix Capital and TriplePoint Capital. “This is a huge market with more than 2m sellers, it’s very fragmented and there is a lot of opportunity for synergies.”
The merchants they target are all part of the “Fulfilment by Amazon” (FBA) programme, who pay to store their stock in Amazon’s warehouses, sell through its main website and app, then have the item delivered (for free, to Prime customers) by Amazon.
“It’s an incredible infrastructure that Amazon has built,” said Riccardo Bruni, co-founder of Heroes, “and Amazon keeps investing billions of dollars to make sure it remains the most sophisticated infrastructure in the world.”
Amazon’s Marketplace is more than 20 years old, yet it took the pandemic’s ecommerce boom for most investors to see its potential as a platform for building large-scale companies.
Shrestha Chowdhury, co-founder of Razor, which has raised €25m in debt and equity, calls her company a “pandemic baby”.
She and her four co-founders, who have backgrounds at German ecommerce group Rocket Internet and consultancy McKinsey, were inspired to start the company in August by the sudden shift in consumer behaviour to ordering online, as well as seeing the success of Thrasio in the US.
Ms Chowdhury said that Razor was using its own algorithm to sift through sellers and product reviews to find the most promising merchants, before automatically approaching them over email.
“We have technified the M&A process,” Ms Chowdhury said, adding that Razor planned to acquire 60 merchants over the next 12 months. “We do due diligence on thousands of sellers every month.”
But finding the durable businesses in the Amazon haystack is far from straightforward. Some merchants have only informal contracts with suppliers, doing deals over WhatsApp and TransferWise with Indian and Chinese factories they will never visit. Others use fake reviews to inflate their ratings. Some have been even been accused of bribing Amazon workers or running counterfeit schemes.
Set against these pitfalls is the need to move quickly, especially as capital floods into the FBA roll-up business model. Thrasio has already bought more than 100 companies. By the end of the year, Heroes will have acquired six brands, including in baby, garden and fitness products, each with annual revenues ranging between £1m to 10m. Razor targets companies with €1m to €5m in revenues and has bought 10 sellers since August.
“The barrier to entry is low so you need to get to scale,” said Mr Libby at Upper90. His company offers founders debt — unusual in early-stage tech — because he says the sellers that the start-ups acquire are usually profitable and make a quick return. “The real challenge is [raising] enough capital to buy a large enough number of them to apply these efficiencies,” he said.
Integrating the acquired businesses will be another challenge. Amazon does not make it easy to transfer a merchant’s assets or online brand, sometimes requiring them to ship all their inventory out of its warehouses and then reinstate it as a new entity.
Thrasio now has a 500-step integration process, said Gabriel Ginorio, one of its earliest employees, developed through “a lot of trial and error”.
“We did it when ecommerce was not as booming [as in 2020] so we had a little more flexibility in testing things out,” he said, while admitting: “We are growing a lot faster than we can consolidate.”
One reason institutional investors did not see potential in Amazon’s Marketplace before 2020 is the so-called “platform risk”.
Disgruntled sellers have accused Amazon of ripping off their ideas for its own “Amazon Basics” and other in-house brands, though the retailer denies such behaviour.
The European Commission in November accused Amazon of distorting competition by gathering data from third-party vendors to advantage its own retail operation and launch its own competing brands.
Others complain that frequent changes to its product search rankings and its coveted “Amazon’s Choice” labelling, new rules or sudden account suspensions make it difficult to build a stable business. “Amazon changes its [search] algorithms so much faster than Google does,” said Mr Ginorio.
On the plus side, these entrepreneurs say, the market is still growing incredibly fast.
Amazon’s own revenues from providing services to third-party sellers increased by more than 50 per cent in the second and third quarters of 2020, suggesting a similar growth rate for the vendors themselves.
The Seattle-based company has said that small and medium-sized sellers make up about 60 per cent of its physical product sales, while its own private-label items, such as Amazon Basics, are only 1 per cent.
That gives these companies comfort that Amazon will remain more of an enabler than a competitor. “Not every Amazon Basics brands is going to win,” said Ms Chowdhury.
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