EP9: eCommerce Brand Houses- The P&Gs of Tomorrow

Investors are pouring billions into building eCommerce Brand Houses – the P&Gs of tomorrow. So what is the opportunity these FBA Aggregators are looking to tap? And what is the value they’re creating? We peel the layers on one of the hottest trends in the Amazon world.

Raphael: Live from DataHawk studio in Paris. I’m your host, Raphael. Welcome to a new episode of the DataHawk eCommerce Podcast. Guys, I don’t know if you heard about investors pouring billions towards building eCommerce Brand Houses. It’s all over the news, if you follow a little bit about what’s happening in the Amazon world, these guys are building the PNGs of tomorrow. If you want to learn more about it, and want to learn what’s an eCommerce brand house, why is there a market explosion right now, I mean we’re talking about hundreds of brands that have already been bought out, and why you should care about it, stay tuned? Pat, the Amazon expert at DataHawk, is with us today. Pat, how are you doing?

Prateek: Excellent, Raphael, and thank you for having me. I’ve got tons of great stuff to share with you today.

Raphael: Awesome. Let’s get into it. Let me start by asking the most obvious question: what are eCommerce Brand Houses?

Prateek: I like how you refer to them as eCommerce Brand Houses, Raphael because it makes them sound very elite. So, eCommerce Brand Houses, or FBA rollouts, are essentially businesses that eventually acquire and then scale small brands which are using FBA to sell on Amazon and have demonstrated success in doing so. 

Raphael: Okay wait. Why the focus on FBA sellers?

Prateek: Well, generally speaking, it’s no secret that success on Amazon and using FBA, go hand in hand, right? Most successful sellers on Amazon use FBA. Yes. So, while there may be brands that don’t use FBA and are still successful and may still be of interest to eCommerce Brand Houses, they make up a very small portion of the target market. The vast majority of brands purchased by eCommerce Brand Houses used FBA when they were purchased.

Raphael: OK. So, my question is, why today? Why are we talking about this today? What changed?

Prateek: Well because the space is really heating up, right? Every single day I hear about some eCommerce Brand House raising tens of millions of dollars, if not hundreds of millions. In February alone, I read about Thrasio.

Raphael: The largest acquirer of Amazon businesses and one of the top 25 salesmen, I did my homework.

Prateek: Your knowledge of eCommerce is better than I thought it was.

Raphael: Just to give you some background.

Prateek: Yeah. They raised 750 million, and Branded raised 150 million, Elevate Brands raised 55 million.

Raphael: How come? I’m very curious to know. It’s amazing. How come the sudden emergence, or rather explosion, of this trend and business model?

Prateek: Yes. That’s an interesting question, Raphael. And there are so many reasons,  right? There is essentially three sides to this. You’ve got the investor side which is pumping money in, you’ve got the eCommerce Brand House side which came up with the model, and the brand side where brands want to exit the company. 

Raphael: Okay. So, let’s start with the investor side, please.

Prateek: Sure. Sure. So, brass tags, Raphael. Money flows where the opportunity is, right? In 2020, 3P sellers accounted for 300 billion of sales on Amazon. That number is set to double in the next five years, meaning we’re looking at a 600 billion dollar industry. Essentially, the whole pie is just getting massive, so it’s no surprise that this opportunity has caught the attention of investors, right?

Raphael: Of course. Of course.

Prateek: Secondly, interest rates are at an all-time low. You’d be stupid to not borrow, really. And after you borrow, what do you do? You invest, right? So there’s all this cheap money available and equities are high so investors are looking for new asset classes, right? They’re looking for new channels to invest in. Hence the massive fundraisers. And, if we were to take a step back, the first phase was the lending phase which started a few years ago. Investors saw an opportunity and began lending to these microbrands. Then, they decided to take it up a notch, and here we are. So, billions of dollars have been raised and hundreds if not thousands of brands have been bought out as you said.

Raphael: Super interesting. And what about the eCommerce Brand Houses side? What do we get?

