E-commerce roll-ups are the next wave of disruption in consumer packaged goods

This year is all about the roll-ups. No, not those fruity snacks you used to find in your lunchbox; roll-ups are the aggregation of smaller companies into larger firms, creating a potentially compelling path for equity value.

Right now, all eyes are on Thrasio, the fastest company to reach unicorn status, and its cadre of competitors, such as Heyday, Branded and Perch, all vying to become the modern model of consumer packaged goods (CPG) companies.

Making things even more interesting, famed investor and operator Keith Rabois recently announced that he too is working on a roll-up concept called OpenStore with Atomic co-founder Jack Abraham.

Like any investment firm, to be successful, a roll-up should have a thesis or two providing it with a cohesive strategy across its portfolio.

Thrasio has been reaping the benefits of the e-commerce market’s Cambrian explosion in 2020, in which over $1 billion of capital was invested in firms on a mission to acquire independent Amazon sellers and brands.

This catalyst can be attributed to a few key factors, the first and most notable being the pandemic accelerating spending on Amazon and e-commerce more broadly. Next is the low cost of capital, a reflection of interest rates making markets flush with cash; this has made it easier to raise both equity and debt capital.

The third is the emerging and quantifiable proofs of concept: Thrasio is one of several raising hundreds of millions of dollars, and Anker, a primarily Amazon-native brand, went public. Both stories have provided further validation that a meaningful brand can be built on top of Amazon’s marketplace.

Still, the interest in creating value through e-commerce brands is particularly striking. Just a year ago, digitally native brands had fallen out of favor with venture capitalists after so many failed to create venture-scale returns. So what’s the roll-up hype about?

Roll-ups are another flavor of investing

Roll-ups aren’t a new concept; they’ve existed for a while. In the offline world, roll-ups often achieve much greater exit multiples, known as “multiple arbitrage,” so it’s no surprise that the trend is making its way online.

Historically, though, roll-ups haven’t been all that successful; HBR notes that more than two-thirds of roll-ups fail to create value for investors. While roll-ups are often effective at building larger companies, they don’t always increase profits or operating cash flows.

Acquirers, i.e., those rolling up smaller companies, need to uncover new operating approaches for their acquired companies to increase equity value, and the only way to increase equity value is to increase operating cash flow. There are four ways to do this: reducing overhead costs, reducing operating costs without sacrificing price or volume, increasing pricing without sacrificing volume or increasing volume without increasing unit costs.

E-commerce could present a new and different opportunity, or at least that’s what investors and smart money are betting on. Let’s explore how this new wave of roll-ups is approaching both growth and value creation.

Channel your enthusiasm: Why every roll-up needs a thesis

Like any investment firm, to be successful, a roll-up should have a thesis or two providing it with a cohesive strategy across its portfolio. There are a few that are trending in this particular wave.

The first is the primary distribution channel upon which a company grows. Evaluating companies with a common distribution channel can be helpful for creating economies of scale, focusing marketing and growth resources in a specific channel versus diluting resources across several.

On the downside, these companies become reliant on this distribution strategy and any changes could create vulnerabilities for their portfolio companies. As a study, let’s take a look at how two companies take different approaches:

#amazon, #business, #column, #e-commerce, #ec-column, #ec-consumer-applications, #ec-ecommerce-and-d2c, #mergers-and-acquisitions, #roll-ups, #tc

0

Thrasio raises $750M more in equity for its Amazon roll-up play

The Amazon Marketplace roll-up play is well and truly underway. In the latest development, Thrasio — one of the biggest and earliest movers in the market to consolidate third-party sellers on the platform, with the promise to provide better economies of scale to manage and grow those businesses — announced that it has raised another $750 million at a valuation that is likely to be over $3.75 billion.

The funding is being led by existing backers Oaktree and Advent, and it includes participation from previous unnamed investors. (That list of equity backers has included Peak6, Western Technology Investment, and Jason Finger, the co-founder of one of the early players in food delivery startups, Seamless.)

Thrasio said it will be using the money to continue its rapid pace of buying up more third-party sellers in the “Amazon FBA ecosystem”, a reference to smaller merchants that sell and distribute their products using the “Fulfilment By Amazon” service from the e-commerce giant.

“Thrasio continues its exceptional growth,” said Joshua Silberstein, who co-founded and co-leads the company with Carlos Cashman. “Over the past two months, we’ve been acquiring $1.5 million in revenue per day.” Those are his italics. “Thrasio is now closing two or three deals every week.”

Thrasio to date has acquired nearly 100 FBA businesses says that it reached that number by way of evaluating 6,000 possible companies and 14,000 “category-leading products.”

