The world of e-commerce isn’t slowing down, yet many e-commerce aggregators are already struggling. Decreased consumer confidence, inflated brand value and a freeze in investment capital are creating a perfect storm. Unless aggregators change how they operate, 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 has come even sooner than we thought. That said, there’s still time for these businesses to course correct. If aggregators act fast, they can position themselves well for their next phase of growth. But first, how did we get here?
In theory, the brand rollup business model sounds like it could work. An aggregator buys consumer product companies and uses its existing infrastructure to scale them and turn a profit. Earnings before interest, taxes, depreciation and amortization (EBITDA) for many of these brands is already at two or three times their original purchase price. Buy enough of them 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’re great at acquiring brands, they’re terrible at investing in R&D, innovation and operations — all the things that matter for growing one brand, let alone a dozen.
Additionally, many aggregators worked on a hyperaccelerated timetable. They had a finite (and shrinking) number of brands to buy in a short amount of time if they wanted to bundle them up 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.