Prateek: Yeah. It was just a matter of time, right? I mean, how many anchors have we seen coming out of Amazon? Anchor recently IPO’d at 10 billion, right? Yeah, but that’s just one example. I can’t think of others. For years, these micro brands which were operating on Amazon just weren’t sophisticated enough. They simply lacked the necessary tools and expertise to scale, right? The founders of these brands had expertise in product development but not retail. They created great products, but that’s it. I can tell you this from experience because when I was working at stores one to three, we were working with all these brands which had great products but would send inventory updates to us via excel data feeds once a day, you know? And that same data feed would go to multiple resellers, they’d all list the same number of units on Amazon and then face out of stock issues because one of the other resellers had already made some sales and placed orders with the brand, but the brand wasn’t updating the inventory feed in real-time.

Raphael: No way. Okay.

Prateek: Right? Or say the brands didn’t have SEO or Amazon advertising expertise, meaning they wouldn’t show up at top of the search. Also, in terms of images, videos, and A+ content, the brand simply didn’t have expertise in those areas. So, the eCommerce Brand Houses sense an opportunity there, right? They were like okay. These products are great, they sell well, but we can really scale them, you know? Introduce variants of the product, improve the organic visibility, invest in advertising, and make them available on other channels like Walmart, take them international like the UK or Europe. They basically marry their money in tech and services expertise with the incredible product and then scale it.

Raphael: Super clear. And what about on the brand side?

Prateek: Right. So, one million 3P sellers joined Amazon in 2020 alone, right? Their total count today is around five million. And why this explosion? Well, because barriers to entry have come way down, Raphael. It’s easy to source thanks to companies like Alibaba, it’s easy to launch thanks to YouTube where there are tons of tutorials, you don’t need a consultant, and it’s easy to tell, right? Just send a few units to FBA, they will store the product and ship it to the end customer. An important point to note, Raphael, is that brands were just tired of their resellers fighting for the Buy Box and engaging in price wars. It was bad for the brand’s reputation and image. But for a whole area of reasons earlier, brands were just dependent on resellers. 

Raphael: What do you mean? It’s their brand and their product. Why were they dependent on their resellers? 

Prateek: Well for so many reasons, Raphael, and you know, eCommerce Brand Houses too are successful for exactly those reasons. In a manner of speaking, they’re contemporary resellers. So, you know, after Amazon introduced the inventory performance index, you know, the IPI, along with it came the long-term storage bill. Meaning, if you weren’t selling your inventory fast enough, you’d be presented with a large storage bill from Amazon. Resellers helped you avoid this. Why? Because large resellers were working with hundreds of brands. In any given month, due to seasonality or product type, some products would sell and others wouldn’t. Though, overall, Amazon’s inventory performance index would be satisfied, you know, thanks to the reseller, and you’d escape having to incur long-term storage charges. Then there’s the shipping cost, right? As a smaller brand selling just their products –

Raphael: Yeah. You wouldn’t get much of a discount from carriers like UPS and FedEx, of course.

Prateek: Exactly. However, a reseller selling products for multiple brands would have a significantly large shipping volume, thus receiving huge discounts from the carriers. I mean, even as high as 40-50%, right? And that, too, became a competitive advantage because the discounts could be passed on to shoppers, making your products look more lucrative, right? Thirdly, retail and Amazon expertise. As I mentioned earlier, the forte of these brand owners was product development, not retail. Given there are hundreds of alternatives for every product on Amazon, you really need to understand SEO and Amazon advertising, creatives, competition tracking, and so on, to be visible top of the search. Brands simply lacked that knowledge. Lastly, overhead costs got distributed when you worked with the reseller. For example, if you were a brand let’s say doing a million dollars annually in sales, your product cost was about 30%, right? The referral fee, you know, Amazon’s referral fee, was about 15%. Shipping cost, inclusive of both inbound and outbound, was about 15%. Warehousing cost of 10%, covering rent, packing supplies, maybe one person for picking and packing orders, you know? Advertising costs, 15%. That leaves you with 15%, right? That’s $150,000. Assuming you want to set aside at least $100,000 for yourself, you’re left with $50,000 to spend on human resources. You can’t hire a data analyst, plus advertising personnel, plus advertising personnel, plus accounting personnel, plus inventory personnel, this is not India, right?

Raphael: India? Yeah, I was going to say it’s definitely not India.

Prateek: But if you work with the reseller because they’re working with multiple brands, they hire the people who do the same work except for multiple brands, and then the cost gets distributed over multiple accounts.

