EP15: John Hefter, a Thrasio Founder on the Future of FBA Aggregation

Raphael: Hey, everybody, welcome to episode 15 of the eCommerce podcast from DataHawk. This is your host, Raphael. And I’m joined by my favorite Amazon expert, Pat. How are you today? 

Prateek: Not too bad. How have you been? 

Raphael: I’m pretty good. I’m super excited about this. Honestly, I couldn’t be more excited for today’s episode as our guests are from the hottest eCommerce company in the world right now. And we’re joined by none other than the pioneers of ABA Aggregation or eCommerce Brand Houses, Thrasio. If Amazon is the everything store, then Thrasio is the everything aggregator. And the timing couldn’t be better, guys. They just announced a $1 billion fundraise yesterday, bringing their total funding to over $3 billion. They currently own over 200 CPG brands, and it feels like they’re just getting started. Today on the program, our guests are John and Sean. It’s a privilege to have you here with us today. And before we deep dive into the million questions we have for you, can you tell us a little bit more about yourself, please?

John: Sure. Yeah. John Hefter. I’m Senior Vice President of Brand Strategy and one of the founders of Thrasio. So, I’ve seen it from drinking glasses of wine in Carlos’s basement, trying to come up with the idea to a little office in a Dunkin Donuts to however many people we are now, and it’s been certainly the journey of a lifetime. 

Sean: Yeah. I’m Sean Perry. I lead the Go To Market team, and I just follow the coattails of John, essentially. He tells us beautiful insights, and then we try to materialize that. 

Prateek: All right, super cool.

Raphael: All right, let’s kick up some questions. Pat, if you want to get started on the operations side. 

Prateek: Yeah, absolutely. So, guys, we have two sets of questions. One is going to focus on the operations aspect and the other sort of more acquisitions, M&A and stuff like that. So, would you like us to throw the questions at you, and then you decide who’s going to answer, or how would you like us to do this? 

John: I’m ready. 

Prateek: All right, cool. All right, let’s do this. So, my first question is, on the operating side, so guys, pre-COVID versus now, what’s changed for or let’s say at Thrasio, apart from the fact that you’ve raised copious amounts of money and now that you own over 200 brands? I mean, more in terms of operations ethos-wise, learnings, what’s changed? 

John: It’s a really good question. We can take it in many different directions. I think a few things that come to mind is a return to simplicity for us, right? We grew so big so fast that we started sort of putting our hands in all sorts of different kinds of pots and, at one point, we were just like, you know what? Let’s just actually try to make our work as simple as possible. So instead of trying to build a Rube Goldberg machine of brand operations, we just wanted to pull as many simple levers that affect that ease and impact hierarchy as possible. And so, for us, from directionally as an ethos system, it’s sort of like a back-to-basics mentality. And that also includes on the acquisition side, it’s sort of like taking in businesses that fit our wheelhouse directly. Obviously, post-COVID inventory has been a massive struggle for everyone. With the iOS update, outside traffic has been more difficult than ever. But that doesn’t mean that you can’t do those little incremental wins that at the end of the day are really what affects growth. Everyone sort of looks for the magic bullet hacks. I talk to conferences all the time, and that’s one thing they’re just writing down. They believe this, but the way they operate their business is if I just stack enough hacks on top of each other, I will be world champion of whatever. Right? But really, it comes down to managing people. It comes down to executing the sort of unglorious little wins that come by doing small things, right. and stacking those things up over time. And that’s what draws you closer to victory. 

Prateek: Agreed. Absolutely. With Amazon, there’s no silver bullet, right? You have to just manage so many moving parts at the same time. All right, cool. You’ve ten X’d, so many of the brands you’ve purchased, right? So, what’s your secret to scaling? Or let’s say, in other words, what’s Thrasio’s core competency today? 

