Looking at the Amazon aggregator sector specifically, $12.3Bn in debt and equity funding was raised over the course of 2021, eclipsing all previous records. The delay between fundraising commencements and deal announcements even made it appear that funding to the sector had accelerated in the second half of the year ($7.2Bn in funding to aggregators vs $5.1Bn in the first half). But in reality by late Q4 2021 the funding to the sector had slowed down and the largest aggregators were already pausing acquisitions.

The first quarter of 2022 has brought even more challenges, with interest rates on an upward trend for the first time in decades, capital markets struggling and the war in Ukraine creating further destabilisation. In contrast to the frenzy of early 2021, there is significant caution across capital markets globally, making it more challenging for acquirers to raise their next funding rounds. Those cheering for the fall of the Amazon aggregators seemed pleased when the first negative news from those firms (layoffs, restructurings) started becoming public in the first half of 2022. Thrasio announced layoffs in the same week as Robinhood, Netflix and many others (as well as hiring slowdowns at Meta and Uber). Many prominent pre-IPO startups had already experienced steep reductions in valuation, yet in the e-commerce ecosystem it seemed all anyone was talking about was the downfall of the aggregators.

But those who are waiting for the collapse of the Amazon aggregator sector will be disappointed. While the aggregators have experienced some challenges, the underlying business model is sound (albeit with adjustments). Restructuring is normal for fast-growing businesses, especially when there are changes to the macro environment they are operating in. Unlike early stage tech startups, the aggregators have revenue and (gross) profits. The most conservative ones are approaching net profitability, less than two years in. The most ambitious, like those who blaze a trail in any sector, have arguably made more mistakes (too many small acquisitions, not enough attention to brand, too much SG&A, not enough founder talent staying on). Thrasio is the most high-profile of these, and its decision to remove its entire M&A function while it recalibrates will raise eyebrows. But Thrasio and the other early aggregators also benefited from the largest equity raises and have larger cushions than those who raised mostly debt. They will (mostly) be fine. It’s clear that they need to acquire and build larger brands if they are to eventually resemble anything close to Unilever or P&G. But they still have time to do so.

METAMORPHOSIS

The aggregators that are currently in cocoon-mode will come out of the metamorphosis looking quite different to before. They will make fewer, larger acquisitions. They will focus on brands rather than merely products. Most aggregators will narrow their focus to specific categories, building platforms in key areas and looking for bolt-on acquisitions to support them. Complex deal structures and joint ventures will become more common. All of the aggregators will remain beholden to their “investment committees”, who are the ultimate decision-makers for all of their deals. With these investors demanding a higher return on capital in the new, higher interest rate environment, lower valuations on average are the inevitable result. But the most sought after brands will continue to command a premium.

Once unease in the capital markets begins to subside in the second half of 2022, investment into the sector will continue, albeit at a slower pace than the record-setting year of 2021. The consumer sector remains a highly investable asset class. The investors who funded the sector pre-pandemic will continue to see opportunities in this space post-pandemic, while most of the new entrants will also remain. Hahnbeck has knowledge of equity raises by several aggregators in 2Q 2022 (in addition to debt restructurings), and many others report that their investors remain keen to reinvest. Executives from CoVenture recently described how they believe the aggregator model will continue to provide a competitive advantage, noting that they have term sheets out with three aggregators in May 2022, despite the news cycle.

Consolidation amongst Amazon FBA aggregators is natural and will continue into 2022 and 2023. There will be some failures, as in any sector. Divestitures of non-core assets will become more common as acquirers focus on their core platforms, operating more like consumer PE firms.

STRATEGICS

Meanwhile, strategic buyers will continue to make acquisitions of synergistic brands. The largest exits will continue to be to strategics (and to PE firms as strategic bolt-ons). Early 2022 has provided more examples of the maxim that the best exits are to strategic buyers.

The most sought after brands will command strong multiples, as strategics, PE and aggregators all vie for the same assets. When acquisition is a firm’s raison d’etre and it narrows its acquisition criteria, as the aggregators are doing, those few targets that meet the new criteria become a much higher priority.

ACHIEVING AN EXIT

While fast-growth DTC brands will continue to command the highest multiples, fast-growing Amazon businesses that have a demonstrated consumer relationship and strong brand will also achieve very good exits. Even pure play Amazon brands will most certainly still be in demand, if they meet the acquirers’ acquisition criteria around brand, defensibility, category, size, margins and growth.

One part of the aggregator story that has so far been disappointing to sellers is the aggregators’ seeming lack of willingness (or ability) to invest in businesses that are not growing strongly. Declining sales and margins are viewed with great disdain. Instead these acquirers have, by and large, relied solely on acquiring brands that are already growing year-on-year. This is partly a function of how their performance is measured by their investors (with the historic sales of the target, even pre-acquisition, feeding into their own consolidated growth metrics). But it is also due to the fact that operating a brand better than the founder is actually incredibly hard. It is much easier to benefit from the tailwinds that already exist in the target than to be confident in generating new profitable growth post-acquisition. The reality of this is quite different to the claims made by many of these firms, especially in their earliest days. While there is still very little enthusiasm for turnaround cases amongst the aggregators, some exceptions are starting to appear, with a few standout firms beginning to have the confidence to acquire businesses with declining sales or margins, in certain situations.

In the current environment, the need for growth as a prerequisite to exit means that many sellers who would like to sell are waiting for year-on-year growth to return first. For most this means waiting until later in 2022 or beyond. Those who have maintained growth through to 2Q 2022 are exceptions and are in higher demand as a result.

Besides growth, each aggregator is starting to develop other strategic priorities (such as specific fulfilment capabilities, IP, talent and more) and businesses that meet these criteria are more highly valued by the acquirers who have those requirements. In this context, working with an advisor like Hahnbeck, who understands each of the buyers in depth, will be absolutely critical. In a frenzied market it was possible to sell without the support of a sell-side advisory firm. But in a more subdued market, brand owners that attempt to go to market without an experienced advisor will find it difficult to sell at all.

DEAL RISK

Many sellers (especially of Amazon brands) have sadly experienced their deals collapsing in the first half of 2022, with buyers suddenly pulling out of the process. Across the market we’re aware of a wide range of reasons buyers have given for abandoning deals under LOI. Some have retraded, others have simply retreated. Ultimately much of this is down to increased caution on the part of the acquirers’ investment committees, who call the shots from “behind the curtain”. Working with an advisory firm who can provide insight and advice regarding the deal risk with each buyer is also very valuable in this environment. Hahnbeck provides this insight, and much more, to its clients.