Raphael: Right. The economy of scales, right? Business 101.

Prateek: Exactly. Yeah. So when you think about it, that’s also the valued proposition of eCommerce Brand Houses, right? So yes. These are some of the reasons why micro brands were dependent on resellers, and the opportunity eCommerce Brand Houses are seeking to tap. Anyhow, we think this trend is only set to accelerate as micro brands are seeing a lot of success on Amazon and are starting to grab market share from larger brands that have been around for a much longer time. And we see this all the time when we prepare our Amazon category best sellers or the Amazon share voice reports.

Raphael: Absolutely, yeah. It’s completely true but let’s promote DataHawk a little later in the episode, okay?

Prateek: Okay. Okay.

Raphael: So, okay. So we covered all this, and now, who are the dominant players in the space today, Pat?

Prateek: Yeah, there’s quite a few actually, as the opportunity is large enough to warrant multiple players, participants. You’ve got Thrasio like you mentioned, which has already raised over a billion dollars in funding and has acquired over one hundred brands already. So, I don’t know if you know this Raphael, but they are acquiring 1.5 million in revenue per day. Why? Because they’re acquiring two to three brands per week. And then you’ve got Boosted Commerce which raised upwards of 80 million late last year. And then you’ve got one of the most recent entrants, Branded, which just came out of stealth mode and has already hit a sales run rate of around 150 million as a result of acquisitions. Elevate Brands just announced a 55 million fundraise just last week, and then of course you’ve got Perch which, in December of 2020, announced they had already acquired 20 brands and raised north of 100 million.

Raphael: Damn. It’s a very exciting time in the space, huh?

Prateek: Yeah. For sure.

Raphael: What does an eCommerce Brand House look for in brands, as in, what decides whether or not they should acquire a part of your brand, Pat?

Prateek: I’m glad you asked, Raphael. I can feel some excitement on your side. Are you planning on launching your own brand?

Raphael: Yeah, I mean, everything is in slow motion for over a year now. For everyone actually So, I’ve had more time for my own projects, right? For my side projects. I think this could be the perfect time to do it. Well, let’s bring DataHawk to the moon first and then we’ll see.

Prateek: Okay. So, first and foremost, they want to acquire DTC sellers, you know? Sellers who have a brand that they owned. The sellers must own the trademark. They’re not looking at acquiring resellers, meaning they’re not looking at acquiring a Pharma Pack, so, you know, one of the biggest resellers in the world if not the biggest. The brand must be on Amazon’s brand registry. They want to buy a business, not a product. That is, if the vast majority of a brand’s business is generated by a single product, the multiple that they will receive will be lower. The reason for that is a risk, right? Because what if the SKU gets suppressed by Amazon or falls out of favor with shoppers.

Raphael: Yeah. They should also have like products with high organic visibility, I guess?

Prateek: Exactly, exactly. The product should have high organic visibility, be top of search results, and a low (), right? The product should not be a fad, you know, a fashionable today gone tomorrow kind of a product, right? There should be a low risk of obsolescence because if your brand let’s say makes iPhone cases and Apple roles out a new model every year, they’re probably not going to be interested in your brand. Just the way you’re not interested in your old iPhone anymore, somebody’s not going to be interested in buying your brand anymore.

Raphael: That makes sense.

Prateek: So, your brand should have great ratings and reviews because, again, that’s the ultimate vote of confidence in your products, right? It shows that shoppers truly like your products, or maybe dislike your products, right? And you should have low return rates again, you know because that’s another really important metric – proving shoppers like your products. You should have profitable unit economics, that is, make money on every single sale. In my opinion, Raphael, the best niches are CPG products with high LTV, right, because these are products that lead to repeat purchases.

Raphael: Yeah, that makes sense. So basically, you need to be successful on Amazon to be bought.

Prateek: Exactly. Exactly.

Raphael: Looks like you’ve really done your homework.

Prateek: Well, Raphael, bars are shut. I have a lot of time.

Raphael: I feel you. What are these eCommerce Brand Houses looking to achieve? Like, really? Are they just looking at brands as investment vehicles that they will build and then sell and have higher validation or what’s the plan here? Are we on the cusp of something bigger?

