Amazon Briefing: An aggregator responds to claims of a bubble bursting

A few weeks ago, I wrote about how it seemed like a bubble was bursting. Many roll-up businesses promised to buy successful Amazon businesses and flip them to make an updated e-commerce portfolio strategy. But then, some of the biggest players that had raised hundreds of millions of dollars reportedly had layoffs and stopped scooping up new brands.

A few months before that, Modern Retail published an interview with the aggregator Forum Brands about its big plans for the year to come. The company, which had raised $30 million in venture capital and $100 million in debt financing, had big plans to grow — saying that the aggregator space was in early innings.

Today, Forum says it is still bringing on new brands — and is even launching a software tool for Amazon brands to help with demand forecasting. I spoke with founder and co-CEO Brenton Howland to get a sense of if he thought things had changed dramatically over the last few months.

What follows is the conversation I had with Howland, which has been edited and condensed for clarity.

Given all the recent headlines of aggregators laying off employees and slowing down rates of acquisitions, has your appetite for bringing on new brands also slowed?
No, it’s actually only accelerated and gotten a little bit more aggressive — at least in terms of how we’re thinking about pace and opportunities that sit out there in our world today.

I come from a private equity background and generally what we see in M&A markets overall is that folks that are disciplined when markets are at their high, typically see an advantage when markets start to reach a trough or at least move in that direction. [That’s] because there’s ample opportunity to step into value-based acquisitions and really strong prices for assets that in my view are still quality.

So we’ve taken a little bit of a different approach than those aggregators in the sense that we are very quality over quantity buyers. We’ve taken a much slower, more category-focused, measured approach to buying larger assets than the average Amazon acquirer.

In doing so, we have built both category depth, but also the opportunity to be a little bit more aggressive in environments like this, where the broader market is seeing a bit of a downturn. We can play offense.

What is the average purchase price ratio to EBITDA for your acquisitions? Has it changed recently?
We’ve always been believers that these assets should trade for anywhere between three and four times for high-quality assets. We have not bought anything for higher than four times.

We didn’t play that game where we got competitive and stepped into really aggressive acquisition multiples in 2021. We really did so because we got a bunch of technology that enables us to do proprietary outreach in a very targeted way. We are effectively building our pipeline of potential acquisitions versus seeing what comes in, playing through broker-driven processes that are inherently competitive and typically result in higher acquisition multiples than these businesses are worth.

We’ve stayed in that three- to four-times threshold and I think that’s really where these assets should trade over time.

How many companies do you currently have in your portfolio and how many acquisitions do you make, say, in a quarter?
We keep some metrics pretty close. So we’re not comfortable disclosing that information. That said, what I would say is that within our five categories, we’ve got depth with multiple brands and pretty significant eight-figure portfolios within each of those. And that has been a huge driver of what is an advantage for us as somebody that spends time acquiring brands that do have a concentration off Amazon. But broadly down the road the mission for us is to build omnichannel category leaders that meet consumers where they are and where they shop across the different pockets of demand.

In terms of pace of acquisition and how we think about targets, I think getting into a game where you say you have to do [for example] two a quarter is a really slippery slope. M&A is inherently opportunistic in the sense that you want [to] solve for your acquisition criteria and your category focus.

For us, we play in five categories within consumer durables. We will not deviate from that in any way. We want to build depth. And so in some quarters we’ll do three or four and other quarters we’ll do one or potentially zero. [We] are very much invested in growing the business from an organic standpoint and really diversifying revenue streams as a way to augment inorganic acquisition growth.

You’ve previously mentioned that you’re looking into other e-commerce platforms to expand into. Can you talk about what specifically your strategy is with this diversification? It seems like you can’t really take an apples-to-apples approach with platforms like, say, Amazon and Shopify. So how do you approach it?
The one consistent thread from an operating standpoint across all of these channels — whether it be Amazon, the retail dot-com platforms of the world, direct-to-consumer, wholesale opportunities to be in physical stores — they all require really sophisticated and thoughtful brand building, and a really close attention and close eye to what the consumer cares about; who you’re targeting, how you’re targeting them, why you’re targeting them and ultimately why you think you’ll win.

Those things are ubiquitous regardless of which channel you’re selling through. That is fundamentally at the core and the first priority for how we think about operating our brands.

You’re right, from an execution perspective it is quite different. And we’re going to take a pretty category-specific approach to thinking about which channels we want to be in and why — with the idea that we can build category-specific capabilities.

