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The eCommerce aggregator market has attracted over $15bn in capital since January 2020. The sector has seen incredible growth, with ~100 active Amazon aggregators across the globe.
The incredible growth in the sector, across both Amazon FBA brands as well as aggregators, has led to increased deal flow and competition. The fast-paced nature means that it is easy to trip up. Olsam’s investment team has made some incredibly successful acquisitions, but there have been some hurdles along the way and with them, an ever-changing playbook on how to tackle them for future acquisitions.
Under or over-valuing brand IP
IP can be an incredibly valuable asset for any Amazon store owner. These rights help distinguish the owner’s products from others available and can prevent competition from selling copy-cat products.
Our ever-evolving due diligence playbook includes a rigorous review of the IP to ensure all potential issues and concerns are flagged pre-close and addressed as early as possible. Through experience, we have identified some of the potential issues:
- Trademark and patent rights are national in scope, meaning that any geographical launch leaves the products unprotected unless international protection is obtained. A key growth lever for Olsam is geographical expansion and not having the trademark in the potential regions can be a significant hurdle, especially if registered by another player.
- Design patents are a very powerful weapon against competitors on Amazon. Enforcing design patent infringement legally is complex and costly, but Amazon’s approach is to aggressively takes down products accused of design patent infringement. Of course, this can go both ways: use by you against a competitor as well as the inverse! But a track record of enforcing patents through Amazon’s channels (and subsequently removing copy-cat sellers) provides evidence of the true enforceability and usefulness of the patent.
We’ve learnt that the proof is in the pudding; and that any prior experience of successfully removing copy-cats is incredibly valuable in driving future growth as any new entrants infringing on the brand’s rights, can be removed quickly and efficiently.
The magnitude of the post-COVID boom or bust
It will come as little surprise to anyone that a Global Pandemic accelerate the adoption of eCommerce sales globally. It is reported that eCommerce sales were $870 billion in the US in 2021, a 14.2% increase over 2020 and a 50.5% increase over 2019. Global eCommerce rose from 15% of total retail sales in 2019 to 21% in 2021.
The question that our Investment team had to grapple with during their investment appraisal process was: as consumers revert to prior behaviours and began shopping in person again, could the growth continue?
Our view overall is that the eCommerce market has plenty of room to grow, assisted by the advancements in logistics, technology, mobile phone adoption and marketplace expansion.
On a deal appraisal level, we had to assess it based on the product category and product type. Where home exercise equipment saw a considerable COVID boom, followed by a muted 2021, volumes are returning to pre-pandemic levels in 2022. On the other hand, travel-related products saw demand fall to near zero throughout the restrictions, yet have seen a greater than anticipated recovery – this is great news for our brands acquires mid-2021!
Reviews, ratings and rankings – are they all that?
There is no question that reviews create trust and add transparency to the purchasing process for the consumer. In 2019, Amazon changed its system from reviews to ratings, allowing consumers to leave a rating out of 5 in one click, without having to leave a written review. This change made it much easier for shoppers to leave their impressions of a product without having to commit to a written review, which in turn resulted in a higher quantity of ratings.
They also introduced means of reducing review manipulation, by only including customer ratings in a product’s overall star rating if the review has Amazon Verified Purchase status.
Amazon has a vested interest in promoting listings which are likely to result in sales, as their commission is based on sales. As such, Amazon will rank listings with a strong sales history and high conversion rates more highly. This has a circuitous effect whereby highly ranked products are more likely to receive more traffic and hence a better chance of achieving high sales. This in turn boosts their ranking and the cycle continues.
Overall, as 93% of consumers online are influenced by reviews in making their purchasing decision, reviews and ratings are critical to the success of a brand. An existing review moat and strong rankings are a great attraction, but Olsam has an incredibly skilled and dedicated in-house team of advertising and SEO experts that can further boost the rankings of our products to give the flywheel an extra kickstart.
There has been much in the news recently about Amazon Aggregators, and the industry that attracted ~$10bn in funding in 2021, has attracted only 20% of that for the year to date. Whilst acquiring at scale benefitted some, what’s transpired is that focus on operations is key to aggregator survival and growth.
Leveraging the lessons learnt from our investments team, and constantly revising our investment mandate and the playbook is what has enabled the Olsam team to make a number of high-quality acquisitions which the operational team has gone on to grow organically, showing strong comparative growth.