A few Amazon aggregators have paused acquisitions as increased seller valuations, supply chain disruptions, and struggles to grow acquired brands caused the industry to readjust.

Despite some Amazon aggregators pausing acquisitions (some didn’t buy for months), the number of deals has not decreased - other firms have increased their pipeline. Aggregators that are or were not buying are not named because they didn’t respond to a request for comment. They are likely to soon or have already resumed. The fact of paused acquisitions is simply an indicator of restrategizing.

According to discussions with aggregators, investors, brokers, and sellers that have sold or have considered selling their business, the aggregator industry is not as optimistic as it was for most of 2021. However, most are confident that some version(-s) of the aggregator model will work. The sentiment is heading to the “Trough of Disillusionment” stage of the Gartner hype cycle, though, a graphical presentation developed by a research firm Gartner to represent the maturity, adoption, and social application of specific technologies.

The key reason for paused acquisitions was that Amazon seller valuations were increasing up to the end of 2021. In the forty-eight-month span from 2020, they doubled. However, the trend didn’t continue into 2022. Valuations are stable, if not declining. Instead, the amplitude between lowest and highest valuations has continued to increase. The average multiple is no longer a representative metric because great businesses are valued multiple times higher than others. Not every seller has a buyer, too.

Aggregators are trying to do more deals directly to combat increasing valuations. The valuation is typically lower when no broker or investment banker is involved. Since the acquisition agreements are complex and the market is opaque (a seller cannot reasonably estimate their valuation based on public information since there is none), dozens of broker firms step up to offer help. They push for higher valuations, which benefits sellers.

Valuations are critical because a roll-up of dozens of businesses acquired for 2x - 3x is significantly different from the current 4x - 8x multiples. Mistakes are more costly than before. Many aggregators bought brands they failed to grow, sometimes failing even to maintain existing sales. Some have found that they are worse at running Amazon seller businesses than the sellers they bought them from.

Doing dozens or hundreds of M&A transactions is ultimately not enough - the post-acquisition steps are infinitely more important. Thus operational skills matter a lot more than M&A experience. A few have bought agencies to solve that.

The industry is growing beyond focusing on acquiring and optimizing Amazon sellers. Some are attempting to focus on geography or a vertical, for example, by becoming experts in beauty products. Many are launching products and brands rather than only focusing on acquisitions. Most are paying considerable attention to the e-commerce market past Amazon, especially the DTC brands.

Others have started to look for ways to offload some acquired brands or exit altogether. Bad capital structure is one of the reasons. Consolidation among aggregators will come, but it is currently looking more like liquidation. Top aggregators are not excited to buy smaller ones; they often want to acquire just part of their portfolio.

Dozens of investors have funded the nearly $15 billion raised by aggregators. They are doubling down on their portfolio firms and looking for differentiated aggregators (for example, those that acquire DTC brands). There is little appetite for more aggregators with the same pitch deck. It’s unlikely that hundreds more Amazon aggregators will launch, but other e-commerce segments will see interest.

The industry is also facing headwinds affecting broader retail: supply chain disruption and weak sales growth from the pandemic-boosted quarters in 2021. EBIDTA figures (profitability) of sellers and aggregators are their key metric; EBIDTA as a percentage is currently being compressed and unlikely to show growth in dollars.

The business of Amazon aggregators appeared trivial up to 2020. It has gotten a lot harder and more competitive. But for every story of a struggling aggregator, there are more stories of those executing well. For every listed headwind, there are tailwinds too. The industry needs more time to play out - it barely existed two years ago, yet now has nearly 100 aggregators, employs close to 7,000 people, and has attracted $15 billion in funding. Most startups fail, and so will some aggregators too, but that’s not a sign that the model cannot work.