John: That’s a really good question. Also, I think really what it comes down to is esoteric excellence across a lot of domains, right? So, we really understand the supply chain. It might not always be perfect, but we get it. We have very high-quality branding people. We have some of the best Google people on the planet who work for us, right? So, we have outside traffic sources, and we have really solid and experienced brand operations. We have people who understand the back end of Amazon really well. So, all the pieces that you want to be done right are there. And it doesn’t mean that every brand we acquire has that sort of potential to ten X, I think that would be hyperbolic, to say the least. But what we try to do is basically take into the brand and what generally happens is there a one to three-person core team who has VAS somewhere else. Right. And they’re good at a few things. They’re awesome at branding. They’re great product people. They have a really good connections supply chain. They’re really good at PPC, whatever it is. It’s very rare that that small group is good at everything. So, a lot of times it’s just us plugging in our stuff. I’d love to give you a more glamorous answer than that, but at the end of the day, I think it really comes down to that entirely, right? And then we look at it as there always will be some diamonds in a rough. Right. And one in, let’s say 20 are the type of brands that we look at it and we can be like, look, we can angry orange that thing and take it from two to $50 million bucks. And so, we’re working on identifying those earlier and creating teams that essentially replicate that for us in the future. 

Prateek: I love the response about esoteric excellence because I’m sure with your 1000 employees, you have excellence across all sorts of functions involved on Amazon. All right, cool. So, my next question is, you know how, so from what I understand, the threshold is focused heavily in the CPG segment, right?. So, because of the low price points, reaching profitability online and CPG is hard, right? But according to a report I read at the end of last year, Thrasio was registering 20% profitability or somewhere in the double digits. How are you doing that? I understand you’re bringing in, let’s say, Google traffic and stuff like that, but can you maybe tell us a little bit more? 

John: Sure. We send mafia guys to all the factories, and we work out the prices. No, I think that for every business we acquire, the beautiful thing about looking at the P&L of an Amazon business, right, is things are generally very clear as to what the margins are, and the marketplace is, in essence, fairly steady, right? So, it allows us to kind of understand what we have before we acquire it and likely where things are going. And then we have the buying power to maybe renegotiate inventory and tweak some other things, or we have better deals on affiliates or whatever it is that we can find profitable efficiencies in certain places. So, for us, it’s more just knowing what we have and staying away sometimes from big businesses that we might feel are dangerous to us. So, I’ll give you an example of one a few years ago would have been one of our bigger deals, and it was in the home space, and they ran their company, and I believe it could be paraphrasing here. They were doing about 20 to 25 million a year, but their profit margins were 9% on a very low-cost product. So, while we’d love to pick up the revenue and the EBITDA from that, the reality was that a 50-cent price move on that product could just totally destroy your business, right? So, for us, it’s like, all right, well, stay away from those risky ones and look at ones that have healthy margins that we can leverage in the future. And the reality is, if you have a good product and you have a really good review moat, you can keep an asset fairly stable from a performance standpoint and you look for efficiencies elsewhere. 

Prateek: We’re going to come back to this point today about the review mode, John, but I think this is a good setup for Raphael’s next question, I think, which is for Sean. 

Raphael: Yeah. I was wondering, as part of product launches, aside from line extension, do you also rethink products? For example, a major company that has traditionally operated offline, when you wanted to begin selling detergent online, for example, it basically rethought that product and removed the water from it, so it has to adapt it for the online space. Do you engage in that kind of stuff also? 

Sean: Yeah, definitely. It goes back to what John said about operational efficiencies right? We always are looking for those one or two simple movements that we can do with the product to help make it better profit margins, much better customer experience, and we look at that from anything that we already have to new acquisitions all the way across the board. 

Raphael: Could you give an example of that? Like a cool example of like a product that you completely, or like, changed?

Sean: This is a beautiful example to do a plug for one of the products that just launched today was our catchy duo, right? We took a very great product and we distilled down everything the customer loved into a smaller, better package, and it was released today. This is a great example of our team coming together and redesigning it from the ground up, which you almost have to look at in every product line is how can a development standpoint or marketing standpoint give new life to this product.

John: We’d always like to launch bug catchers going into winter, but not everything is perfect in life. But we think it’s going to be a great product for us, so we’re excited about it. 

Raphael: Cool. How do you trust your preparation for Q Four 2021, as in, given the amount of uncertainty with the shipping cost, shopping behavior, how do you track your forecast demand and ensure adequate supply? 

