The Beginning of the End For Lots of Amazon Rollup Companies

The Amazon rollup model was only ever going to work for a select few of them. Those with a narrow category focus (many acquired all over the category spectrum). Those with extreme operational experience (most had never built a profitable Amazon business before raising money).

Personally I also think a focus on the smaller end of the brand spectrum as always the greatest opportunity. It's not about building the most tech, and it's not about being the biggest, either.

Sometimes being large only means that you leave a bigger hole in the ground when you crash.

Recently the Information did an article which highlighted a few areas:

- the more companies you acquire, the harder it is to integrate and run them.

- several of these companies have bought high and sold low from a valuation point of view, due to the pandemic.

- it's easier than you think to get booted off Amazon.

- As an industry, these companies took about $4 in debt for every $1 in equity. Debt of course needs to be repaid with cash flow. Sometimes cashflow is hard to come by, particularly if you are overinvesting (many of these aggregators incorrectly thought they were tech companies -- btw so did WeWork who is now WeCrashed).

- The industry took on about $14B in funding, which means that only $3.8B in equity and $11.2B in debt. That is a crushing amount of debt to take on.

Sounds to me like the creditors (finance as picks and shovels?) won this round.

Before the pandemic, larger sellers were buying smaller sellers. Right before and during the pandemic, investors raised money to simply aggregate growth and EBIT with no real differentiation.

The counter-narrative is simple:

- small to medium-size sellers are underoptimized in so many ways (people, advertising, supply chain primarily)

- amazon 3P still growing fast

The main problem is this counter-narrative does not solve for cash flow. Another huge problem is any cost savings are being eaten up by rising supply chain costs, materials and labor inflation.

It's about cash flow. Trust me, the most successful sellers on Amazon do not want you to hear about them.

Ever.

They want to remain hidden and keep throwing off cash to their owners.