Steve Katz:
Hi everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco Global Smarter Perspective Podcasts. As returning listeners know by now, I'm your host of Steve Katz. And if this is your first time with us, well then, welcome. We are glad that you could tune in.
Today we'll be talking about a topic related to the popularity of third-party selling on Amazon and a group of businesses that's known as, digital aggregators, that are actually acquiring the most successful of these e-commerce sellers. But in many cases, as Ray was telling me leading into this podcast, they're also facing challenges in making those acquisitions profitable after the deals are closed. So with us for that conversation, as I alluded to, is a return podcast guest and friend of the show, Ray Armendariz, CEO of Hilco Wholesale Solutions. Ray, it's great to have you back out with us.
Ray Armendariz:
Thank you, Steve, so much. It's great to be back.
Steve Katz:
Well, all right. Let's just jump right into it. This is obviously very timely. I think it's going to really surprise a lot of listeners because it seems from the outside, these companies must just be absolutely killing it. But when you take a closer look, that's not necessarily the case.
So Ray, what exactly is going on here? I thought that I heard somewhere that Amazon's third-party marketplace was generating more sales volume for them than its own direct sales efforts do. So, how can anybody really be losing money here?
Ray Armendariz:
Well, Steve, Amazon created a sizable market opportunity for those third-party sellers of all sizes and experience levels looking for outlets through which to offer their merchandise and transact. And there are hundreds, if not thousands of product success examples across any number of retail categories, which would simply not exist today, frankly, if it were not for the structure that Amazon has put in place and which they continue to evolve to foster and support those businesses. So it's not surprising really, that these types of PE aggregator companies have come along and started swallowing them up. What has been surprising, at least to them, is that many of these companies they bought aren't always what they seem to be.
Steve Katz:
Interesting. So, let's dig into that. There's obviously diligence that goes on pre-acquisition. So, what is being missed during that process that really needs to be caught?
Ray Armendariz:
Listen, virtually overnight, many sellers have gone from virtual obscurity and modest sales to social media phenomenons in need of added production capacity, just to meet the demand. They've achieved this in large part by leveraging the power of fulfillment by Amazon or FBA, as it's known, and its pay-as-you-go model, which charges for storage space, order fulfillment, that includes Amazon's free customer shipping options, its customer service platform, and streamline return process. The companies that manufacture these type of products that attain high levels of popularity and sales on Amazon sites, and in some cases, by the way, on sites and apps such as Shopify and in some cases through their own DTC websites, are not always highly sophisticated or experienced. And quite frankly, they make mistakes that can be detrimental to those who acquire them, when those mistakes aren't detected or acted quickly upon after acquisition.
Steve Katz:
So Ray, what exactly are we talking about here? I mean, what kind of issues are they having? What types of problems need to be solved? And how can this be done?
Ray Armendariz:
Well, aggregators have their own criteria for investment. Some of the most important include product quality, steady demands substantiated by data, historically competitive, organic search rankings, and significant potential for long-term growth. That said, each have their own revenue range requirements and categories of specialization and focus. The challenge that has occurred for some aggregators in this market, as you might expect, is very similar in nature to what many private equity firms have experienced when acquiring businesses over the years.
Buying something, it turns out, is much easier than actually operating it. And while the majority of these aggregator businesses have notable sales and operational expertise within their own management teams, and leverage data and best practices to drive performance and margin, they're finding out that many of the businesses that they have acquired are actually far more challenged than their initial diligence revealed. Once they dig in and start looking at inventory and assortment, holes frequently begin to appear, including but not limited to current supply chain issues, which we've all seen in the recent past.
For example, Steve, a company that has been highly successful selling a black spatula that doesn't scratch pans but still can be used in high-temperature barbecues, and the new breed of consumer pizza ovens that we see out there may have decided in the last year to produce that same item in 30 colors. Yet, only five of those are selling while the others are taking up warehouse space. The aggregator may also find that because the acquired business was in essence, filled for Amazon and other DCC online sales channels, it doesn't have the infrastructure. And then, of course, all of its non-FBA inventory is spread across a multitude of third-party logistic businesses, each of which require costly monthly payments for storage and the handling, resulting in accrued expense and merchandise that is not fluid.
Additionally, selling on Amazon is all about winning the buy box. If supply chain issues have inhibited and acquired seller's production capabilities, which in turn has impacted fulfillment, customer loyalty could be impacted. Without return customers and positive word-of-mouth reviews, what was once hot products, they can quickly become commoditized in this highly competitive marketplace forcing them to compete only on price.