John: You have your first Q4 meeting around St. Patrick’s Day. 

Raphael: When’s that? 

John: That’s a glorious holiday, mid-March. Mid-March in the States.

Raphael: Got it. That’s a good one. I really love this one. During COVID, Ecommerce was clearly booming. Everybody and their grandmother, my grandma, too. So, sales boost, clearly. How difficult does that make it for Thrasio when conducting due diligence on the brand? Like, how do you decide if the sales pick, the brand will stay or disappear in the post-COVID world?

John: I think it’s really just patterned recognition, right? Like, you can pull even things outside of Amazon to see how much interest in the product gains. I’ll give an example. We had one right when the lockdown started in the UK. Of course, we stocked out of this, but I find it hilarious. Like, we had this jump rope that was doing less than I’d say, like, let’s say $1,500 a week and all of a sudden and one day did $110,000 in sales. You know, obviously, that’s like a massive COVID bump, right? And so, there are certain categories where you just see this really arhythmic bump in their performance and then as sort of lockdown eases across America in particular, you’ll see things sort of settled back down to normal. So, we don’t totally discount some of the earnings that were gained during that period, but we just have a reality check. And any honest seller who is really trying to do a deal is not going to try to hoodwink you over like, oh, no, this is going to continue forever, right? So, you look at an assessment of search volume and sales across the entire category, not only across their business, to see where those waves are. And if the seller really believes that, no, this is actually the new reality, then we’ll say, okay, well, let’s just prove it together and we’ll build an earn-out structure that allows them to capture that upside if they’re right. 

Prateek: John, I was just reading that during COVID, you know how all of these pet shelters everywhere, they were just running dry because everybody went and got themselves a little nice dog, et cetera. Now that people are returning to work, they’re sort of taking these pets back to the shelters and saying these were abandoned stuff, animals we saw. So clearly, I think the demand for pet products will maybe sort of go down to some extent. This is, to your point, where you mentioned that the demand for certain things will go up and then start to, maybe,

John: Well, thanks for bringing up the feel-good story of the year. 

Prateek: All right. So, my next question is with billions having been poured into space, right? I think close to 10 billion or something. And now there are like 70 players. Some say that it’s become a buyer’s market, the brand’s market. Have multiples of EBITDA gone up over the last year? 

John: Yes, I think it’s a seller’s market, actually. I think that is what you were trying to identify there. Yes. And I believe they’re getting to a point where they’re sort of stabilizing now. Look, I can’t predict the future, but if I was to look at every other bubble in history, like the rate at which fast money is being thrown at this industry and how aggressively people want to deploy it will mean that some people who aren’t capable of actually managing these businesses will get their hands on them, right? And when that actually happens and they start to falter at very high multiples, which doesn’t allow for a lot of forgiveness. So, you have to remember we were paying very low multiples while we were learning how to do this, which allowed us a lot of forgiveness in some way. If we weren’t performing perfectly, then it still was a good investment. But if you push something up, I’m making this number up now. But if it’s a ten X multiple and you start to screw up in Q1 or you get something suspended for 30 days, it becomes like a very tenuous situation at best. So, my prediction is somewhere over the next year, some of the people who entered the space are going to falter. And some of that money, which again is pledged but not guaranteed, is going to start to dry up. And we’ll never return to the 2018 multiples that were there, but we’ll sort of as we’ll settle. So, if I was to say it went like here and it was here, it’s going to kind of settle down here somewhere. And the wheat will separate from the chaff. The good players will continue to operate and there’ll be plenty of them, including us, of course, and the industry will sort of carrying on as normal. So, I would say if you’re a seller coming out of a post-COVID bump in the market right now where multiples have gone up crazy, it’s a good time to at least consider what your options are because it’s sort of like a rising-up forever mentality. You might get yourself in a situation where you have some serious regret. 

Prateek: Agreed. Absolutely, John, I was just reading a study on FPA aggregators, and it said that 46% asserts that they require a minimum operating history of one year for a potential acquisition target, while 17% said that they don’t require any operating history. This, to me, is already a bad sign. It means that they’re looking to acquire any and every brand that’s out there just to sort of meet the numbers. So, are you suggesting that we might start to see, let’s say, an aggregation of aggregators in the sense maybe an M&A, in the M&A space? 

