2021 may have been a breakthrough year for eCommerce. But nowhere else was that breakthrough more apparent than in the marketplace success of industries enabled by the digital commerce boom.
Cryptocurrency may have captured more media coverage than ever before in 2021, there was one market many outlets ignored, much less predicted would command such unprecedented attention: Amazon aggregators.
The Amazon Aggregator Marketplace in 2021
According to Marketplace Pulse, the Amazon aggregator marketplace was valued at approximately $10 Billion in November of 2021.
That number was boosted in October by news that top aggregator Thrasio raised over $1 Billion in their latest round of Series D funding, despite their initial plans of going public being temporarily shelved. Yet aggregator performance was already anticipated to peak as early as January of 2021 with the announcement that Seattle's Cap Hill Brands had managed to secure $150 Million in funding.
Nor were they the only aggregators to outperform expectations. Austin's Elevate Brands secured $372 Million in November, while German based Berlin Brands Group managed to raise $100 Million that same month.
But the aggregator market isn't an overnight phenomenon. There's a reason why private equity interest in Amazon sellers has grown by leaps and bounds since 2020, and it's not simply a result of the pandemic. It's the same reason why any private equity business chooses to acquire brands: sales performance.
Why the Amazon Marketplace Matters to Private Equity
Amazon business is, of course, big business.
Gross merchandise sales volume in the third party seller market on Amazon grew by nearly ten percent between 2015 and 2018, well before both the pandemic and the subsequent surge in eCommerce. But that number grew exponentially by over 33 percent from $18.2 Million to $24.5 Million between Q2 2020 and Q2 2021.
Those numbers aren't flukes. Admittedly, they include brands with an existing presence outside of Amazon. But Amazon native brands are rapidly becoming both short and long-term investments for aggregators who realize their potential. A potential based on consumer demand.
Acquisition isn't solely the domain of eight figure Amazon brands with an IPO. Amazon FBA aggregators such as New York-based Forum Brands have thrown their hat into the market, securing $100 Million in debt financing as recently as September 2021, thanks to a partnership with Triple Point Capital.
Seller acquisition is a high potential market—but not without its risks.
The Risks Facing Amazon Aggregators
While traditional multinational brand acquirers have suffered from a lack of insight into digital strategies, the Amazon aggregator business model is predicated on a digitally native foresight of market value and consumer trends. Amazon aggregators are strategic buyers, not impulsive.
Aggregators demand results. Subsequently, a data rich environment like Amazon is in a unique position for brands looking to exit. It provides actionable and understandable analytic reporting in addition to historically reliable sales performance.
Unlike other aggregators who specialize in high-risk ventures, Amazon aggregators understand they rely on two fundamental factors before investing in a brand: consistency of performance and cold, hard data. And for venture capital firms specializing in eCommerce brands, it's only natural they'd turn to Amazon as a marketplace resource first.
At least, ideally. But for every Amazon aggregator success story, there are countless other equity firms failing to understand digital-specific retail challenges.
A seemingly never-ending supply chain crisis may have gripped the world in 2021. But Amazon businesses were already accustomed to a fragile chain of logistics. Supply chain snags, integration delays, stock outs and inconsistent sales data are only part of the challenges third party sellers faced last year.
Maintaining visibility on Amazon can be difficult enough for many brands to expand their presence. But the dilution of product strength can be even greater in a relatively unregulated environment, particularly for brands who fail to distinguish themselves from their competition.
And the recurring concerns over bad actors, counterfeiters and product liability on Amazon weren't necessarily factors many starry-eyed investors took into consideration before throwing their hats into the aggregator market.
What are Amazon Aggregators Looking For?
There's a reason why aggregators choose Amazon to source prospective brands over Walmart or Shopify. No matter how unpredictable its performance may be in the stock market, Amazon's market share in eCommerce isn't likely to dwindle anytime soon.
Diversifying your sales channels may increase your own brand visibility, But aggregators are interested solely in the percentage of your sales on Amazon specifically, with an ideal profit margin of at least 20 percent. And brands lacking optimal conversion rates and an understanding of demand forecasting may find it difficult, if not impossible, to attract aggregator interest.
That's why aggregators are solely interested in Amazon sellers who own registered brands with top performing, high quality products—although private label brands can be considered depending on their sales volume. While many aggregators may have different requirements for minimum sales of anywhere from 15 to 75 percent on Amazon Marketplace, most will not necessarily require exclusivity on the platform.
More specifically, Amazon aggregators are looking for an evergreen product line when considering a purchase. They're concerned about long-term consumer demand, not a line which requires constant redesign, brand development, adherence to changing regulatory standards or diversity.
If a seller has roughly 25 different SKUs grossing $10 Million in total, it's nowhere near as impressive to an aggregator as sellers with $5 Million in sales but a product line of only three SKUs.
A recent survey from Fortunet released in October 2021 indicated that the home and garden segment was the single most popular product category among aggregators at 88 percent, followed by pet supplies (78 percent), baby products (67 percent), outdoors (64 percent) and health and personal care (64 percent.)
In short? Amazon aggregators are looking for brands that reflect a general lifestyle, not necessarily a specialized niche.
The Hidden Costs of Scalability
Most aggregators seem to be fairly confident in their ability to scale brands on their own post-acquisition. Yet Fortunet's findings reveal that 37 percent of buyers are willing to offer a partial acquisition, with over 90 percent solely interested in purchasing the assets of a business with a minimum asking price of $500,000 to $1 Million.
What that means for Amazon businesses is that they should be tailored for acquisition, including minimizing operational deficiencies and a ready made product line which can be optimized for future growth.
"Aggregators are gobbling up brands faster than their internal teams can grow them due to resource constraints and expertise," explains Josh Levine, Managing Partner at Color More Lines. "Amazon is a lucrative but challenging marketplace to grow brands without deep, data-driven knowledge to scale successfully."
That's largely the result of underestimating the operational difficulties in managing digital retail. The end goal may be profitability for an aggregator; but those who fail to understand the complexities and challenges of retail eCommerce quickly find themselves over their heads in managing a digital native business.
And if you don't have the resources to scale your business in spite of those challenges, an aggregator won't necessarily have that access or experience.
Amazon Aggregators and the Bottom Line
Amazon aggregators, like any private equity investor, are bottom line entities. But they may not have considered just how much effort goes into meeting that bottom line.
There's also a chance that many Amazon businesses haven't as well. Success isn't always assured, nor is it a replicable phenomenon. If a brand lacks both a finely tuned product line and the foresight and knowledge to reach their market, an aggregator won't necessarily have them, either.
That's because what matters in eCommerce isn't the exit of a brand. It's the entrance.
Color More Lines helps brands achieve actionable results from entrance to exit on Amazon. Find out more at Color More Lines.