Off the back of Amazon’s pandemic-fuelled success, a wave of aggregator businesses are buying up smaller Amazon sellers and growing their brands in Europe.
The aggregators are raising funds at a phenomenal rate — last month investors pumped $1.1bn into the sector in Europe in a single day.
But as the quest to become the digital Proctor and Gamble heats up, all might not be as rosy as it seems.
“I see it as a bubble,” says Danny McMillan who runs Databrill, an agency which helps Amazon sellers scale. “There's more big money in the market compared to good quality brands that they need to buy because they need deal flow.”
Bidding wars are driving up prices to secure the best Amazon sellers. That’s driving up valuations, meaning some say companies are acquiring at a rate they won’t be able to make returns on. And an increase in interest rates ahead could also prove tricky.
“In 18 months, there will be bloodshed,” McMillan says, predicting we’ll start to see the bigger aggregators buying up the smaller ones.
Globally, a lot of aggregators are trying to emulate the model of Thrasio, an American company founded in 2018. It has acquired over 100 Amazon businesses and saw its valuation surpass $1bn last June.
“When Thrasio started, they were looking at 1.7 times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a valuation for acquiring an online business,” explains Rachel ten Brink, an early-stage investor and advisor to several consumer-tech companies in the US.
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“At that type of valuation, if you can just sustain the business, you don't even need to grow it, you have a very profitable cash cow.”
But things have changed a lot since Thrasio started out in 2018. There’s a lot more competition — there are now at least 21 aggregators in Europe and, alongside that, the pandemic-induced ecommerce boom has also inflated valuations.
Ten Brink says she’s seen valuations as high as 5.7, 7 and 8 times the EBITDA of small sellers.
In a bid to compete with each other and bring the best Amazon merchants on board, aggregators have started offering things like additional revenue share for founders, or promising them quicker cash exits, or even throwing extras into the deal like a car, ten Brink says.
“It’s a private equity rollup strategy,” she says. “It’s no different from rolling up dry cleaners. They’re doing the same thing, they’re just doing it online instead of on the high street. And that makes sense, but it only makes sense if the valuations make sense.”
Coronavirus has also been a factor. The pandemic triggered record ecommerce sales, bumping up the valuations of online shops which have since fallen as in-person retail reopened. If aggregators bought during that period, that could also have warped the valuations.
Fabian Chrobog, founder of North Wall Capital, which has put a combined $210m into two European aggregators (Olsam and Dwarfs), says the valuations in Europe are less extreme than elsewhere, however.
“There has been some purchase price inflation but actually most of the buyers are structuring these deals by offering three or four times EBITDA upfront and then the rest in deferrals, which are only paid if the business continues to grow.”
A beautiful opportunity for sellers
McMillan’s convinced that, when aggregators come to raise funds again, the ones who lost out on the seller buying spree will struggle. That will create an opportunity for sellers.
“Instead of you having to go cap in hand to the top 10 aggregators, there's 100 of them, every single one of those needs deal flow,” he says, “so they’re going to pay more for your business.”
The companies usually use the funding for acquisitions, and it’s commonplace for aggregator raises to include a small amount of equity alongside a larger credit vehicle. And currently, that credit is cheap.
“While credit is very cheap, they're all getting really cheap money. That's great, but if that ever changed, which it could, that could be a challenge,” says ten Brink.
Chrobog, however, says investor appetite in this “emerging asset class” is strong and will stay strong, because of the nature of the deal — it allows investors to put money into the growing ecommerce sector, without investing directly into individual stores.
Chrobog also asserts that the inflation in valuations is unlikely to put investors off.
“I think it's important to distinguish between us as a lender and the equity story. We don't need to believe in the equity story of forever growth to be a very happy lender to these businesses, because we are first in line for repayment.”
Amazon is the wild west still
Beyond the financials, ten Brink says growing businesses on Amazon is hard. “Amazon is a little bit like the wild west still,” she says.
She cites an example from earlier this year, where Amazon blocked a number of top sellers in China for paying for false reviews of their products.
And supply chains can also be an issue.
“That’s why you have to back management teams that have not only ecommerce experience, but also Amazon experience, and business and operations experience in an environment where you have real exogenous pressure factors coming in,” says Chrobog.
So what’s the verdict?
“There will be winners,” says ten Brink, “but I don't think there'll be as many winners as there are players right now.”
Chrobog says that the situation in Europe could be more positive for smaller aggregators than elsewhere, because the market is more fragmented (it’s not just Amazon), meaning smaller aggregators can look to sites beyond Amazon for acquisitions.
“I believe that there will be multiple cross-platform winners rather than it being a winner takes all market,” he says.
McMillan is less sure. He thinks companies will be okay if they’ve “land grabbed and are in the top five, like Thrasio,” but predicts the rest are in for a rockier future.