This is a guest post by Samkit Mehta who is Founder and CEO at Kaona Brands, a buyer and builder of high-growth consumer brands across Southeast Asia. Prior to starting Kaona Samkit was a private equity investor at Temasek and an investment banker at J.P. Morgan.
Guest Author: Samkit Mehta
The Rise
In July 2020, exactly two years after it was founded, Thrasio achieved unicorn status. It went on to raise capital from some of the smartest money in the world, including private equity firms Silver Lake and Advent.
The e-commerce aggregator achieved tremendous growth by rapidly acquiring Amazon sellers and developing a systematic playbook to scale up their operations, thus placing a leveraged and diversified bet on the growth of e-commerce.
At one point, it estimated that one in six households in the US had purchased a product from one of their portfolio companies.
A little over three years later, the company declared bankruptcy. What happened? Was the thesis wrong, was the execution flawed, or was it just bad luck? Let’s take a closer look.
Here are six factors that contributed to the decline of Thrasio.
1) Excessive amount of leverage
Thrasio raised well over $1 billion in different kinds of debt facilities to fund its acquisitions. Even without the rise in interest rates, this placed an unnecessary strain on internal cash flows that could otherwise have been used to boost marketing, conduct R&D, and expand inventory for high-growth brands.
2) Lack of rigorous acquisition criteria
As advertised on its website and investor materials, Thrasio used a framework that it called R3 to evaluate potential targets, which boiled down to an Amazon seller’s ratings, rankings, and reviews.
However, as most consumer goods investors know, there are many (arguably more important) factors to consider, including gross margin, customer lifetime value, cost of customer acquisition, competitive positioning, etc. when selecting which brands to buy.
Ignoring these factors led to an adverse selection issue and filled the portfolio with many poor quality assets that dragged down overall performance.
3) Integration infrastructure unable to support number of acquisitions
Thrasio made over 200 acquisitions in its first three years of existence. Regardless of the amount of funding received, developing the systems and processes, organizing and training the right team, and building the cultural cohesion necessary to integrate that many brands in such a short time is an extremely challenging task.
This led to a lot of miscommunications and simple operational errors, such as large amounts of inventory going missing.
4) Channel concentration
Selling almost exclusively through Amazon left its portfolio vulnerable to commission increases and rising advertising costs, squeezing margins. The Amazon sellers it owned had high rankings, but this was basically the equivalent of an increasingly expensive online real estate rental, in which Amazon as the landlord held all of the power.
5) Limited growth avenues
The end game was always uncertain as very few Amazon sellers manage to expand into other channels and most had optimized their Amazon business already before selling to Thrasio.
Continuing with the online real estate analogy, top ranked Amazon sellers attracted a lot of web traffic in the same way that stores on Fifth Avenue attract a lot of foot traffic, but without brand equity, no demand existed for their products outside of that one specific location.
Furthermore, unlike most large consumer goods companies, Thrasio invested very little into R&D, removing yet another growth avenue and subjecting their product portfolio to natural decay as many products reached the end of their lifecycle.
6) Macro environment
At first the macro environment fueled the rise of Thrasio, as e-commerce boomed during COVID and generated high organic growth across its Amazon portfolio.
However, it then accelerated its fall as rising interest rates, inflation, and supply chain issues created a perfect storm that exposed and exacerbated all of the aforementioned flaws in its business model.
So what’s next?
Many e-commerce aggregators, like Thrasio, have declared bankruptcy or been dissolved.
Others around the world are managing to stay afloat, perhaps due to lower leverage and or a higher quality portfolio, though they are still struggling to grow and raise funding.
Amidst all of this, global e-commerce is expected to grow at double digit rates for the foreseeable future. Barriers to entry for new brands continue to get lower, leading to unprecedented innovation in consumer goods.
Can the aggregator model evolve and find a more sustainable way to participate in this growth and innovation at scale? Or was the thesis doomed from the start, with no way to systematically create value across a portfolio of subscale brands?
What do you think?
