Roll-ups 2.0: Changing winds prompt shifts in ecommerce aggregator model

The winds are changing for ecommerce roll-up firms that snapped up dozens of brands as Covid-19 swept across the world, prompting some to shift their strategy.

By touting scale and cost advantages from integrating marketing, HR, finance, to supply chain functions across various brands, aggregators raised a great deal of capital amid a pandemic-driven boom in ecommerce.

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US-based Thrasio, for instance, raised over US$3 billion between 2020 and 2022 alone.

But the period of growing rapidly via acquisitions is ending for some roll-ups as interest rates rise. In turn, this has driven up the cost of capital – partly fueled by debt – while a souring macroeconomic climate slows ecommerce growth.

JJ Chai, CEO of Singapore-based Rainforest, tells Tech in Asia that his company reached profitability on an EBITDA basis in the first quarter of 2023, a quarter shy of its original target.

The former Carousell executive attributes the delay to the sluggish pace of acquisitions in the past year. “We found it harder to get targets and deals that fit our category and the requirements that we have, so we slowed down,” Chai explains.

In a model where it’s common for firms to buy companies using debt and repay them with the profits made from acquired brands, higher interest rates pull up interest cost expenses and make it harder for ecommerce aggregators to achieve profitability.

Rainforest’s debt is “fixed rate” and is among the reasons why the firm hit EBITDA profitability in Q1 this year, according to Chai.

In 2022, Rainforest logged an annual revenue of US$50 million, an increase from an annualized US$30 million in 2021 – the year it launched. The company currently has a portfolio of 15 brands.

See also: India’s young roll-ups may be in for a wake-up call

On the plus side, revenue multiples – a way for roll-up companies to value brands – have also turned conservative amid lower margins and growth rates, reducing the cost of acquisitions.

While this would previously range between 1x and 1.5x, it has “definitely gone lower,” Chai notes. “You’ll see some deals that are below 1x … 1.5x is quite rare.”

“In general, we are entering a buyer’s market, which we believe can be favorable for us as we are actively investing,” says Bjorn Bergstrom, CEO of Neso Brands. Launched in 2022, the roll-up company is building a specialist house of brands for the eyewear space.

Tackling “flat” growth

The evolution to Aggregators 2.0

More consolidation ahead