In 2021, investors poured more than $12bn into a new breed of start-ups focused on buying Amazon marketplace sellers. This year, the funding has mostly dried up, with dealmaking all but grinding to a halt as ecommerce growth stalls and investors grow wary.
It has meant that the acquisition start-ups, known as aggregators, which were previously clambering over each other to pay over-the-odds for sellers have now been left to rue their overexuberance. Many have made lay-offs or been forced to narrow their focus.
“Last year was crazy,” said Shrestha Chowdhury, chief technology officer at Berlin-based aggregator Razor Group, which at the peak was buying a dozen companies a month. “I wouldn’t do that again.”
Amazon aggregators, or roll-ups, are groups that buy sellers who typically do the bulk of their business through Amazon’s third-party marketplace. The thesis is that by combining many brands under one roof, efficiencies can be found through, among other things, marketing spend and inventory management.
In 2021, as the ecommerce sector surged following the large shift in behaviour during Covid lockdowns from buying services to goods, confidence in the roll-up model was sky high. According to data from Marketplace Pulse, investors poured in more than $12bn into roll-up companies last year.
But so far in 2022 funding has dropped to just over $2bn, the lion’s share of which came before the stock market slump in March that was prompted by rising inflation, the war in Ukraine and a broad sell-off in tech stocks. This confluence of factors hit the ecommerce sector particularly hard.
“The private market almost shut down,” said Riccardo Bruni, co-founder of London-based aggregator Heroes. “For a certain period of time access to capital became impossible.”
That is a stark contrast to 2021, when aggregators were desperate to win deals by spending big. Groups such as Acquco, for instance, went as far as offering a free Tesla in return for successful referrals. Such was the competition, promising merchants were being bought for about 6-7 times adjusted earnings before interest, tax, depreciation and amortisation.
Roll-ups are now much more cautious, with some suspending dealmaking altogether. Chowdhury said Razor Group was making one or two deals each month — which still makes it one of the more active aggregators. Industry insiders estimated that out of several dozen aggregators that had raised capital over the past two years, fewer than 10 were still making acquisitions.
“If 2021 was the year to launch an aggregator and attract what looked like unlimited capital, 2022 is the year of survival,” said Juozas Kaziukenas, analyst with ecommerce research company Marketplace Pulse. “The market is still active, but I think it will be a long slump of quietness before some of those find the winning formula.”
Massachusetts-based Thrasio, the largest aggregator having raised at least $3.5bn and made more than 200 acquisitions, laid off some 20 per cent of its staff in May, shortly after announcing the hiring of Amazon veteran Greg Greeley as its chief executive.
As part of the cull, Thrasio’s acquisitions team was almost entirely done away with, two people familiar with the company said. The company told the Financial Times it was still looking at brands but would not say if any deals had happened since May’s cuts.
Perch, another leading aggregator that has raised more than $930mn, has also suspended acquiring companies, according to two people familiar with its operations. Instead, one of the people said, it would focus on “organic” growth of the brands it has already brought in.
Several other aggregators, including Heroes and Berlin-based SellerX, have also laid off dozens of staff between them this summer.
There has been a “palpable change in the mood”, said Taliesen Hollywood, director of specialist M&A agency Hahnbeck, which has brokered large seller deals with aggregators.
“Brick and mortar grew faster than ecommerce for the first time in history,” Hollywood said. “By the start of 2022 it was clear the acquisitions weren’t performing as well as they’d hoped. Ultimately that meant they had overpaid for some of those businesses.”
Much of 2021’s frantic dealmaking was funded by debt, with aggregators often paying interest rates as high as 18 per cent when starting out, Hollywood said. As growth slows and with no clear path to profitability, several operators may soon breach their debt covenants, he said.
Aggregators’ fortunes have not been helped by conditions on Amazon itself. Seller fees have increased by more than 30 per cent over the past two years, according to Marketplace Pulse, with Amazon citing logistical pressures. Other additional costs have included a 5 per cent fuel surcharge imposed in April that is levied on every delivery made via Amazon’s own logistics network.
In addition, some aggregators were finding that categories that performed extremely well during the booming pandemic months had seen a sharp drop-off. “Everyone has bought their bread baking machines,” said Bruni from Heroes.
Despite all the pressures, believers in the aggregate model are finding positive signs for the remainder of 2022 and beyond, keen to distance their business models from other flash-in-the-pan investment frenzies in recent years, such as rapid grocery delivery apps or 2018’s electric scooter boom.
“Generally speaking, as we go into 2023, I think all of the actions that are being taken by folks now are going to build a far more resilient business model,” said James Serena, co-founder and chief executive of Telos Brands, a smaller-scale aggregator based in San Francisco.
Sebastian Rymarz, chief executive of aggregator Heyday, said his group had managed to avoid “mass” layoffs and was looking at deals that could bring in an additional $450mn in yearly revenue, in an effort to “take advantage of the dislocation” in the space.
Shipping costs, while still elevated, are now about two-thirds below their pandemic highs.
“The pressure on the supply chain has significantly eased — primarily driven by lower global demand,” said Philipp Triebel, co-founder of SellerX. “We see an amazing opportunity to acquire high-calibre assets at lower prices over the next 12-24 months.”
Still, a bruising 2022 has meant talk in the sector has now turned to consolidation — the roll-ups being rolled up — said two people close to aggregator businesses. It was “on a lot of people’s minds”, one person said.