The world of e-commerce is not slowing down, but many ecommerce aggregators are already struggling. Decreased consumer confidence, too high a brand value and a freeze on investment capital create a perfect storm. Unless aggregators change the way they work, their future is bleak at best and nonexistent at worst.
At Pattern, we predicted the demise of the aggregator business model last year, but the moment of truth is even faster than we thought. That said, there is still time for these companies to correct their course. If aggregators act quickly, they can position themselves well for their next growth phase. But first, how did we get here?
The broken model
In theory, the business model for merging brands sounds like it could work. An aggregator buys consumer products companies and uses its existing infrastructure to scale them up and make a profit. Earnings before interest, taxes, depreciation and amortization (EBITDA) for many of these brands is already two or three times the original purchase price. Buy enough and you’re looking at EBITDA arbitrage – a 20x or 30x increase in your own valuation. So far, so good.
However, this is where most of these aggregators stop. While they are great at acquiring brands, they are terrible at investing in R&D, innovation and operations – all the things that matter in growing one brand, let alone a dozen.
In addition, many aggregators were working on a hyper-accelerated time schedule. They had a finite (and shrinking) number of brands to buy in a short space of time if they wanted to bundle them together and flip them as a package. So they kept buying brands without going through the usual due diligence, which inevitably led to buying brands with mediocre products, inflated sales and fake reviews.