Six thousand may sound like a big number, but one estimate puts the number of third-party sellers on Amazon at around 5 million, a number that appears to be growing exponentially at the moment, with more than 1 million sellers joining the platform last year.

The size of the opportunity, plus the Amazon-proven promise of economy of scale in the world of e-commerce, are likely two reasons why we have seen so many startups emerging looking to roll them up.

Thrasio’s $750 million fundraise is an all-equity venture round. Based on its $3 billion valuation in January (when it closed a debt round of $500 million), this latest cash injection appears to be coming in at a $3.75 billion valuation, but quite possibly more.

“Quite possibly more” because the news comes at a particularly overheated time in this specific area of e-commerce.

Thrasio’s news came out yesterday afternoon, only hours after we reported on a new rival called Branded, which launched its own roll-up business on $150 million in funding and with a critical detail: one of the “co-founders” is the deep-pocketed European VC firm Target Global.

And that comes on the heels of others in this space — they include, in addition to Thrasio and Branded, Berlin Brands Group, SellerXHeydayHeroesPerch and more — collectively raising or committing from their own balance sheets well over $1 billion in aid of their own efforts to buy up small but promising third-party merchants.

For its part, Thrasio notes that the funding was raised quickly and diluted existing shareholders by 11.1%, and that it has now raised $1.75 in equity and debt.

We have asked Thrasio to confirm its valuation and will update as we learn more.

Thrasio products do not carry any kind of Thrasio branding. But I’m guessing that as Thrasio and its rivals look for a better edge and aim to give the impression of more quality (rather than the fly-by-night feeling that some of these sellers have today), we may see more of that coming out.

Brands that it owns include Vybe Percussion deep tissue massage gun, Circadian Optics bright light therapy lamps, and skincare products from Sdara Skincare, Thrasio said.

In the competition for the best of these, Thrasio claims its marketing and analytics can help these newcomers “compete with top household name labels, quickly becoming the trusted items that consumers turn to for their everyday needs.”

The feverish pace of fundraising in the area of FBA roll-ups feels very much like a bubble in the market — not least because none of these still-young companies have yet to prove that the strategy to buy up and consolidate these sellers is a useful and profitable one.

(The only one that has stated that it is profitable, Berlin Brands Group, has done so on its existing business model, which has involved building a variety of third-party sellers from the ground up itself, not buying up others, with whatever legacy baggage they may carry, good or bad.)

Thrasio is very much in the go-big-or-go-home stage of scaling with funding, and in its favor, although it’s only three years old (founded in 2018), that age has made it one of the oldest and more proven in this current wave.

“In ten years, omnichannel retail will be the backbone of the entire consumer products ecosystem – but today, it’s still in its genesis. Every day, the very fabric of this market is twisting as it continues to evolve,” said Cashman in a statement. “Our balance sheet isn’t built to win yesterday’s battles – it is designed to pursue the accelerating opportunities that accompany these kinds of seismic changes in an industry.”

#e-commerce, #ecommerce, #funding, #roll-ups, #thrasio

0

Target Global leads $150M round for Amazon Marketplace consolidator Branded

There’s been a profusion of startups emerging in the last year around the concept of rolling up smaller e-commerce businesses — operations that mainly sell and distribute their products on marketplace platforms like Amazon’s — using economies of scale to bring them together to run and grow them more efficiently.

Today, one of the latest of these, Branded Group, is coming out of stealth with a significant round of funding. The company has picked up $150 million and says that since quietly opening for business in mid-2020 it has already acquired 20 startups in categories like home, leisure and lifestyle across Europe, United States, and Asia.

The idea is that while the companies it acquires will continue to be sold and distributed via Amazon’s B2B service Fulfilled by Amazon (they are often referred to as FBA businesses), Branded will help with things like marketing, financing, operations expertise and technology to manage the business, provide business analytics and intelligence and so on.

The funding is being led by Target Global, which is being described as a “co-founder” of the startup, alongside the other two co-founders Pierre Poignant and Michael Ronen.

Other investors in the round include Declaration Partners, Tiger Global, Kreos Capital, Lurra Capital, Regah Ventures, Kima Ventures, and Vine Ventures, as well as individual investments from Marc Pincus (Founder of Zynga), Jon Oringer (Founder of Shutterstock), and a dozen other execs who have worked at retail giants like Amazon, Walmart, Alibaba and Lazada.

Branded is not disclosing the names of the 20 companies it has acquired — we have asked — but it claims to include some of the biggest companies selling home, leisure, and lifestyle products on Amazon.