John: I think it’s totally feasible. Rumors of that are already swirling around our camp. I’ll give a very extreme example. You get someone who decides to buy a hot supplement company. I’m just making this up, right? And they don’t realize that almost every sale from that supplement company is entirely vaporware, right? It’s someone from a place where nefarious activities are common. They find a way to buy reviews or buy sales or do whatever it is to make their business look good, and the people in the diligence don’t have the experience to identify that this is like an unscrupulous actor. I’m just making this up. They buy, they’re doing fine a year in supplement sales, right? They have great reviews. The new people take over, it goes down, and immediately it’s a million dollars in supplement sales and their score goes from four, five to three, eight. It’s a very extreme example, but,

Prateek: It’s happening, right? Because Amazon just suspended so many brands for having bought stars and reviews and all that stuff. 

John: So, I think that’s where some of these inexperienced operators might get into themselves a little bit of a pickle, right? And then they’ll look to get out of trouble. I don’t want to be like a gloom and doom prognosticator by any means here. I think we’re going to have a very healthy ecosystem. But I think on the tertiary, there’s going to be some stories that are something akin to this. 

Prateek: Agreed. Agreed. My next question is slightly related. So, John, there was a time when eCommerce Brand Houses were willing to purchase, let’s say brands that had 100 KF. Now, given that PPC costs have risen inbound shipping costs continue to rise. Shipping is like 4x what it was back in January. I’m talking about the container costs and stuff like that. Do you think that FBI aggregators are now looking to raise the minimum EBIT to something more in the camp of, let’s say, 500K or a million? Because 100K of EBIT simply is just too risky, right? It doesn’t provide enough wiggle room. 

John: I think some are and some aren’t. You have to look at a risk profile in two different ways. There’s not a lot of wiggle room in 100K, even a business. But there’s also not a lot of risks, right, from the money that you’re taking in. So, it’s who’s taking big bites of the apple and who has in a very simple game theory way, how do they look at the risk of your portfolio, the businesses that you own in relation to the bet you’re taking right now? So for a company of our size, a 10 million EBITDA company, as crazy as that sounds, is not a massive risk, right?

Prateek: I only trust you could say something.

John: But for others, like a $2 million eBay company, their investors would only care about that.

Prateek: Got it.

John: So, I think there’ll be opportunities for all levels for people who want to exit. But those people who are at the 100K, what I want to say is, like, have you pushed yourself far enough? Could your 100K actually become 500K, a million in a year and a half if you just hung in there and do the things, the hard things you know, you have to do to make it either a brand or to take a loan out for inventory to drive sales, whatever it is, how much-unrealized gains are you willing to sacrifice?

Prateek: Agreed. I think this is a good setup for Raphael’s next question. 

Raphael: Yeah, I was listening to yesterday’s podcast where Carlos Cashman was saying that Amazon follows matches principle to those who have everything, everything will be given. 

John: He stole that line from me. Carlos.

Prateek: And I’ve stolen it from all of you. I’ve said it like ten times now. 

Raphael: Everything will be given. We’ve seen that in any given category on Amazon. The top 30 brands tend to be dominant. And that makes sense, right? I mean, they create that rating moat, and then the flywheel effect takes over and everything. As such, in a given category, if four or five aggregators buy out most of the top brands, will another mom-and-pop-owned brand even be able to emerge? Do they stand a chance today? 

