Member Exclusive   //   March 12, 2024

DTC Briefing: Aggregators are undergoing a correction as issues around debt come to a head

This is the latest installment of the DTC Briefing, a weekly Modern Retail+ column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. More from the series →

It’s been a challenging start to the year for aggregators. 

Three years ago, venture capitalists and fintech companies were throwing money at aggregators in the hopes that they would be backing the modern Procter & Gamble. In particular, Amazon-focused aggregators raised over $12 billion in 2021 — a combination of both debt and equity — according to Marketplace Pulse. 

Fast forward to 2024, and the environment couldn’t be more different. In just the first three months of the year, Amazon-focused aggregator Thrasio has filed for bankruptcy while Shopify-focused holding company Win Brands Group went through a significant round of layoffs, its third in 12 months, Modern Retail exclusively reported. Other aggregators are trying to survive through consolidation: Razor Group acquired Perch, in a deal valued at $1.7 billion, while home goods-focused holding company Resident Home sold to Ashley Furniture, one of the companies it was initially trying to disrupt. 

It’s not all bad news though. Razor startup Harry’s has quietly become a holding company in its own right, after helping launch new brands like Flamingo and Cat Person and acquiring natural deodorant brand Lume at the end of 2021. Now, Harry’s has reportedly confidently filed to go public, according to Reuters, and is profitable while also nearing $1 billion in revenue. To avoid trappings that other holding companies have fallen into, the remaining aggregators are taking on less debt than their predecessors and slowing down their pace of acquisitions while more sharply defining their focus areas. 

Thrasio’s trajectory demonstrates just how drastically the tides have turned for aggregators. In 2021, Thrasio — which focused on Amazon brands — was riding high after raising roughly $1.8 billion in debt and equity just that year. Rumors flew that Thrasio would go public via a SPAC. 

But the weight of the debt proved to be too crushing for Thrasio. Last month, the company filed for bankruptcy, in order to reduce $495 million in debt from its financial oblications. 

Many of the challenges that today’s aggregators are running into boil down to one key issue: funding. They are not bringing in enough money to cover their operations, forcing them to resort to fire sales, layoffs, or in the worst cases, bankruptcy. 

The problem is that “any business that relies on acquiring businesses is by nature, I think, a very capital-intensive business,” Matt Rhodes, co-founder and chief financial officer of brand platform Foundry Brands said. 

Aggregators essentially have two choices when it comes to funding their business: debt or equity. But the problem is that many of these aggregators raised their debt in 2021 when interest rates were near zero. As interest rates have risen, so too has the cost of servicing that debt. 

The other problem is that e-commerce valuations were also highly inflated in 2021. Aggregators were snapping up companies after two years of Covid-induced e-commerce growth. In the years since then, matching those e-commerce growth rates has gotten more challenging. 

What some aggregators are experiencing right now, then, is a double whammy: the cost of servicing their debt has gone up while some of the brands they own may be seeing a decline or near-flattening of sales. 

Thrasio is the oft-cited poster child of taking on too much debt to acquire too many businesses. It reportedly acquired over 200 businesses at its peak. But even if an aggregator has the right strategy on paper, if one or some of its businesses has a down year — and it has too much debt — the results can be catastrophic.

“If the businesses do not perform well, then the debt will ultimately kill the business,” Ben Cogan, co-founder of aggregator Agora Brands, which focuses on businesses doing $1 million to $15 million in revenue. 

Surviving various economic downturns as an aggregator then depends upon having the right funding structure. Given how capital-intensive running an aggregator business is, accruing some level of debt is likely unavoidable. But, today’s aggregators are trying to accrue less debt. According to Rhodes, 95% of Foundry Brand’s funding comes from equity.

Foundry Brands launched in 2021 with $100 million from LightBay Capital and Monogram Capital Partners. Today, Foundry Brands is profitable, Rhodes said, and “only decided to go and raise a debt facility once we were profitable.”

Cogan said that raising debt isn’t inherently bad, and that “at the end of the day, 4 to 5x debt is fine, as long as interest rates remain relatively low, and as long as the business continues to perform.”

Therein lies the other challenge. In order for an aggregator to succeed, all of the brands that it acquires have to not only succeed but also help the entire parent company grow in value. 

Not all brands are likely to be a home run. Even Harry’s, which has found success with some of the other brands it founded like Flamingo at Cat Person, appears to have quietly shuttered Headquarters, a hair care-focused brand that it launched at the beginning of 2021. The brand’s social media pages don’t show any posts after December 2022.

But, aggregators have a better chance of succeeding if they slow down the rate at which they acquire or launch brands — and do so with a more specialized focus. While aggregators do have an area of focus, some of them are so broad (like a focus on Amazon) that they could encompass thousands of brands in theory.

Foundry Brands’ Rhodes said that his company aims to acquire one to two brands per year — and, that the company has found success in premium men’s skincare in particular. Some of the brands that Foundry Brands has acquired include razor brand Supply, men’s cosmetics startup Stryx and skincare brand Blu Atlas. Focusing on brands in this area allows Foundry Brands to gain more insight into a particular customer demographic. Rhodes also added that one-third of Foundry Brands’ profit is generated by products that are protected by a patent — which helps further protect Foundry Brands against the possibility of another, more well-funded aggregator encroaching upon its territory. 

Similarly, Agora Brands’ Cogan believes that going forward, aggregators can’t simply be an economic arbitrage play. “The aggregator really needs to truly add value to the business,” he said. That could present itself in a number of ways. For example, maybe an aggregator has developed a sophisticated supply chain management system that the brands it acquires can take advantage of. Or maybe the aggregator has a proven track record of scaling brands in wholesale that its newer brands can take advantage of. 

Despite the bumps that recent well-funded companies have run into, the aggregator model doesn’t show any signs of disappearing entirely. There will always be companies that see an opportunity to build an even bigger business by acquiring other brands.

Harry’s, for example, doubled down on building its own brands and acquiring some after its acquisition by Edgewell was blocked by the FTC. In the home design and furnishings space, interior design service Havenly has quietly sought to build itself into a collection of brands in recent years. Over the past two years, Havenly has acquired three startups: custom furniture startup The Inside, sofa company Interior Define, and, just last month, home decor brand The Citizenry.

Foundry Brands’ Rhodes insists that despite the recent upheaval in the aggregator space, “our business model is a proven model,” pointing to the businesses conglomerates like Estee Lauder and L’Oreal have been able to build. 

He added that during the funding boom of 2021, it was easy to wake up and read a story about a well-funded company raising a billion-dollar round and think “Are we doing something wrong here?” 

“We have sort of been the tortoise, just continuing to plug along and grow 20% year after year and build a sustainable company,” he added.

Correction: This story has been updated to correct the year in which Harry’s acquired Lume. Harry’s acquired Lume in 2021.

What I’m reading 

  • According to Meta employees who spoke with the Wall Street Journal, Temu spent $2 billion on Facebook and Instagram ads last year. 
  • Oddity, owner of Il Makiage and SpoiledChild, said it plans to launch two new brands in 2025, after going public last year. 
  • Oura is now selling its smart rings on Amazon

What we’ve covered

  • Win Brands Group, owner of Homesick Candles, Qalo and more recently had its third round of layoffs in the last 12 months. 
  • How brands like Jolie, Canopy and more are trying to recast humidifiers and showerheads as beauty products.  
  • After four years, sustainable shoe brand Vivaia is rolling out its first brand campaign.