E-commerce roll-ups have attracted a lot of media attention over last year as dozens of roll-ups raised billions of dollars to drive their acquisitions.
E-Commerce roll-ups (sometimes misnamed as E-Commerce Aggregators) are a type of Private Equity holding company that acquires and operates multiple companies with hopes of increased efficiencies derived from a shared services model. The concept of roll-ups has been around for a long time, however the difference with the nascent companies in this space is that most rely heavily on third party platforms, be it Amazon, or Shopify.
Most roll-ups are competing in crowded industries, and somewhat worryingly, crowded platforms. The largest funding rounds this year focused on roll-ups that aggressively chase Fulfilment by Amazon (FBA) brands. The investment thesis of most FBA roll-ups is simple: Acquire, optimize, invest, grow.
The risk of FBA focused roll-ups is that brands do not own the platform, the data, and the customer relationship. Brands are fully exposed to changes in search algorithms, are unable to forge closer relationships with customers, and miss out on critical data that could be used to improve its products. FBA roll-ups are technically Direct to Consumer (DTC/D2C), however lack the benefits of an effective DTC strategy.
The Future is Omni-Channel
FBA roll-ups are experiencing explosive growth, however, the business model is not sustainable in the long term without expanding into fully fledged omni-channel brands. FBA brands will have to expand beyond a single platform and become available at every popular platform, distributor, and brick-and-mortar store whenever commercially feasible.
The same drivers that make roll-ups vulnerable when dealing with FBA also become incentives to invest into omni-channel. Roll-up companies that dominate all aspects of omni-channel will create a protective moat around their products that new entrants in the future will struggle to compete against.
Another important factor around omni-channel roll-ups is to provide pricing consistency so that all channels are aligned, without unfair players that break the Minimum Advertised Price (MAP). MAP compliance becomes a core factor that enables an FBA brand to co-exist with more traditional distributors and third-party brick-and-mortar stores without risking price erosion.
Data and platforms are also critical factors for creating sustainable roll-ups. Building direct to consumer relationships without alienating traditional distributors and retailers will enable brands to leverage the best of both worlds. Pureplay DTC may bring higher margins, however for sustainable growth DTC brands must collaborate with not-so-direct distributors and retailers. That means DTC brands may send a promotional email to a customer, however the customer will be able to make a purchase directly, on a platform, or on their local brick-and-mortar retailer for exactly the same price.
The size of the funding rounds for e-commerce roll-ups might be mind boggling for some, however even the total cumulative funding for roll-ups is still a small fraction of more traditional Private Equity mergers and acquisitions of more traditional brands in the same space. E-commerce roll-ups are a good entry point to create the Private Equity holding companies of the future.