Prateek: Yeah. You know, Raphael, the truth is these guys are looking to build P&Gs, RBs, you know, unit levers of tomorrow. They’re looking to build household brands. They will go multi-channel, you know, they will be available on shelves and supermarkets. They will build out their own warehouses. They’re looking at achieving scale, and that scale will have a tremendous impact on the business. You name it. I mean, sourcing, because they will carry a much larger catalog, naturally their sourcing volumes will be higher, entitling them to better prices, right? On the logistics front, they will consolidate containers and incur a reduced inbound cost. On the sales front, they will introduce let’s say **, which will help expand the various **, you know, reviews, ratings, star ratings, organic visibility, and so on. And think of advertising. They’ll have their own products to run product ads on, on their own PDPs, meaning you will not see a competing product on their PDPs. They will expand to other channels, Walmart being the first. In fact, both Perch and Thrasio, they’re already at Walmart. And they will expand to new geographies, meaning they will essentially scale the brands to their true potential.

Raphael: You mentioned P&G, right? That’s interesting because, today, P&G has really, really deep pockets. Why can’t they do exactly what Thrasio’s doing, meaning why can’t they just go out and acquire brands also?

Prateek: Yeah, touchy subject.

Raphael: Why so? It’s logical, right?

Prateek: It’s logical but it’s touchy for me to answer that because I don’t want to offend the good folks at P&G and I have some friends working there. Look, Raphael, the whole business model is different. P&G is not a DTC company, meaning they don’t sell shampoo, they sell pallets of shampoo. Do you know what I mean? And traditional CPG companies, change pricing once a year. Boosted commerce changes pricing every hour because online retail, Amazon, is in their blood, right? But this is a wake-up call for traditional CPG companies. They need to go DTC now. Look, Target has created six 1-billion-dollar brands in just the last three or four years. Traditional CPG companies, I mean, I can’t think of any, right? In my opinion, Raphael should start acquiring DTC brands ASAP and try to scale them. In fact, Unilever started with the acquisition of the Dollar Shave Club, right? One of the biggest factors behind Unilever’s acquisition of the Dollar Shave Club was the fact that the latter was a DTC brand with direct relationships with their customers. They just did it again with SmartyPants, a DTC multivitamin company. Traditional CPG companies need to really accelerate their acquisitions or, in the next few years, they’re going to be facing a very different competitive landscape. Look, today, Thrasio is already selling 12-14 thousand unique products. When you factor in **, that’s close to 50 thousand products, right? On a recent podcast, Carlos Cashman, the co-founder of Thrasio, said that he’s now thinking of how to get to selling one million products, and in my opinion, that day is not too far away.

Raphael: Yeah. Me too. Basically, you answered the question by saying yes, they should. They should acquire brands.

Prateek: Exactly. Exactly. For sure. Absolutely. Time’s running out.

Raphael: Today, DataHawk is proud to be serving companies such as Thrasio, Boosted Commerce, Branded, you know, leaders in the FBA acquisition space. So, can you explain exactly how DataHawk is helping them?

Prateek: Absolutely. So, our analytical capabilities allow them to quickly identify top-selling products and brands on Amazon across over 20 thousand Amazon categories in all Amazon geographies. You know, be the US, the UK, Germany, France, Italy, and so on. Thereafter, we help them with the due diligence, in a sense. We measure brands’ organic and sponsored visibility on Amazon. We assess how the acquisition targets stack up against the competition in terms of reviews and ratings. We also provide a complete account audit of the brands’ Amazon sales and advertising history, meaning the brand’s cost per click, ACoS, revenue net of ad spent, and so on. Essentially, it’s a scorecard, Raphael, which pretty much provides a buy or don’t buy recommendation for these eCommerce Brand Houses.

Raphael: I love that. Eye-opening. Alright. That’s a wrap, people. Thank you, Prateek, for your time today. Really.

Prateek: Thank you for giving me the opportunity, Raphael.

Raphael: Amazing, amazing introduction on one of the hottest trends in the Amazon world.

Prateek: Yeah, for sure.

Raphael: I really hope you guys enjoyed it, and we’ll see you very, very, very soon. Bye-bye.

Prateek: Bye-bye.