I predict FBA Aggregators will come around to the single multi-brand D2C store approach
Summary
- Probably more than $10bn of VC money has been thrown into ‘FBA Aggregators’ like Thrasio who rollup Amazon sellers in the last couple years.
- FBA Aggregators have purchased hundreds of Amazon sellers that often have D2C sites on platforms like Shopify
- These Shopify sites are almost never large business for sellers that grew up on Amazon because they were bad at acquisition marketing
- When you’re a D2C site that is bad at acquisition marketing, you can’t get the LTV (Lifetime Value) -CAC (Cost to Acquire a Customer) equation to work
- To get LTV-CAC to work you need a lot of assortment. It is just math.
- And so it makes almost zero sense to have a portfolio of focused, small assortment D2C sites.
FBA Aggregators are all the rage
The likes of Thrasio, Perch and others have probably raised close to $10bn in VC money in the past couple of years and there is now enormous amounts of capital hunting good Amazon sellers.
And since many of them have been going at for at least a year or two, they have already built up a pretty big portfolio of sellers they’ve acquired. The vast majority of these sellers are Amazon-focused but almost all end up adding some additional channels to diversify and pad their revenue. And since it’s so easy to open a Shopify store, the vast majority of sellers have opened up D2C stores on Shopify.
Most Amazon-focused sellers still suck at D2C
The typical Amazon white label seller became successful by gaming Amazon and getting good at SEO on Amazon. Then they started investing in a brand, and started spending more and more time & money advertising on Amazon. But they never had a heritage of advertising off Amazon and its very hard to do well. So when opened up their Shopify store, they almost universally didn’t know how to grow it profitably. They’d throw some money into Google Adword and Facebook advertising… achieve a conversion rate of like 1% while paying $3 per click, and realize that a CAC (Customer Acquisition Cost) of $300/customer when they had perhaps a $10 margin on their product made zero economic sense. So they just kind of let their Shopify site mosey along without much attention, typically never accounting for more than say 3–4% of their overall revenue.
Companies that are good at D2C live and breathe the LTV-CAC equation
I learned this when I headed product & data for a D2C site in 2019–20. I’d always been a marketplace guy prior to that and so it was a pretty big mental shift. Now it was all about understanding LTV and what kind of repeat purchase you would get and for how long. And on the CAC side you had tons of different marketing channels…. not just the traditional paid ones like Google & Facebook, but also influencers, affiliates, and much more.
And you needed to be great at measuring, tracking, and converting. It is a completely different skillset than the one you learn on Amazon (note that i’d also done some FBA Amazon selling previous to that). And you need a solid digital marketing team to do it well.
But more than that you learn very clearly that LTV is all about assortment. Why? Because you’re constantly trying to upsell, cross-sell, launch new products to draw the repeat purchase, etc. And you’re often using personalization on your site to try to get smarter about what your customer likes so that you can drive that conversion up. Which only works if you have a pretty massive assortment to be able to apply the personalization on.
So how do the FBA Aggregators up their D2C game?
If you read the press about most aggregators.. many of them claim their long-term game is to focus more on D2C because that is the channel where they have customer loyalty and they don’t have to pay the hefty Amazon commissions. So essentially their revenue becomes more stable & predictable, which is what their investors want. In particular once they go public. Nobody likes being a public company where all of a sudden Amazon shuts down one of your accounts and you need to tell your investors in your quarterly earnings update that your revenue fell 40% short as a result. You want to wean yourself off the Amazon crackpipe. And D2C is the answer.
But given this is the case I am surprised by the fact that almost all of them still retain all of the separate D2C sites that they inherited. From a strategic perspective if i’d bought all these sellers, i’d have a plan in place to stick them all on a single multi-brand D2C site as soon as possible. Why?
- Many of these sellers that are acquired have <100 SKU’s on their Shopify site. Meaning they NEVER have any chance of getting LTV to be high enough to make the LTV-CAC equation work (if they began aggressive acquisition marketing.)
- And if they did try to do make the marketing to these sites work, it is extremely inefficient to market so many different sites.
- The SEO benefit that you generate thru this paid advertising & traffic is now diluted across many sites
- It is also a ton of work to maintain so many sites and so the economies of scale is not there.
So what justification do these aggregators give for retaining them? Well i have a feeling the most common one is that they think that it turns off consumers when they see seemingly unrelated brands jumbled together on a single site. But to this i’d make a few points from my D2C experience:
- You can often design the site in a way where it doesn’t seem odd that you have seemingly unrelated brands or categories on the same site. I mean just look at the marketplaces like Amazon, eBay.. they have everything under the sun. So obviously there is a way to make it work.
- And the fact is that when you do paid marketing, the consumer is almost always coming to a specific product page or a landing page.
And to be honest I have never in my entire life clicked on an ad, come to an interesting product I liked, but then looked at the site and said “oh but wait.. they also sell this other unrelated category… forget it, i’m outta here.” It just doesn’t make sense to do that. You do, however, need to have a professional looking site as I have left sites that didn’t look professional.
Wayfair is one good example of this model working
You need quite a bit of capital and ambition to take this approach (which many aggregators do), as you’re essentially trying to become a competitor to Amazon over time (and they’re a very powerful enemy to have). But the shining example of success that i’d give for who has already done this is Wayfair… a company I have actually worked for in the past. And had heard their history directly from their co-founder, Steve Conine, who actually loves to tell this story a lot… and probably has told it like 100x+ but still does a great job telling it each time.
Until 2011, Wayfair was originally a couple hundred disparate brands/sites that were called CSN Stores. And they rolled them all up into what is now Wayfair (article here). Wayfair now is about head to head against Amazon in the furniture category in the US with a ~$15bn market cap.
Do i think that every aggregator should try to become the next Wayfair and take on Amazon? No of course not. And note that eventually Amazon kicked Wayfair’s brands off of Amazon as Wayfair was actually one of Amazon’s largest sellers at one point. But Amazon realized they were developing their biggest competitor and put an end to that.
But to sum up…I would say that aggregators cannot say they want to go deep on D2C without streamlining into a multi-brand single store approach.
To say otherwise, simply means they don’t yet understand how the math of the LTV-CAC equation works in D2C. And I welcome them to prove me wrong… the minute an aggregator takes their D2C share from <10% (where most of them are today) to like 40%+ using the portfolio of lots of disparate sites approach I am happy to write a blog article about how I am full of shit. But it won’t happen ;)