John: Of course, yeah. It’s the Matthew Principle. So, it’s not like I didn’t steal that from someone anyway. Those iterations of the creative principle, it’s just like the 8020 rule, right? It’s the same across every domain. It’s like the top 50 music artists produce like 90% of the revenue in this place. Whatever it is, it’s the same across our world here. But here’s the issue when you are acquiring brands. The rate, which I believe Carlos said, we’re at 1.5 brands per week right now. Right. That’s a lot of work to do right now. It’s a ton of work and also it’s a ton of distributed focus. So, we talk about this sort of conflict all the time. If our top lines were to sit down in a room and only focus on one brand for X amount of time, we know we’d get y amount of output there. And we could take this one thing and make it amazing at the cost of everything else. Right? So that’s like our balance which the savvy new winner can do. And I use this example all the time. If I was to enter like the lemon squeezer space. Right? I don’t know. I’m making this up. 10,000 people selling that space, all the squeezers look the same. How are you going to win? You probably have some direct factory sellers selling for a much lower cost. Yeah. Well, for me it’s like, all right, well, I’d come up with a branding play probably. And I’d make stronger hinges that I would patent and I would make it a different color. And I do a video where it’s like breaking a watermelon in half or avocado seed or whatever it is or doing like 20,000 squeezes and it looks exactly the same, and I call it like the gorilla squeezer. I don’t know, something like that, right? And then I have a chance at winning in that category even at a higher price point because I built like a brand, let’s say, right? We’re not going to do that. Not to any massive, we will do it in certain very specific cases where we see as a real opportunity. But smaller sellers still can, and they can obsess about those little minutiae that can really help drive their business in the future. So, I’d like, the idea that we’re going to kill the small business person, which, by the way, our business relies on. 

Prateek: Yeah, exactly.

John: I don’t think that’s the case. It might be harder, though, because it’s more. It’s harder because advertising costs more now, shipping costs more now. That’s what’s going to make it harder, not people like us entering this space. 

Prateek: Agreed. That brings us to our last question. The last guy I used to work with, so he used to like saying with scale comes complexity, right? And you guys have scaled so much in the last year, right? So 1000 employees, 200 brands. What are some of the complexities you’re seeing creep into the system and how are you dealing with them?

John: Whoever said that’s a really smart dude, I would say. I missed the days when if I needed something, I could just yell across the table at every department and we were like a little pirate ship. To get angry orange off its feet, I’m on the phone with my creative person yelling at them to get me 19 different variations of this thing. I’m calling the supplier and saying if you don’t do this for me, I’m the company factor myself, you know, and we could just do, we just did stuff. 

Prateek: Yeah, right. I was reading an interview where somebody said that they picked out the right color for the bottle of angry orange after looking at like 20 different colors. Was that you? 

John: That was me. Yeah, that was me. 

Prateek: Oh, wow. Okay.

John: Anyway, but those days are long over. We have systems. We have processes, right? We have more investors who are interested in what we’re doing and how we’re doing it and we have SP&A teams and HR teams and we have interdepartmental politics. And there are 1000 more layers to things that were before, which is why I open up this interview by saying, we are leaning into simplicity as much as possible. 

Prateek: Yeah, okay. 

John: Harder to get things done too when you’re a big moving we’re cruise ship now. We were a pirate ship before, right? Like turning into any harbor and now we’re this giant ship. And so, it’s really hard to reconcile those things, but Carlos does a great job of saying this often, which is just like everything’s more complicated than you think it is. Yeah. So, it’s just like, be very careful with the new things we take on, and yeah. It’s the only thing that keeps my head spinning sometimes, which is just like, we see a problem that used to be so simple to solve but now there are 19 parts connected. Sometimes it’s like if you ever try to do this, maybe don’t do this, but try to think about the creation of the universe and how it actually started. Eventually, your mind will just turn away too much and we get that feeling sometimes. 

Prateek: John, in the age of social media, I can’t think about anything for more than 30 seconds. That’s my sort of attention span now. So, that’s what, well, thank you so much, guys. I don’t have any other questions. I don’t know. Raphael, do you?

Raphael: Where are you guys based right now? Where are you talking to us from? 

John: Sean is in Salt Lake and I am in the Boston Area. 

Prateek: Got it. Lots of activity there. There’s Perch and there are you guys and I think there’s another player if I’m not mistaken. I can’t recall. Whatever 70 brands there.

John: Imitation is flattery, you know?

Raphael: Well guys, from Paris, France, thanks a lot, really, for being on our show. I learned a lot of things. It was a pleasure to speak to both of you, and a real pleasure to chat with you. And we’ll see you all next time. Bye-bye.

Prateek: Thank you. Thank you so much, guys. See you. Bye.

John: Talk to you later. Bye.