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🎢 #55 - Amazon roll-up biz
+ insights from Ryan Gnesin (founder of Elevate Brands)
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Some background info on Amazon roll-up companies…
When I’m searching for a specific product, the first place I go is Amazon, and I’m willing to bet that you do too. The best part is, we’re not alone. More than 62% of consumers in the US do exactly that - begin and end their searches for products on Amazon. With this in mind, I doubt anyone would be surprised to learn just how complex the selling ecosystem behind Amazon is.
There are two types of sellers in the Amazon ecosystem - first-party sellers (1P) who sell to Amazon as a vendor, and third-party sellers (3P) who sell on Amazon’s platform. 3P sales account for 54% of Amazon’s revenue, and 92% of those 3P sellers use Fulfillment by Amazon (FBA), a service that helps sellers handle product storage, shipping, returns, and customer service.
Even among third-party sellers, there are a ton of different business models. Jungle Scout has a nice infographic on the top Amazon business models - this is a great article that helps break down the nuances of each business model.
Introducing the Amazon roll-up biz…
The roll-up business model is common within the private equity world, but it has recently become a growing trend in the Amazon universe as well. How it works is that companies buy 3P private label brands (mostly FBA), grow them under one entity, and provide the founders with liquidity to pursue other opportunities.
The OG in this biz is Thrasio, which recently raised $750M at a valuation likely between $3B and $4B. According to co-founder Carlos Cashman, Thrasio has been gaining $1.5M in revenue per day with nearly 100 FBA acquisitions to date.
A marketplace map I made on the leading players (thx Pitchbook):
To learn more about the nuances and intricacies in the industry, I reached out to the CEO of Elevate Brands, Ryan Gnesin.
Elevate Brands aspires to be the Unilever of the Amazon FBA world - they are on track to reach 40 acquisitions with 150M in pro forma revenue by the end of this year. Below is a list of insights I learned from a recent conversation with Ryan.
💡 Why this biz
In 2016, Ryan wanted to start a business in a high-growth industry. He felt that e-commerce was the industry that most met this growth criterion. The idea for Elevate Brands came from some Amazon events he attended.
During those events, he noticed that there were a lot of really successful Amazon FBA sellers, but there was a significant lack of sophisticated capital in those events.
“I didn’t find any private equity or venture capital people there - it occurred to me that people probably hadn’t woken up to the real potential yet. I’ve always felt like it’s important to choose an area where not everyone wants to go. I used to trade commodities in Indonesia. Not everyone wanted to live in Jakarta, but I thought that was a great place to go due to the lack of competition. I felt the same way when I came to the Amazon ecosystem as well.”
📈 Amazon roll-up industry trends
1. The bar to create a good Amazon business is getting higher
“Three or four years ago, you could set up an Amazon business, and even if you didn't have really great quality product, good marketing, or really strong pay-per-click ads strategy (aka PPC in the industry), you could still probably be successful. However, it's much harder today so you have to really be excellent at all of those things.”
2. It is more expensive to acquire an FBA business
“I think the price for buying these businesses is significantly higher today than it was 12 months ago or even just three months ago. It means that the buying market is more competitive and the room for error is much smaller. When we started looking at businesses to buy in 2019, you could buy businesses for 2.5x EBITDA - even if you didn't grow the business, you could still be very successful.
Today, you don’t have the luxury anymore, because you are paying higher prices (closer to 4x EBITDA depending on the business), so you have to grow them to survive in this market.”
🔭 How to evaluate a FBA brand
Ryan and his team have four main criteria when evaluating a deal:
Great product - they assess the product by reading through reviews, evaluating the validity of those reviews, and testing the product themselves to make sure they are indeed good quality
Earning longevity - they avoid fabs and businesses that might be obsolete in the next month or next year (e.g. fidget spinner) and prefer products that can have sustainable earnings
Room for growth - they look for businesses that are under-optimized and have room for growth through marketing expertise
Sizable existing business - they prefer businesses that have at least half a million in EBITDA - otherwise, the impact is too small on pro forma revenue
🤔 Main challenges
Ryan mentioned three key challenges in this industry:
Competition - it becomes increasingly expensive to buy Amazon businesses, minimizing room for error
Growth - it is important to continue finding new ways to grow the business (more in the next section)
Brand management - the bigger the business gets, the more complicated it is to manage multiple brands from a logistics point of view (Elevate now owns 20 brands)
🚀 Key growth levers for a FBA brand
Similar to any type of business, you can expand revenue by increasing either price or quantity. Below is a list of growth initiatives that impact those two levers:
New marketplaces - listing on other marketplaces within the US or overseas
Marketing optimization - optimize branding, advertising, and PPC & build communities and experiment with different influencer social media campaigns
SKUs augmentation - add new product variations to existing SKUs, including new sizes and new categories
Pricing improvement - increase the price of the product
Any low-hanging fruit?
“It depends on the business because each of them is different. Sometimes, a simple price increase can have the biggest uplift while others might be more competitive so you cannot increase the price, but you can add a new video that improves conversion.”
Check out Elevate Brands!
⚡️ Bonus content - how to start a successful Amazon FBA business
Interested in potentially starting an Amazon FBA business, I asked Ryan what he would do to start an Amazon FBA business today. Here is what I learned:
Step 1A - Use data analytics software such as Helium 10 or Jungle Scout to evaluate Amazon data to see what types of products are worth launching
Step 1B - Take a course on Amazon FBA (e.g. Amazon Selling Machine, Kevin King’s course on Helium 10) to learn the fundamentals
Step 2 - Source the product from China and start selling on Amazon
Key success factors:
Good and differentiated product (patented product is better)
Solid brand, marketing, and PPC strategy
Supply chain competency
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