The world of e-commerce isn’t slowing down, yet many e-commerce aggregators are already struggling. Decreased consumer confidence, inflated brand value and a freeze in investment capital are creating a perfect storm. Unless aggregators change how they operate, their future is bleak at best and nonexistent at worst.
At Pattern, we predicted the demise of the aggregator business model last year, but the moment of truth has come even sooner than we thought. That said, there’s still time for these businesses to course correct. If aggregators act fast, they can position themselves well for their next phase of growth. But first, how did we get here?
The broken model
In theory, the brand rollup business model sounds like it could work. An aggregator buys consumer product companies and uses its existing infrastructure to scale them and turn a profit. Earnings before interest, taxes, depreciation and amortization (EBITDA) for many of these brands is already at two or three times their original purchase price. Buy enough of them and you’re looking at EBITDA arbitrage — a 20x or 30x increase in your own valuation. So far, so good.
However, this is where most of these aggregators stop. While they’re great at acquiring brands, they’re terrible at investing in R&D, innovation and operations — all the things that matter for growing one brand, let alone a dozen.
Additionally, many aggregators worked on a hyperaccelerated timetable. They had a finite (and shrinking) number of brands to buy in a short amount of time if they wanted to bundle them up and flip them as a package. So, they kept buying brands without going through the usual due diligence, which inevitably led to buying brands with mediocre products, inflated sales and fake reviews.
It’s comparable to the financial crisis of 2008, when poor financial products were lumped together in order to diversify risk and make them look better than they actually were. We all know how that turned out.
Marketplace crackdowns and increased competition
Amazon is very much geared toward protecting the consumer, which is bad news for some aggregators. As Amazon cracks down on brands that have been gaming their reviews, many have been forced to shut their doors — including brands that have become part of rollups. Brands that survived the squeeze are seeing fewer sales and slower growth now that their mediocre-to-poor products have to stand on their own merits.
Simultaneously, the number of players in the aggregator market has significantly increased, which means the cost of brand acquisition has gone up. This forced most aggregators to overpay for the brands they purchased, which means they now struggle to recoup their initial investment. What’s more, the drop in consumer confidence in Q1 and recent world events have destabilized the markets, bringing the whole business model to its knees.
The path forward
For aggregators that have survived the initial squeeze, the path forward is a two-stage journey. First, they need to scale back their M&A teams and make room for experts in consumer packaged goods (CPG) to grow the businesses they manage. Their finance teams were excellent in helping them get to this stage, but that calibration won’t serve them well now. To survive, aggregators are going to have to look and act more like the brands they compete against, which means having a team that resembles the ones at the leading CPG companies.
Second, they need to close the data science and technology chasm between them and the brands they compete against. Many of those brands partner with e-commerce accelerators that have a different approach to growing a brand. Rather than acquiring them, they arm brands with the latest innovation, data science, technology and expertise to help them maximize brand visibility, drive conversions, maintain price integrity, accelerate revenue and scale logistics.
Many accelerators have spent years building data science and technology platforms to grow brands on a global scale. Aggregators don’t have this, but they desperately need it if they want to survive, let alone thrive. In the end, they can do that by partnering with an e-commerce accelerator or decide to become one themselves.
Beware the chameleon aggregator
Aggregators are aware of the trouble they’re in, so it’s possible that some of them claim to be accelerators. However, there are tell-tale signs that can give them away. The easiest way to find out is to look at their executive team.
Unlike aggregators, accelerators need data scientists, marketers and innovators to grow the businesses they manage. They continuously look at ways to innovate and make their brands more competitive, so it’s very likely that a big part of their executive team will have backgrounds in these fields.
In contrast, aggregators are mostly concerned with spotting good business opportunities and turning a quick profit. It’s not uncommon to find that 30% or more of their executive team is from the banking or financial services industries. If that’s the case, you instantly know that the company has yet to make the full transformation. They’re likely an accelerator in name only.
Finding a safe harbor
Not all aggregators are destined for failure. There are some great ones out there run by amazing people. These folks understand that growth through acquisition got them here, but it won’t get them to the next safe harbor. They now need to grow the brands they have if they want to survive.
Time will tell how many aggregators are successfully able to make this pivot. Those that don’t are likely to become acquisition targets themselves, but those that do will likely reshape the way we think about creating successful houses of brands in the 21st century — born digitally, aggregated deftly and accelerated globally.