Thrasio Bankruptcy/Restructuring & Our Retrospective on the Amazon Aggregator Space
While management upheaval at OpenAI has taken over the news cycle in tech, we should not ignore the other big story that hit right before Thanksgiving.
Thrasio, the Amazon aggregator company which raised over $3.4B in funding and was estimated to be worth between $5 and $10 billion unexpectedly prepared to file for bankruptcy/corporate restructuring last week.
In the past several years, over 80 Amazon aggregators raised billions of venture capital on the promise of leveraging a roll-up strategy to improve operations across their acquired brands, driving increased revenue and profit.
The pandemic provided the fuel for these roll-ups, and things looked quite rosy as e-commerce spending was up, especially on Amazon, and interest rates were low. Aggregators raised money easily, and acquired brands quickly. While the recent news has placed the primary blame on the change in the macroenvironment (decline in consumer spending, higher interest rate environment), we believe there were more fundamental factors that made it difficult to scale these businesses profitability.
- Operating Leverage More Elusive Than Expected
Amazon aggregators hoped to deliver operating leverage by utilizing services across brands. However, it was likely harder to deliver meaningful cost savings across marketing, finance, and logistics while supporting the shared corporate overhead to support the combined entity. Teams within the rollups were often siloed, with brand managers focused on running each brand, but often found it hard to outperform the original founder of the brand.
2. Cross-Selling Proved Difficult
Many roll-ups built business cases around cross-selling multiple products to the same consumer. This strategy faced two fundamental challenges.
- FBA Aggregators Had Limited Customer Data: Amazon makes it exceedingly difficult to extract customer data for cross-selling. While there are ways to cross-sell (like dropping inserts into customer orders), it is not nearly as effective as continual post-purchase marketing directed at consumers.
- Non-FBA Aggregators Had to Purchase Brands With Similar Customer Bases: As the number of FBA aggregators proliferated, the competition for brands increased, making it more difficult to buy brands serving very specific customer bases. As the aggregators branched out to find acquisition targets, the power of cross-selling was diminished.
3. Multiples Increased Quickly — And Then Fell off a Cliff
A vast majority of the brand acquisitions were made in a period of intense competition for assets and low cost of capital. This resulted in inflated multiples for these assets. Now that the market has turned, the cost of capital for the FBA aggregators has increased, while the value of their assets has decreased as multiples contracted. Many of the aggregators were forced to unload their assets as low multiples to fulfill their large debt burdens. In some cases, there has not been enough equity value to fulfill their debt obligations.
4. It is Easier Than Ever to Launch A Brand — Thanks to AMZN and a Variety of Tools/Services
The barrier to launching a new brand has fallen steadily as Amazon and a large number of tools providers have enabled manufacturers and entrepreneurs to quickly launch products and sell them to consumers. Even Amazon itself has continued its push into private label products across a wide variety of products. This has simply put more pressure on the existing brands that were acquired by the aggregators.
Our View: Still Some Opportunity, But Not As Easy As It Initially Appeared
There is likely still a place for aggregators in the market. Depressed brand multiples today would certainly make new acquisitions much more attractive. However, we don’t expect to see a frenzy like the one that took place over the past 3–4 years. Measured acquisition pace and solid execution are likely what will be required for aggregators to succeed in 2024 and beyond.