Cheap Replaceable Products Don't Make for a Happy Aggregator!
Some great private and public discussion about my prior articles on the FBA aggregation business model prompted some more ideas I want to share. I had promised to switch gears and talk about the strengths of the business model but I am going to have to "pull an Elon over at Twitter" and reverse myself. Let's dive into additional problems with the FBA aggregation business model:
- A focus on low Average Sale Price (ASP) products in commodity categories with hard to defend margins
- Ever rising Amazon.com fees for FBA sellers (i.e., "render unto Caesar that which belongs to Caesar") and tightening stock limits
- Strict Amazon policies for things like health care-type products, trademark protection, ASIN suspensions, Know Your Customer (KYC) regulations and so on that can be super hard to navigate for people who don't understand Amazon
Replaceable Products in Commodity Categories
There are exceptions like Thrasio's $369 foot massager but to a large extent the FBA aggregators often pursue "me too" strategies purchasing low ASP commodity products like Thrasio's $12 mineral oil wood conditioner, its $27 mop, and $26 teapot. These types of products are highly replaceable and available with better quality and often cheaper prices at your local Costco. E.g., you can spend $25 with Thrasio on Amazon for a 4-pack mop pad or $22 at Costco for a 50-count pack of almost the same thing (sure the Thrasio one is re-usable but have you noticed how nasty a mop pad gets... how many times will you really reuse it?). A good slice of the FBA aggregators are buying basically the same thing: cheap stuff that you kind of need but not really. These products do indeed sell well on Amazon but they are commodities easily replaceable if you try to raise prices too much, which bring us to...
Amazon is a Fickle Mistress
Over the last few years Amazon has been aggressively raising fees and sharply limiting inventory levels for FBA sellers when it suits Amazon's needs. During the pandemic Amazon opened the floodgates to FBA sellers because it needed product in its Fulfillment Centers (FCs) to meet unprecedented demand. That was a controversial decision within Amazon because the "dirty secret" is that FBA provides volume but very low margins whereas FBM (often called MFN inside Amazon) is where the profit really exists. This is because FBA requires Amazon to invest billions in FCs, sort centers, delivery trucks, people and so on whereas MFN is pure profit (i.e., Amazon takes a cut of the sale and doesn't have to invest a single dollar in the fulfillment of the sale). This is why Amazon launched and is so keen on Seller Fulfilled Prime (SFP) which is another "pure profit" opportunity for Amazon.
Once the pandemic panic buying subsided, Amazon was left with a glut of FCs and other expensive facilities and an avalanche of FBA product sitting in those expensive locations it is keen to get rid of. Amazon would love nothing more than to shift more customer demand towards MFN and SFP to juice its own bottom line. This means Amazon has become far more aggressive in sharply limiting stock levels with no warning to FBA sellers. The increasing fees and harder to navigate stock level limits are huge problems for the FBA aggregation business model.
When you are selling a pack of 4 mop pads for $25 on Amazon that you can replace with a pack of 25 mop pads for $22 on Costco, your ability to raise prices to protect your margins when Amazon is raising its fees on your brand is very weak. You raise prices too much and you will shed customers to other brands and alternative products (i.e., there is a high elasticity for your product and low stickiness). You might think Amazon cares but it does not because there are 20 other brands selling the same thing you are selling without the high costs/low productivity you see out of the FBA aggregation business model. When Amazon says its "customer obsessed" (which is genuine), it means its laser focused on the customer buying the products; Amazon does not care about the brands selling the products because those are easily replaceable. There always is and will always be another brand willing to sell if you are no longer competitive because of Amazon's higher fees and lower stock limits.
This weak pricing power applies even if the brand was not acquired by an FBA aggregator but remember that the acquisition generated debt equivalent to 3 - 6x EBITDA for the brand. This limits your runway and makes life far more challenging when Amazon relentlessly raises FBA fees.
Not understanding Amazon
If you have never worked at Amazon, then whatever you imagine Amazon is and how it works is completely wrong. The company believes strongly in ownership and 2-pizza teams which means many of its internal systems and processes are disjoint. They are the product of local optimization because Amazon believes that local optimization yields far better results in the long run (i.e., greater adaptability and flexibility to move quickly even if global optimization would be more efficient). This means that navigating Amazon from the outside can be frustrating and confusing. It will seem like you are dealing with a completely different company depending on the issue you are trying to solve... and in a way you actually are given how Amazon is organized.
Amazon is under a lot of scrutiny and pressure from regulators and governments. In particular, on 1) the safety of products bought through Amazon, and 2) the scourge of fake products and infringing products. Amazon is so large that it can afford to "shoot first and ask questions later", which means that "when in doubt, shut it down" is how things often work. This means that if there is the slightest risk your ASIN might be a healthcare risk (e.g,. you are selling supplements that make even a tangential healthcare claim or that has unknown/suspicious ingredients), Amazon will slap you with ASIN or brand-level suspensions. A $10 million per year business might be really important to you as a brand owner... but to Amazon that measures its revenue in 100s of billions per quarter, you are nothing. Even an FBA aggregator with $1 billion in sales through Amazon is still less than 1% of a single quarter of sales for Amazon.
For the FBA aggregation business model, not understanding Amazon or the peculiar nature of its organization can make life very difficult. Its internal systems and processes were never designed for the FBA aggregation business model, which can sometimes trip them up and cause suspensions. For example, Amazon expected the typical FBA seller to be a small business with a simplified legal structure but some FBA aggregators can have convoluted legal structures that trigger KYC issues. Or shifting regulatory and legal pressures can cause scrutiny of product categories that previously had far less attention. When you've loaded up on debt to acquire brands, any suspensions can have serious impact on the FBA aggregation business model. And Amazon's peculiar structure and culture can make navigating the resolution especially frustrating to FBA aggregators. This is true for un-acquired brands as well but the added complexity of the FBA aggregation business model increases the chances of something going wrong when it interacts with Amazon's systems, processes and culture that never expected the existence of aggregators.