Branded said they collectively generate $150 million in gross revenues annually. (This is the amount in sales prior to any cost-of-sale deductions, so not net revenue or nor profit.)

And in a market where reviews (for what they are worth) are one of the key levers in convincing shoppers to buy one similar-looking product (sometimes the exact same product, in fact) over another, Branded says that its sellers have amassed a whopping 700,000 reviews.

One reason that Branded may not be talking about specific names in its stable is to keep some competitive strategic advantage, because the landscape of companies building roll-up outfits to bring smaller e-commerce businesses together is getting crowded very fast.

At the end of January, Berlin Brands Group — which itself is profitable and has not raised significant outside funding, yet — announced it would use $300 million+ off its balance sheet to by smaller companies. That came on the heels of U.S. competitor Thrasio raising $500 million in debt to use to buy companies, as well as significant rounds in the several months for SellerXHeydayHeroesPerch and more.

There is well over $1 billion in capital swimming around now among startups looking to be the consolidator-in-chief among smaller sellers, who have build fledging businesses leaning on efficient marketplace services for marketing, distribution and logistics to get their products to buyers, but may not have bigger strategies for how to operate them in the longer term, or to grow them.

In that mix, though, there are some interesting details about the founders of Branded that speak to why it has attracted so much funding so soon, and the company’s potential ability to leverage that into a bigger business.

Poignant was the co-founder of Lazada — the Asia-based Amazon clone backed by Rocket Internet, Alibaba and others — while Ronen was previously a managing partner at SoftBank’s Vision Fund in the U.S. (he left almost exactly a year ago, after the fund had started to come under a lot of scrutiny). Branded’s pitch is that it can use that expertise in building online businesses to grow its stable of sellers and brands better than they might be able to do on their own.

“We are excited to leverage our e-commerce and business-building experience to create this next-generation multi-brand platform,” said Mr. Poignant in a statement. “Our team will provide unmatched operations, marketing, business development and supply chain expertise, serving as the partner of choice for entrepreneurs worldwide to scale their consumer brands and delight consumers on Amazon and beyond. Our global footprint, our team’s experience in scale-up growth, our strong access to capital, as well as the proprietary analytical tools and business intelligence capabilities we are building, uniquely position us to exponentially grow the best brands out there.”

The opportunity is a big one, it seems. It is estimated that there are some 5 million smaller sellers on Amazon’s Marketplace, making up about half of all sales on the platform.

Similar to the other companies that are hoping to make a splash in the area of consolidating some of them, the pitch from Branded is that it’s able to find the most interesting of these to partner or buy in brands to help run them more efficiency and scale them to the next levels of growth.

That opportunity appears to be a particularly keen one at the moment. The global health pandemic has led to a huge shift towards online shopping, with consumers either choosing or being forced to use the internet to buy goods and services as regions enact lockdown orders or in other cases encourage people to stay away from crowded places to slow the spread of Covid-19.

That’s spelled a lot of activity for retailers selling on digital platforms, although as a Perch founders once described it, not all sellers are prepared for or interested in exploring how to handle that kind of growth. That is the scenario that startups like Branded are hoping to tap, giving them a chance to grow a stable of brands on the back of proven consumer demand.

“Covid-19 has been a massive accelerator of consumers’ continuing shift to online shopping. We see fundamental changes in consumer behavior and purchase decision-making opening an opportunity to build a new type of consumer products leader with a digital-first mindset,” said Ben Kaminski, partner at Target Global who is also a co-founded at Branded as well as chairman of the board, in a statement. “Target Global has been a proud co-founder and investor in Branded. We are excited to jointly realize this unique opportunity, while becoming a home for some of the most talented sellers and entrepreneurs seeking to take their brands to the next level. I am excited to work with Pierre and Michael to realize Branded’s full potential.”

For now, it seems that Branded’s focus is mainly on Amazon — which remains the biggest company of its kind in the U.S. and has a strong presence in a number of other countries — but it’s notable that others in the space like Berlin Brands Group are looking beyond it for other marketplaces and even opportunities in direct-to-consumer brands that sell through their own sites to bring into the bigger roll-up strategy.

“Thanks to Amazon’s incredible investment in global logistics and leading technology, there are millions of third-party sellers worldwide on the Amazon marketplace,” said Mr. Ronen in a statement. “We are facing a generational opportunity to build Branded into the leading, digital-first consumer product goods (CPG) e-commerce platform, distilling the best among the $300 billion in revenue generated by businesses already thriving on Amazon’s marketplace. We will look to partner with and enable the most successful founders of high-potential brands to scale their operations globally.”

#branded, #ecommerce, #fulfilled-by-amazon, #roll-ups

0