15 September 2022

Aggregator Growing Pains Warrant Specialty Advisory Expertise

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Guest Article By: Raymundo Armendariz

In this article we take a look at the popularity of third-party selling on Amazon, the group of businesses that are actively seeking to acquire the most successful e-commerce sellers, and the operational challenges many are facing in making those acquisitions profitable after the deal is closed. With no direct rivals and a dominant foothold in market share, Amazon’s third-party marketplace has been a highly successful endeavor to say the least. The business has, in fact, generated notably greater sales volume for Amazon that its own direct sales efforts have been able to achieve.

By establishing the offering, Amazon created a sizable market opportunity for those third-party sellers of all sizes and experience levels looking for outlets through which to offer their merchandise and transact. From audience recognition and reach to a highly evolved, easy to navigate site structure, Amazon’s platform is a very enticing prospect for both brands which have traditionally sold via brick & mortar and DTC online, as well as for new products and brands coming to market for the first time. There are hundreds, if not thousands, of product success examples across any number of retail categories which would simply not exist today if it were not for the structure that Amazon has put in place and continues to evolve to foster and support those businesses.

Much of the strength of this business can be attributed to its fulfillment component. Fulfillment by Amazon (FBA) is a service which enables businesses to outsource their order fulfillment directly to Amazon. Businesses send their products to Amazon’s vast network of fulfillment centers worldwide. When customers make purchases, Amazon’s warehouse team members pick, pack and ship the order with a high degree of efficiency and process quality oversight. Virtually overnight, many sellers have gone from obscurity and modest sales to social media phenomenons in need of added production capacity to meet demand.

They have achieved this in large part by leveraging the power of FBA and its pay as you go model which charges for storage spaced used and orders fulfilled and features Amazon’s free customer shipping options, customer service platform and streamlined return process. The list of best-selling products being offered on Amazon is constantly changing. As of this publication, items such as a cooling bed sheet set from Mellanni, car cleaning gel from Pulidiki and satin pillowcases for hair and skin from Bedsure top that list. The companies that manufacture these types of products that attain high levels of popularity and sales on the Amazon site – and in some cases as on sites/apps such as Shopify and via their own DTC websites – have increasingly become the willing target of e-commerce aggregation companies which seek to acquire and roll them up into their “holdco” portfolio of operating companies. This provides a quick and profitable exit strategy for the sellers and an opportunity for aggregator buyers such as Thrasio, Razor Group and Society Brands to use their expertise and scale to drive even greater profitability and cash flow from those acquired businesses and, many cases, ultimately sell them for sizable profit. 

Capital raised by Amazon aggregators over the past two years has grown exponentially and competition between them has driven acquisition multiples up steadily over that period. Many analysts now believe that growth has now peaked. 

Because these e-commerce aggregators acquire and manage multiple third-party sellers, businesses across their portfolios benefit from certain economies of scale which optimize operational costs and other overhead as compared with businesses which operate independently. This trend has grown and we are now seeing some of these firms acquiring more than five or six such sellers a week, conducting rolling acquisition diligence projects utilizing outsourced resources that are focused in large part on an analysis of the EBITDA those businesses are generating and an assessment of how that can help grow the EBITDA of the roll-up overall. While aggregators each have their own criteria for investment, some of the most important factors that go into those decisions include positive user reviews, a track record of product quality, steady demand substantiated by data, a historically competitive organic search ranking and a significant potential for long-term growth. Each have their own revenue range requirements and categories of specialization and focus.

The challenge that has occurred for some aggregators in this market, as you might expect, is very similar in nature to what many private equity firms have experienced when acquiring businesses over the years. Buying something, it turns out, is much easier than actually operating it. And while the majority of these aggregator businesses have notable sales and operations expertise within their management teams, and leverage data and best practices to drive performance and margin, they are finding that many of the businesses they have acquired are actually far more challenged than their initial diligence revealed.

