The pandemic mirage for commerce

Have you ever seen a mirage?

Mirage in a desert

The pandemic changed our lives. (not to state the obvious) but on reflection, it generated a mirage for parts of commerce. What is a mirage? It is an optical illusion caused by weather conditions.

Everybody wins in hindsight, but the pandemic created an illusion that capital was allocated to concepts that would never scale when life was to return to normal.

  1. Amazon and Shopify aggregators.
    Remember when aggregators /roll-up businesses raised $18b to buy Amazon sellers and Shopify stores. Buying brands is hard; doing so daily is borderline crazy. Yes - customers spend money buying products on Amazon, but acquiring brands based on crazy multiples and then repaying loans based on brand sales on Amazon is akin to financial gymnastics. Using economies of scale to centralize marketing and logistics sounds tremendous but requires internal talent and skills. Buying agencies and 3PLs creates more risks and more points of failure. Its also important to note that incumbent conglomerates such as Proctor and Gamble own multiple brands that each have brand equity and historical investment into advertising. Creating holding companies with new acquisitions will require significant investment into advertising to generate sales and continuous brand awareness for customers.

As of September 2023 - no aggregator has listed via an initial public offering (IPO) yet companies are either closing down or being acquired by competing aggregators as investors. are scrambling to find sales or acquisition targets. The risks involved with this business model have outweighed the upside for shareholders.

  1. Rapid grocery delivery
    Remember when you could order groceries and have them delivered in 15 minutes? In certain cities such as New York, many companies opened dark stores closer to customers and competed via discounts to grow their businesses. This sector grew its adoption significantly as lockdowns forced consumers to stop going to local grocers and order everything online. It is worth noting that groceries are a low-margin sector. It is capital intensive through picking, packing, and then delivery to consumers, all eat into the profitability and margin per order. Groceries has been the one sector that has not been solved online. Why would Russian entrepreneurs solve US grocery e-commerce? Venture capital investors believed online grocery had finally arrived, did little diligence, and wrote checks for companies that never had product market fit or sustainable business models. Only Gopuff, which has been around for nearly a decade, has successfully delivered groceries and hot food made under license from quick service restaurants. Getir, in Europe, grew rapidly during the pandemic and has seen its valuation slashed from $11.8b to $2.5b.

Gopuff is on the road to being profitable before going public and we have seen Walmart grow its online grocery business from 5% to 35% in a year. Over the last 18 months, the emergence of curbside delivery has accelerated and more retailers are fulfilling from their stores. Getting groceries in 15 minutes was a venture capital investment that did not solve a customer problem. Retailers offering customers delivery in an hour via an app or online seems to be gaining momentum.

We have seen consumer behavior return to pre-pandemic levels as inflation forces customers to look for cheaper products. Amazon is currently under the microscope by the FTC and sellers are getting access to tools to make selling online easier,

Marketplaces and online retailers are slowly increasing free shipping minimums to generate more profit per order, making consumer returns harder.

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A few points to augment

  1. Aggregators. B2C ecommerce is not the only business area that has seen that behaviour. Podcasts (and similar media) has seen similar rollups in their value chain, which aggregator companies trying to bridge sponsorship acquisition through to networks of podcast creators (often onboarding the latter with longish periods of guaranteed minimum payments). And some are going bust, or some pretty dodgy sounding IPOs
  2. For GoPuff in the US, read Deliveroo in the UK. Who have decided to release excess capital back to their shareholders. Interestingly, it seems the 15 minute model hasn’t really stolen share from the well developed through the door prebooked slotted delivery model that is widely available in the UK for decades, but maybe has stolen share from restaurant takeaway, or stolen share from local convenience stores (independent or chain). If any “traditional” grocery share has been lost post pandemic, it has been to cheaper operators (e.g. tradedown from Ocado to Asda, Iceland), smaller basket sizes, or cessation and reverting to in-person visit to discounters (Aldi, Lidl, B&M, Poundland etc.)

Additional (later) thought.

There are some successful aggregators of brands, but probably only working with well established brands. Not sure if any are publicly listed.

I submit as an example Authentic Brands Group (who has a mixture of retail brands, but also other rights IP e.g. dead celebrities). ABG were on course for an IPO in 2021 but pulled it (I think attracted other PE investment, potentially allowing the existing investors to partially or fully cash out)

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I view ABG as a licensing business rather than an Amazon brand aggregator.

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