Investors can’t get enough of roll-up funds that buy Amazon sellers. John Thornhill reports for the Financial Times:
Any sober seller might think twice about doing business with a company whose founder was wedded to the idea that “your margin is my opportunity.” But many merchants, desperate to stay afloat as retail sales shifted online during the pandemic, have had little choice but to sell on Amazon’s vast marketplace. At last count, some 56 per cent of the units sold on Amazon’s platform were made by 1.9m third-party sellers.
Jeff Bezos may have blasted out of the chief executive’s seat at Amazon after 27 years in charge but the company he founded is still dedicated to the relentless pursuit of opportunities in others’ profits.
As described in a recent article in Harvard Business Review by two business academics, Andrei Hagiu and Julian Wright, Amazon has many ways of squeezing margins out of merchants. The ecommerce company entices as many sellers as possible on to its platform to sharpen price competition. It can modify its listing fees or tweak its recommendation algorithms in unknowable ways to promote or demote sellers. It can spot emerging trends in its sales data and launch rival own-brand products.
All this makes selling on Amazon akin to tiptoeing into a dragon’s cave. You may be able to keep warm but you run the risk of incineration. Yet in spite of the well-advertised dangers, billions of dollars have been pouring into specialist investment funds to snap up some of the platform’s most popular small merchants. Market Pulse, which tracks the market, calculates that 74 such roll-up funds have raised almost $9bn since April 2020, including Thrasio, Berlin Brands Group and Perch. A trend that started in the US has now spread to Europe. Such has been the demand that one fund has even been offering a free Tesla for every successful merchant referral. Why are investors keen to swallow such glaring risks?
The sketchy answer tells us much about the rapidly evolving dynamics of online marketplaces as well as the desperation of footloose investors to dance in the digital economy. Some adaptable merchants have thrived in Amazon’s marketplace thanks to its immense reach and logistics infrastructure. The most-cited example is Anker, the “Amazon-native” Chinese computer accessory manufacturer, that listed in Shenzhen last year with an $8bn valuation.
If Amazon is in the business of profitably intermediating data flows then others can acquire useful data intelligence from its site, too. Savvy aggregator funds can snap up the best-selling small merchants and deepen their insights into Amazon’s algorithms. The Boston-based Thrasio, which has raised $1.8bn of funding, now owns 150 brands and a portfolio of 22,000 products. Its ambition is to become a consumer goods heavyweight, a new Procter & Gamble designed for the digital age.
Read more here.