Once they dig in and start looking at inventory and assortment, holes frequently begin to appear, including but not limited to current supply chain issues. For example, a company that has been highly successful selling a black spatula that doesn’t scratch pans but can still be used in high temperature barbeques and the new breed of consumer pizza ovens, may have decided in the last year to produce that same item in 30 colors. Yet only five of those are selling while the others are taking up warehouse space. The aggregator may also find that because the acquired business was in essence built for Amazon and other DTC online sales channels, it doesn’t have an infrastructure and all of its non-FBA inventory is spread across a multitude of third-party logistics businesses each requiring costly monthly payment for storage and handling, resulting in accrued expense on merchandise that is not turning. Additionally, selling on Amazon is all about winning the buy box. If supply chain issues have inhibited an acquired seller’s production capabilities which, in turn, has impacted fulfillment... customer loyalty could be impacted. Without return customers and positive word of mouth/reviews, once “hot” products can quickly become commoditized in this highly competitive marketplace, forcing them to compete only on price. 

So while aggregators have access to the development capital needed to make these types of acquisitions and their acquisition teams are aggressively working to bring more online businesses into the portfolio, there are really two key pain points at play for these firms. First, most simply do not have operational bandwidth to address the breadth of issues that are prevalent across their acquired businesses and second, in many cases they do not possess the specific expertise needed to identify those pain points and address them effectively. 

With increasing frequency over the past year and a half, our Wholesale Solutions team at Hilco Global has been contacted for assistance by aggregators facing these and numerous other challenges associated with the operation of online selling businesses in their rapidly expanded portfolios.

Our team possesses the aforementioned specialty expertise that these businesses do not and we have the bandwidth and or mechanisms in place within our extensive industry network to ensure that the requisite resources are available to ensure the success of the highly customized solutions we create and provide for our clients. 

For example, we have the expertise needed to conduct a thorough SKU rationalization process to determine when a business is focused on too many items, many of which are not selling and are just sitting out on inventory. We also have the relationships to move those items quickly into the channels which can deliver the best monetization potential. Similarly we have the knowledge and resources to take clothing and other product initially packaged for online sales and get those properly sorted, configured and into the brick & mortar off-price environment, which right now is actively looking to bring in fast turning, in-country products. And lastly, we have the capital on hand to buy that merchandise outright from an aggregator’s portfolio company, delivering needed cash flow quickly and with a minimum of effort on the seller’s behalf. 

If you are an e-commerce aggregator experiencing unanticipated challenges with one or more of your acquired portfolio companies and are lacking either the resources or specific niche expertise to address those matters in a timely and effective manner, consider reaching out to our team for an exploratory conversation. There may be steps you can take on your own to right the ship in the short term and chances are we can assist you with those and other efforts to best ensure the maximum return from your investment moving ahead. We are here to help.

About Hilco Wholesale:

Through the delivery of customized solutions tailored to a client’s exacting needs, Hilco Wholesale Solutions effectively and efficiently monetizes the inventories of a broad range of asset classes including: Apparel, Footwear, Toys and Games, Books, Sporting Goods, Housewares, Health and Beauty Products, Grocery Items and End of Season Merchandise. Leveraging Hilco’s global disposition capabilities, infrastructure and expertise, the Hilco Wholesale Solutions team is able to efficiently re-market these merchandise assets while at the same time avoiding channel conflict. The end result is a timely, tailored disposition program that maximizes recovery and provides needed liquidity for clients. The business is a unit of Hilco Merchant Resources (HMR), which specializes in liquidation and disposition events at the wholesale and retail level to monetize unwanted or underperforming inventory and FF&E. HMR develops, implements and manages going out of business sales, store closings and relocations, or clearance event sales, in support of M&A transactions, divestitures, rationalizations and other contexts.

For more retail perspectives visit: https://www.hilcomerchantresources.com/

About the author:

Ray Armendariz is CEO of Hilco Wholesale Solutions.

Ray has been with Hilco since 1999. He has overseen the execution of numerous transactions covering a broad range of inventory categories and store formats within the continental United States, Puerto Rico, Mexico, Canada, Australia and UK.

Contact Ray at: 915-276-6262 or rarmendariz@hilcoglobal.com


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