BEIJING, July 29, 2022 /PRNewswire/ — To explore the logic behind the successful financing, Nebula Brands co-founder Yanzhi Wang shared his insights in an interview with ChinaVenture.cn.
In the first half of 2021, the booming Amazon aggregator industry raised a total of $5.1 billion; while in the first half of this year, only $2.2 billion. Recently, Nebula brands, a China-based Amazon aggregator, has bucked the trend and received Series B+ funding from Mubadala, an Abu Dhabi sovereign wealth fund, which has generated intense discussion in the Amazon aggregator industry.
Industry reverts to the mean
After obtaining the B round of financing from L Catterton, the world’s largest consumer private equity firm, Nebula Brands received another B+ round of financing from Mubadala, a large sovereign wealth fund from Abu Dhabi, in the next 6 months. William Wang, co-founder of Nebula Brands, said that this round of financing will be tapped to expand the acquisition scale of the assets of brands that “go global” from China and recruit talents from all fields. This will help consolidate its capabilities in business growth and brand building.
Founded in 2019, Nebula Brands is the first and largest Amazon brands acquisition platform in China. Such companies are referred as Amazon Aggregator (AA) overseas. AA mainly acquires Amazon brands with potential, and then integrates operations to increase profit and brand premium.
Since the end of 2020, AA has started a wave of fundraising frenzy around the world. Thrasio, the fastest US company to achieve unicorn status, is a player in this industry as well. Since more than 70% of product supply chain and 50% of third-party sellers on Amazon trace back to China, global Amazon aggregators also turn their attention to this market last year. European leading Amazon aggregators flock to Chinese market after Thrasio entered it in 2021.
However, the industry has suffered a setback this year. In May, Thrasio, the world’s largest Amazon aggregator, announced it would lay off nearly 20% of its staff and replace its CEO. The scale of investment and financing is also shrinking. According to data from MarketplacePulse, an e-commerce research agency, Amazon aggregators raised more than $5.1 billion in the first half of 2021 but only managed to raise $2.2 billion in the first half of 2022. Merely12 new aggregators announced successful financing. According to the report on mergers and acquisitions of Amazon aggregators of Capstone Partners, an investment bank, the market prices of Amazon FBA brands soared last year with an influx of money for Amazon brands acquisition, the growth of AA has slowed down as a result.
So, has the AA bubble burst?
“The AA industry boomed last year thanks to multiple favorable factors that are difficult to replicate in the early days of the industry.” Said William Wang, co-founder of Nebula. A core reason is that the sales of overseas e-commerce platforms have grown exponentially due to the pandemic. Against this backdrop, most of the brands acquired on the Amazon platform improve their performances amid a booming market. The rapid growth of profits has led to an increase in the valuation of such assets. This industry received an influx of money that seeks opportunities for greater profit.
In his view, the industry reverts to the mean this year in a positive manner, which is normal in market cycles. Although the growth of overseas e-commerce markets such as the Amazon has slowed down compared with the previous two years, the fundamentals remain sound. Instead, more mature channels and markets are identified after the pandemic. The need for AA is also palpable – bottom-up integration through acquisitions will continue to happen in any mature market.
“The fragmented brands will be acquired by AA, and the small AAs may be acquired by big AAs, brand groups or listed companies in the future, which are common market integrations. It is not that the market is gone for AA, but that there is no certain growth of the broader market. Therefore, you need more solid judgment and more effective operational growth ability. ” William Wang reckoned.
The more difficult it is to do business, the higher the threshold will be. Different AAs that have entered the market will focus on acquisitions with dimensions where they have an edge in specific industries or product features. The acquisition platforms also have a trend of diversifying from Amazon to other channels.
With the total financing reaching $3.4 billion, Thrasio’s strategy was to expand rapidly to achieve a scale effect through the Middle Platform operations. William Wang believed that there is no fundamental problem with this strategy in the market environment at that time, but there are no shortcuts for omni-channel consumer brands or Amazon’s consumer brand building, so early leading AAs such as Thrasio needs to slow down and sort out specific operations. “Most AAs are still new companies, and it is unlikely to have a substantial improvement over the original operator in all fronts in the short term. Each replicable operational capability requires trial, error and iteration before it can be applied to multiple brands. After the rapid online consumption growth brought about by the pandemic slows down, the previous strategy of rapid expansion will lead to numerous fragmented brand assets and redundant workforce. Fragmented capabilities of excessive manpower do not reflect the value of AA. “
It depends more on the nature and capabilities of each AA to choose a specific category or full category for acquisition. At the same time, assets also flow between different AAs. For example, assets of some categories might be sold to have a more focused strategy in the future. At present, Nebula Brands’ strategy is focused on categories such as outdoor, maternal, and infant products. Meanwhile, it plans to tap another one to two product categories with more advantages and richer product lines in the Chinese supply chain like small household appliances.