I’d say in the next couple of years, we want to mirror e-commerce market share. That means not having Amazon be 95% of our business (and we’re already nicely below that today). Instead, having it be 50% or 60% of our business and having grown in the process, but adding incrementality and additional growth through other channels.

Can you talk a little bit about the fundraising side of things? A bunch of companies raised a lot of capital over the last few years — and it seems many of them raised debt, which may make things difficult as e-commerce growth begins to slow. I know you’ve raised a fair amount of capital — both VC and debt. So what do you feel about the overall funding state for investors as a whole?
I think we’re seeing investor sentiment, even if it’s in this macroeconomic environment, still be really strong. I would say most investors and capital providers — both on the equity and credit side — that I’ve spoken to over the last month or two are just trying to figure out what the winning strategy is in this space. They recognize that the business model fundamentally works as you scale.

All of our businesses are quite profitable. We run over 20% brand EBITDA margins across the board. As that base grows, these holding company structures should be quite profitable and cash generative.

Now a lot of operators in and around our space have not run their businesses that way instead have earned a lot of money on the backs of really aggressive valuations and big checks. We’ve taken a little bit more of a conservative approach in the sense that we wanted to build a sustainable business model first and foremost, and then scale from there in a way where we felt like we had as much control as we possibly could over the business.

We’re going to continue to double down on this strategy and grow quite quickly. We’re an 80-person company 18 months in. That said, not grow too fast — and really make sure that we feel like we can grow sustainably and scalably.

We’ve been really thoughtful about the use of equity and debt as a way to bring our costs of capital down and ultimately invest the right dollars in the right places and the business.

Are aggregators currently in a bubble that’s bursting?
I certainly don’t think that there is a bubble in this space. We’re seeing something shake out, but we see shake outs in really big nascent markets constantly time after time — where investor valuations are aggressive because the market is huge and the business model works.

What happens is that certain folks scale really quickly and use that capital and deploy it fast and then have to look up over a period of time and say, you know, does this model still work? Do we need to rethink strategy a bit? Do we need to reorg it?

A lot of the news has come out around Thrasio specifically. That’s a phenomenal company and it’s a huge business. They’ve got a long history in front of them. Unfortunately, what they had to do is spend a bit of time reorg-ing and cutting certain headcounts where it didn’t quite make sense. It’s disappointing but it’s a normal product of market cycles, in my view.

Amazon Fresh continues to expand

Amazon’s physical retail strategy may be shifting, but that doesn’t mean it’s not opening new locations. The company just announced this week that it was hiring for two new stores in New Jersey and New York. The company said it planned to bring hundreds of new people on to run the Paramus, New Jersey and Oceanside New York locations, which are slated to open later this summer.

These are two new states for Fresh, which currently has locations in California, Illinois, Maryland, Pennsylvania, Virginia, Washington state and Washington, DC. And this comes as Amazon begins rethinking some of its overall physical retail ambitions.

As we wrote a few months ago, the company decided to close down both its bookstores and 4-star stores. Only a few weeks after that, Amazon announced plans to close six Whole Foods locations.

It seems the focus now is on these new types of formats — and that likely has to do with sales data and connecting online customers who offline conversations. As eMarketer principal analyst Andrew Lipsman said a few months back, “I think they probably tested out these stores and realized the links between online and offline weren’t that strong,” Lipsman said. “It’s going to be a different thing for Amazon Fresh.”

Amazon news to know

• Amazon is ramping up streaming programming in the U.K. while competitors like Netflix begin to make budget cuts. According to the Guardian, Amazon for the first time disclosed that it has invested more than £1 billion in TV, movie and sports content.
• Amazon unveiled its latest Fire tablet earlier this week. The latest Fire 7 tablet will cost around $60 and the company says the battery lasts as long as 10 hours.
• There’s been a labor crisis in the United States for a bit now, but Amazon’s is unique from most other employers. As Business Insider reports, while other companies have difficult finding new talent Amazon and Walmart have a reverse labor problem — in that they hired too aggressively and are now backpedaling.

What we’ve covered

• Amazon isn’t the only target for aggregators. This week’s Modern Retail Podcast speaks with OpenStore co-founder Michael Rubenstein about how his business is targeting Shopify brands.
• Nike has been cutting back on major wholesale partnerships. This leaves a big space open for its competitors to fill the gap.
• Target’s earnings, like many other big retailer’s earnings, weren’t pretty. The big-box store operating income dropped 43% year-over-year.