Steve Katz:
Yeah. So, great points that you raised there. So I guess my next question is, when aggregators do become aware of these types of situations, one would think that they would be in a position to right the ship, so to speak, get everything in order because they have so much of their own e-tailing knowledge and expertise that they can bring to bear on the business in pretty efficient manner. However, is that maybe not the case here? What's going on? Why do they need outside help?
Ray Armendariz:
Yeah. So look, what you're raising here, Steve, really gets to the heart of the matter. While these aggregators have access to the [inaudible 00:06:56] capital needed to make these type of acquisitions and their acquisition teams are aggressively working to bring more online businesses into their portfolio, there are really two key pain points at play for these firms. First, most simply do not have the operational bandwidth to address the breadth of issues that are prevalent across their acquired businesses. And second, in many cases, they do not possess the specific expertise needed to identify those pain points and address them effectively.
So Steve, with increasing frequency over the past year and a half, our wholesale solutions team here at Hilco has been contacted for assistance by aggregators facing these and numerous other challenges associated with the operation of online selling businesses in their rapidly expanding portfolios. Our team possesses the specialty expertise that these business do not. And we have the bandwidth and, or mechanism in place within our extensive industry network to ensure that the requisite resources are available to ensure the success of the highly customized solutions we create and provide for our clients.
For example, we have the expertise needed to conduct a thorough [inaudible 00:08:03] rationalization process to determine when a business is focused on too many items. Many of which are not selling and are simply part of an unproductive inventory taking of space. We also have the relationships to move those items quickly into the channels, which can deliver the best monetization potential. And oh, by the way, our broad customer base enables us to avoid conflict and preserve brand equity by monetizing goods into non-competing channels. Similarly, we have the knowledge and resource to take clothing and other products initially packaged for online sales, and get those properly sorted, configured, and into brick and mortar off price environment, which right now, is actively looking to bring in fast-turning, in-country products.
Steve Katz:
Yeah, I can imagine they are, given what's gone on with supply chain. We're getting a little close to the end here, but I wanted to also throw this out there. I know that Hilco has extensive capital solutions available to clients that I can imagine would be applicable in situations like these. Any last thoughts for the audience on that?
Ray Armendariz:
Yes, good point. Glad you brought that up, Steve. We have a capital to buy merchandise outright from the aggregator's portfolio company delivering needed cash flow quickly, and with a minimum of effort on the seller's behalf. This can really be helpful for these firms. And we have seen it be a differentiator in their decision to work with us. Because the sooner that you can get those carrying costs off their books and get an injection of cash to assist with other needed efforts, the better off they know they'll be.
Steve Katz:
Yeah, it makes a lot of sense. Makes a lot of sense. Well, listen, Ray, thanks so much for being on with us again here today. Really great insights. I think probably a lot of people have been looking at these acquisitions from the outside and think it's all a cakewalk. But obviously, it's not. And for aggregators themselves, obviously, they know it's not. So can you share with the listeners, your contact info?
Ray Armendariz:
Absolutely. I would be glad to. So my direct number at the office is 8-4-7-8-4-9-2-9-2-1. My email may be a little more difficult if you're trying to jot something down. It's R Armendariz. That's R-A-R-M-E-N-D-A-R-I-Z @hilcoglobal.com. I'd love to hear from you.
Steve Katz:
All right, Ray. Thanks again for being on. And listeners, if you're an e-commerce aggregator experiencing any type of unanticipated challenge with one or more of your acquired portfolio companies, and you are lacking the resources or expertise, as Ray mentioned, many companies are at this point in time. To address those matters directly, it's probably time to consider reaching out to Ray and the team at Hilco Wholesale Solutions for an exploratory conversation. And if you are an advisor to or investor in an acquisition firm or a recently acquired e-tailer company itself, why not send them a link to this podcast? I am sure that they will be glad you did that for them.
And as always, we hope that this Smarter Perspective podcast provided you with at least one key takeaway that you can put to good use with your business, or share with a colleague or client to help make them that much more successful moving forward. And one more thing, please remember that you can check out more great podcasts and articles featuring timely insights from Hilco experts such as Ray at hilcoglobal.com/smarter-perspectives. Until next time, for Hilco Global, I'm Steve Katz.