Raj Sapru, chief operating officer, Netrush
In many ways, 2020 was the year of the Amazon FBA aggregator. By some estimates, investors spent $1 billion snapping small brands that had built viable businesses using the Fulfilled by Amazon (FBA) service. One of them, Thrasio, even achieved unicorn status with a valuation of over $1 billion.
None of these entities are public companies, so no one is exactly sure how these deals are going. But even if details remain in the dark, the acquisitions’ beneficial effect on the marketplace is clear.
For one thing, aggregators are incentivizing entrepreneurship. Before their arrival, sellers could only look to their own profits as a reward. Often, they were operating out of living rooms and garages, which brought inherent inefficiencies that limited their potential to grow. Now, aggregators are giving them a reward for their efforts and a chance to try something new.
Aggregators are also providing a bridge to better things down the road. Today, most deals are quite small, involving companies with less than $1 million in revenue per year, making them unlikely acquisition targets for FMCG giants like P&G or Unilever. Aggregators can bring on the marketing and operations expertise needed to help them build up supply chains, diversify product portfolios, and eventually become attractive to larger companies.
That said, aggregators face several underappreciated challenges. As acquisition costs grow, they need to quickly build sustainable, long-term businesses around an often surprisingly diverse portfolio of brands. In addition, many of them are led by seasoned investors who have little e-commerce experience and are relying on outside experts to scale their acquisitions. To succeed, they need to do at least four things:
- Avoid short-termism: Small entrepreneurs are often focused on getting their products out the door, which leaves them with high customer acquisition costs and limits their ability to expand their product lines. Aggregators need to encourage repeat business through long-term investments in dance and the customer experience. These efforts should also include data-driven product innovation to increase loyalty and give customers more options to buy.
- Expand the footprint: Most of these small brands rely exclusively on Amazon to deliver their products to customers. While this has proved a successful strategy in the near term, it carries some risk and limits the potential customer base. Aggregators need to find ways to expand their brands’ footprint to other platforms, such as Walmart, Target, or even their own direct-to-consumer platforms. In doing so, it’s essential to move intentionally, making sure they can fully compete with existing products on a platform before moving in.
- Widen the reach: Small product companies tend to rely exclusively on search advertising on Amazon to attract new customers. Aggregators have a rich opportunity to widen that base, following consumers to where they are most likely to be receptive to targeted ads, such as Google, Facebook, or other social media properties. From there, they can drive traffic either to Amazon or to wherever they can make the most profitable sale.
- Stay the course: After an acquisition, it’s easy to break things that were already working. Right now, small entrepreneurs tend to be quite innovative in their use of social media and the tools in the Amazon Marketplace. While aggregators have a lot to offer, they should not ignore the special sauce that has gotten these brands to where they are right now. Doing more of the same while scaling the business is the right path forward.
Overall, aggregators provide a welcome jolt of oxygen to the Amazon Marketplace, but they shouldn’t overlook the demanding work it takes to grow small brands into major players. They start from a small base and scale their new acquisitions from niche audiences to mainstream acceptance. Many have recruited the right talent to make it happen. Others will need to find partners to help them bridge the gaps between their limited experience and lofty ambitions.
At this point, it’s unclear how well these companies and investment firms will perform, but we can at least acknowledge the big challenges and excellent opportunities they have.
Netrush helps brands sell on Amazon and other online marketplaces.
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