Recently, there has been an explosion of aggregators (or roll-ups) that raise large amounts of venture capital money to buy a portfolio of small but promising third-party merchants on Amazon (and now, increasingly, on other platforms as well). In this post we discuss the main economic factors that create the business opportunity for these aggregators, as well as how sustainable these factors are.
One of the first and most successful adopters of this strategy is Thrasio. Founded in July 2018, it achieved unicorn status in just two years—a record. It has raised vast amounts of venture capital funds and acquired over 125 third-party merchants on Amazon to date. After acquisition, Thrasio aims to grow the sales of each merchant by leveraging its expertise in operations, marketing, and pricing in several ways:
Further improving the merchants’ products, often by making better use of customer feedback to optimize the product offered.
Improving the merchants’ product listing page (e.g. photos and text).
Knowing how and when to make use of Amazon advertising to boost product sales.
Optimizing the pricing algorithm used.
Keeping up-to-date with Amazon’s rules and regulations, handling bad (fake) reviews and managing Amazon’s response to them.
Improving logistics by negotiating better rates with third-party shippers and by sharing fulfillment best practices for handling customers directly.
Cross marketing the more than 14,000 products it offers (from pet-odor eliminators to socks and kitchenware). For instance, this can be done via promotional offers included with shipped items.
Thrasio pays merchants a combination of upfront payment as well as additional earnout payments within 12-24 months of the sale based on the performance of the business. The role of the earnout payments is presumably to make selling to Thrasio more attractive for higher-growth businesses.
Many other firms have adopted the rollup strategy on Amazon (at least 69 to date). Some of the best-known ones are Perch, Boosted Commerce and Heyday, all of which have raised significant venture funding. Amazon aggregators are not constrained to North America: factory14 is applying this in Europe, Rainforest is doing so in Asia, and similarly there are others in Latin America and India. And some have also started applying the rollup strategy in other ecosystems: for instance, OpenStore, Hedgehog and Pattern are doing it with Shopify merchants.
A version of the roll-up strategy is also employed by Wave.tv, a rapidly growing start-up that publishes offbeat sports content on social media platforms, including Instagram, Facebook, Snapchat, TikTok, and YouTube. Wave.tv acquires or licenses content from many sources and leverages its technology and data analytics to repackage it under more than 15 brands, including BenchMob, Haymakers, and Buckets, increasing the content’s reach on the many platforms on which it operates.
The arbitrage opportunity exploited by aggregators of platform merchants
Fundamentally, merchant aggregators are exploiting an arbitrage opportunity. And there are three underlying factors that create this opportunity.
First, the aggregators add value via economies of scope (i.e. via synergies) and scale (i.e. via volume), as illustrated by the Thrasio example described above. At the most fundamental level, the opportunity for such value creation comes from the explosion of digital platforms and tools now available for online merchants and digital creators to reach their customers. These platforms and tools are easy to use but hard to master, so many merchants and content creators operate below their potential scale: aggregating them creates scale and scope efficiencies.
Second, aggregators can raise large amounts of capital at cheaper rates than individual merchants could achieve on their own. The reason is that these aggregators have access to venture capital, which at least currently, is plentiful. Small individual merchants are not at venture scale and so cannot access this funding, unless they are aggregated together into a portfolio.
And third, and more controversially, some investors might be drawn by the fast top-line growth in revenue that can be shown by aggregators buying more and more merchants. Of course, this does not represent real growth in the underlying businesses, but it might be hard for investors to perfectly disentangle real growth due to synergies (first point above) from growth that is “manufactured” via ongoing acquisitions.
So how sustainable are the arbitrage opportunities exploited by merchant aggregators?
It seems pretty clear that the capital arbitrage opportunity (the second and third factors above) on Amazon will be wiped out pretty quickly by competition. Not surprisingly, the prices aggregators have to pay to acquire merchants have already been bid up significantly (by now, some are even giving away Teslas to convince merchants to sell). Furthermore, there is a sense in which this is a zero-sum game on Amazon: since many of the synergies revolve around improving marketing and sales, if all the good merchants on Amazon improve their marketing and sales, there is no sustainable competitive advantage being created by the aggregators.
On the other hand, there are a couple of factors that point towards a positive-sum game and bode well for the future of the aggregator business model. First, Amazon is massive and still growing fast, with one estimate being that it has 5 million merchants, with more than 1 million added in 2020. And second, there is an even larger opportunity to apply the roll-up strategy across ecommerce more broadly (e.g. eBay, Etsy, Shopify, BigCommerce, Taobao, etc.). This need not be limited to an individual platform. Una Brands is applying the roll-up strategy across the multitude of marketplaces and other providers that merchants use in Asia-Pacific. And further synergies arise when aggregators can help merchants that are only selling in one channel access other channels (e.g. taking a good Amazon seller and leveraging it on eBay as well as in its direct channel via Shopify).