Outdoor, maternal, and infant products are chosen because many products in these categories are durable consumer goods with slower evolution. After continuous micro-level innovation of original products, they can remain their advantage in the channel. It is harder to overtake leading brands in such categories under Amazon’s rules, which can ensure the relative stability of brand revenue after the acquisition. Furthermore, consumers trust brands in such categories more from the perspective of omni-channel. Consumers go beyond value for money and may have the trend to achieve consumption upgrades. With deeper understanding of users and products after the acquisition, more product innovation and brand building will help these Amazon brands evolve to omni-channel brands.
In the long run, it is of great significance for AA to create several star brands in major categories and a series of channel brands that are outstanding in a specific dimension such as category, price and positioning. User insights, supply chain integration, and migration of brand traffic facilitate cost reductions and efficiency gains. ” Stated William Wang. Therefore, Nebula Brands usually carries out extended acquisitions of brands in the same category and related categories or engages in product innovation to enhance competitiveness and growth through synergy after completing the acquisition of key brands. During the last Prime Day, the synergetic strategy helped an outdoor brand acquired by Nebula to achieve more than tenfold year-on-year sales growth.
“Investment” and “Post-investment”
Capital acquisition and brand operation are the two business pillars of Nebula. These two pillars could be benchmarked against “investment” and “post-investment” if a comparison between AA and funds is drawn in terms of asset management.
The process of “investment” can be further broken down into two parts, identifying a good project and negotiating the project at a reasonable price.
As a local AA in China, Nebula Brands is better positioned to target the source of the projects. Nebula can directly get access to first-hand projects by establishing a marketing and business team in China. William Wang revealed that more than 90% of Nebula’s projects are identified by the in-house teams now rather than recommended by intermediaries, which is conducive to acquiring brands at a more reasonable price and establishing in-depth cooperation with original sellers.
In addition, another channel for Nebula Brands to acquire projects lies in the upstream supply chain. There are many concentrated industrial belts in China. When a good project is identified, acquisitions relevant to it could trace back to high-quality sellers with the industrial belt as the source. These actions have expanded the coverage of high-quality projects while avoiding excessive head-to-head bidding against overseas AAs.
The Nebula team has reflected on the acquisition criteria. “In the beginning, the team was eager to pursue the strategy of Thrasio by looking for the top 1-3 brands in a particular industry. With the decline of the abnormal growth of the market, this strategy of seeking fast speed is not in line with the common sense of value identification. The market is changing rapidly, and the ability to adjust acquisition strategies and standards will become the core competitiveness of AAs in acquisition. For example, one of the strengths of AA lies in the connection between acquisitions and operations in e-commerce channels. The data team boasts the resources to analyze the whole chain of data from industry competition, user reviews to the supply chain, therefore the team can adjust the judgment model according to the results in practice. Data analysis is performed to identify industries with stronger internal growth momentum to locate a desirable track for future operations. “Stated William Wang.
Specifically, in addition to the basic criteria that AAs have long adopted, other aspects also need to be reviewed. The basic criteria include a high and stable ranking in its category, sales from a limited number of SKUs, gross margin over 20%, high ratings and good reviews, etc. Besides that, Nebula Brands also focuses on “trickier” elements for integration such as the importance of China’s supply chain in the value chain of a category, product innovation drive, and leveraging differentiated capabilities of the original seller teams.
As for “post-investment”, since building a brand is a task with assured success, not all assets acquired by AA will develop towards omni-channel brands. At this stage, most assets acquired by Nebula Brands are those that generate sustained cash flow. To be specific, the short-term positioning of most acquired assets is being a channel brand. Aside from maintaining and growing sales on Amazon through better advertising and product micro-level innovation, these brands are also empowered to expand into high-certainty sales pipelines like Walmart, Tiktok, offline distribution, etc. As for a small number of assets that have the potential to scale into omni-channel big brands, Nebula Brands will take actions from product R&D to brand promotion with intensified, long-term input, aiming to help develop it into an influential consumer brand.