Aggregating merchants on digital marketplaces vs. direct-to-consumer merchants
While the bulk of these aggregators have been focused on Amazon, as noted earlier, more recently several roll-ups have emerged for merchants that are built on Shopify. This raises the interesting question of whether the aggregation strategy works better with merchants on digital marketplaces like Amazon’s, or with online merchants that sell directly (powered by the likes of Shopify and BigCommerce)?
The advantage of doing this on Amazon is the massive reach that sellers can obtain if they manage to rise to the top (e.g. if they can win Amazon’s Buy Box). This makes it possible for an Amazon aggregator to scale up individual businesses 10X or perhaps even 100X if they manage to get things right. The reason is that digital marketplaces create powerful self-reinforcing cycles around desirable products. The more a product aligns with what consumers are searching for, the higher its ratings will be, increasing the chances that the platform’s algorithms will drive target customers to it. That means more people will buy and rate the product, further heightening its advantage.
By comparison, the upside from aggregating individual merchants that sell directly (so have to find their own customers) will tend to be more limited, at least in the short run. On the other hand, there may be more scope in the long run to develop unique and defensible brands based on Shopify merchants, since Shopify merchants fully own and control the relationship with their customers. Not only does this mean the merchants being aggregated are more defensible, but it allows for much better cross-selling opportunities. As Keith Rabois, a prominent VC and founder of Shopify aggregator OpenStore notes, “We want to have control about how we stitch these together … And obviously Amazon is not going to just let us do whatever we want.”
This suggests that some merchants may be inherently more suitable for roll-ups on top of digital marketplaces (e.g. sellers of fast-growing products, but perhaps with shorter lifecycles), while others are more suitable for roll-ups that sell directly via their own websites (e.g. sellers of products that can create defensible brands). And of course, this in turn makes it possible for aggregators to specialize accordingly.
The future of the aggregator strategy
The idea of rolling up small businesses and scaling them up is hardly new. Tiny has been doing this since 2014, successfully aggregating small technology-based companies. And Berlin Brands Group started aggregating D2C companies well before Thrasio was founded. However, the scale at which roll-ups can be done and the potential payoff from doing so have been turbo-charged by the emergence of large digital platforms and providers of software tools that support millions of merchants. So how far can this aggregator strategy go?
Right now, the capital that is flowing into aggregator businesses on Amazon feels like a gold rush. And the latecomers are unlikely to find much gold left. Prices to acquire high quality merchants are being bid up. And the potential gains from roll-ups will diminish as more and more merchants are aggregated across each market segment. Indeed, each aggregated merchant will be competing with a greater number of other similar (aggregated) rivals and the quality of the merchants that are still left to be acquired will decrease rapidly.
By now, the biggest potential gains from roll-ups likely lie outside Amazon. As we noted earlier, there are many other digital platforms to scour (e.g. eBay, Etsy, Faire, Taobao) and there is a lot more room to run in D2C (e.g. Shopify-powered merchants). Moreover, aggregators will increasingly look to build up brands of their own in order to create some defensibility, i.e. follow the approach of Unilever or Procter & Gamble. Perch has already taken some steps in this direction.
Finally, the aggregator strategy can also be applied to areas outside of ecommerce. Social media platforms (e.g. YouTube, Instagram, Snapchat, TikTok) provide a clear opportunity, as we have seen with Wave.tv. Other opportunities include aggregating small SaaS companies, podcasts (to some extent Spotify is already doing this), mobile apps, or Substack newsletters like ours (an aggregator could pool together multiple creators and help grow, monetize and cross-sell their audiences).
In short, we think there is a lot more gold to be discovered by aggregators, but perhaps not where most investors are currently looking.
Very interesting article but I wonder whether aggregator differentiation could be the difference between success and failure on platforms such as Amazon rather than just the highest bidder? Take Branded for example, https://joinbranded.com/, they have an approach of working alongside the store owner rather than a complete buyout which might be favourable for those who have built their store from nothing and not quite ready to let go entirely. If all aggregators are pushing for price with no differentiation then indeed those late to the party will have little gains but if they bring something different to the offer then I do think they might be able to find success.
Re: YouTube, hasn’t this already existed in Vevo/Machinima? Only w contracts instead of acquisitions