Nebula Brands can be seen as a consumer brand management business with an acquisition + operation model. In the view of William Wang, compared with Apple, DJI and other single-category technology firms in big industries, most durable consumer goods brands acquired from Amazon compete in a smaller industry. Therefore, acquisition becomes a more optimal approach to quickly create synergy matrix of these brands, which is different from the buyouts made by funds that invest in mature brands. These Amazon brands may be far from household names at this moment, but still have access to steady and growing cash flow, constant feedback from users, and highly coordinated supply chains. All of these features lay solid foundation to breed omni-channel brands especially when synergy is created among similar categories.
Another story AAs like to tell is data plus Middle Platform. William Wang pointed out that based on e-commerce marketplace like Amazon, AAs are keen to invest in technology to cope with a complex and ever-changing e-commerce landscape with data-driven decision-making, applied SOPs and efficient supply chain management, use less manpower than original sellers and reduce the likelihood of human error.
“Comparisons are drawn between AAs and P&G as both need to understand and manage channels. But offline channels are P&G’s turf while AA’s focus is online ones.”
The operation of offline channels requires a lot of time and manpower while online channels have new rules and characteristics. For AA, investment in data is a long-term effort that yields results over time. If the company seeks to further consolidate the online market share in the long run, human judgment can never be fully relied on to have solid institutionalized capabilities. Without support from data, it is unlikely to interpret customer demand agilely, respond to competition and change rules properly or engage with supply chain partners efficiently. In particular, having been through cycles and failures, we realize that the key is to have our own data.
The advantage of being local
AA, a new model in need of issuing equities and debts, is currently more favored by overseas investors. As the debt market is still underdeveloped in China where early-stage start-ups are unable to issue debt flexibly, recent fundraising of Nebula Brands tends to turn to funds with overseas backgrounds.
Between the two rounds of financing for Nebula Brands, it is a period when both overseas e-commerce market and capital market are under pressure. William Wang said that the current circumstances are forcing latecomers like Nebula Brands to think through what their long-term and unique value is. For example, one of the major topics for the team’s daily strategic discussions is what so-called China’s advantage is.
One fact is that majorities of the most dynamic sellers with greatest potential on Amazon are in China. Data shows that over 63% of Amazon’s top sellers are from China, of which one-third are in Shenzhen. This means Chinese aggregators that acquire third-party sellers enjoy unrivalled advantages of being local, no matter in terms of geographical location or target assessment.
Despite a raft of overseas aggregators marching into the Chinese market, William Wang believed this will not pose too much pressure to Nebula Brands. In his view, the wrestling between Nebula Brands and other AA focuses on winning high-quality projects. But since it is not a zero-sum market, players tend to find their own edges over time and competition often comes along with cooperation. “Less competition is seen this year than last one. This is because a number of AAs with established presence in China start to fade out, and meanwhile overseas aggregators tend to look for projects via intermediaries. Unlike us who seek first-hand projects on our own and compete against intermediaries for exclusivity of projects, AAs involved in projects via intermediaries may find themselves in a black-box bidding process, leading to higher purchase price than the actual value of the assets.” William Wang said.
This can be evidenced by a piece of news this year. BBG, one of the leading fundraisers, has withdrawn from the Chinese market at the end of February. According to the analysis made by industry media, it is mainly due to factors such as the efficiency in decision-making and bidding mechanism.
Compared with overseas aggregators who usually only have marketing teams or even no team in China, Nebula Brands and its management are able to communicate directly with sellers when appropriate in terms of acquisition, operation and supply chain. This will boost sellers’ trust in the acquirer and they are more willing to share more data and information to explore possibilities of in-depth cooperation in the future.
“For the acquisitions we have completed, many sellers are tied to us in the long term through various forms of cooperation, and have made substantial contributions to the brand growth,” William Wang said. The key is to leverage the advantages of sellers in the organization and integrate them into other brands. This means sellers are given more room to perform beyond the original assets, work with exceptional talents to achieve a win-win result. This is also a key highlight to attract sellers compared with overseas aggregators.
The strength of China’s supply chain is also crucial. Supply chain uncertainty caused by various reasons is one of the main detriments to sellers’ business. Overseas aggregators sometimes face out-of-stock issues as well. For Nebula Brands, being in China does not guarantee an advantage in supply chain. Efforts should be made in stable production scheduling and new product R&D so as to achieve replicable optimization.
“We work with factories with sincerity to persuade them that we are not a disruptor that quickly goes in and out of the business. Instead, we will deploy more resources to make the upstream and downstream of the industry better”. William Wang remarked, “Amazon is a platform where product innovation will be highly amplified. The key, as opposed to the changing rankings, is the user needs hiding in massive reviews. We know how to gain insights from reviews, and we are working together with the suppliers to achieve consumer-driven innovation.”