Another Bad Year for Amazon Aggregators

2023 was bad for Amazon aggregator funding, and this year is on track to be even worse.

Just two equity funding rounds were closed through June 27, compared to five at the same time last year and 12 in all of 2023.

“The decline in funding reflects the overall venture environment, where funding has slowed across industries. For Amazon aggregators in particular, the biggest and most well-known player, Thrasio, prepared for bankruptcy in late 2023 as the overall slowdown in ecommerce sales growth slowed funding to the space as well,” Laura Kennedy, principal analyst at CB Insights, said in a written statement to Practical Ecommerce. “These aggregator companies still exist and are making acquisitions, but overall the market has flatlined.”

Thrasio announced last week that it had emerged from Chapter 11 bankruptcy and promoted Chief Operating Officer Stephanie Fox to CEO and a director of the company, effective immediately. CEO Greg Greeley had been expected to step down following the restructuring.

“The revitalized Thrasio will prioritize its top-performing brands with a focus on profitability as a consumer goods company,” Thrasio said in a press release.

Thrasio, based in Walpole, Mass., filed for Chapter 11 bankruptcy protection in a New Jersey court in February. It requested that the court oversee a restructuring agreement with lenders, allowing it to cut about $495 million in debt and defer interest payments for a year after exiting bankruptcy.

“The restructuring has left Thrasio financially stronger, with a clean balance sheet, reduced debt, and an infusion of $90 million in fresh capital,” the company said.

Thrasio will concentrate on its leading brands with a loyal customer base and potential for product and channel expansion, the company said, including The Hate Stains Co. stain removers, which has grown over 100% in the last year, and Angry Orange pet deodorizer, which has achieved 21 times top-line growth since being acquired in 2018.

“We are emerging from Chapter 11 with a clean balance sheet, fresh capital, and a renewed focus on our core business of building brands,” Fox said. “I have been with Thrasio since day one and remain as excited about the opportunity ahead now as I was in 2018.”

The ecommerce landscape, however, has changed with China’s Temu and Shein taking an ever-increasing share of the market with cheap goods.

In 2021, Amazon brand acquirers spent more than $6 billion in acquisitions amid the pandemic stay-at-home frenzy that pushed ecommerce demand through the roof. So far this year, aggregators have spent $100 million.

“I have to imagine the growth at Temu and Shein has not helped the aggregator market, as the idea of an inexpensive online ‘brand’ becomes even less important in that environment focused on the lowest price possible (and now Amazon is going to start its own direct-from-China product marketplace as well),” CB Insight’s Kennedy said.

Amazon Mid-2024: Earnings, Overview

Amid the hoopla surrounding next month’s Prime Day, it’s worth remembering the marginal impact of that event on Amazon’s overall financial performance. Measured by bottom-line profit, Amazon in 2024 is mostly a cloud computing company.

Yet millions of merchants and consumers rely on Amazon’s marketplace. What follows is our analysis of the company’s overall financial performance and its plans for shoppers, sellers, logistics, and more.

Assessing Amazon’s financials requires a bit of scrutiny. The company, famously opaque for what it discloses (and doesn’t disclose), operates three components.

The first is physical and digital goods that it carries as inventory and sells directly to consumers either online or through its outlets such as Whole Foods Markets. Amazon calls this component “Product sales.”

Next is what the company calls “Service sales.” It consists of commissions from its massive marketplace and related fulfillment, shipping, and advertising revenue. Grouped into Service sales are Prime membership fees and, notably, fees to Amazon Web Services, its monster cloud-computing division.

For purposes of this article, however, AWS is a separate component given its size and profitability.

All told, the three components generated $143.3 billion in Q1 2024 revenue, a 13% increase from the first quarter a year earlier.

Operating income for Q1 2024 reached $15.3 billion, much higher than the $4.8 billion a year earlier.

Big-picture takeaways are this.

• Amazon is highly dependent on AWS. The cloud division drove all operating income (net sales less operating expenses) in the first quarter last year and roughly 62% this year.

• “Product sales,” while modestly growing, are likely only marginally profitable, at best, given the presumed cost of goods attached to that category. Amazon does not report operating income for Product sales alone.

• “Service sales” (excluding AWS), with “Third-party seller services” (marketplace commissions and related), “Advertising services,” and “Subscription services” (Prime memberships, mostly), could easily be more profitable than “Products.” But, again, Amazon doesn’t separately report operating income for Services. Here’s the revenue breakout, however, for those items.

According to Marketplace Pulse, Amazon pockets more than 50% of marketplace seller revenue, up from 40% five years ago. A typical Amazon seller, per Marketplace Pulse, pays a 15% transaction fee, 20-35% in Fulfillment by Amazon fees, and up to 15% for advertising and promotions on Amazon. The total fees vary depending on the category, product price, size, weight, and the seller’s business model.

Delivery and AI

Amazon delivers to Prime members faster than ever, with more than 2 billion global packages arriving the same or next day in the first quarter. In March, across the top 60 largest U.S. metro areas, nearly 60% of Prime member orders arrived the same or the next day, and in London, Tokyo, and Toronto, three out of four items were delivered the same or the next day.

Whole Foods and Amazon Fresh now offer a grocery subscription service with unlimited delivery on orders over $35. The program is available to Prime members in more than 3,500 U.S. cities, as well as customers using an Electronic Benefits Transfer card, i.e., those using government benefits.

Amazon continued rolling out Rufus, its generative artificial intelligence shopping assistant, to millions of U.S. customers. The bot, still in beta, can answer shopping-related questions, compare and recommend products, and more. Amazon said it improved Rufus’s accuracy and response speed and added features, including “My Orders,” which answers questions such as “when did I last order coffee?” and “what dog treats did I last order?”

The company continues adding generative AI features for marketplace sellers. One new tool allows sellers to sync product listings from their own websites by providing a URL. The program parses the information from the websites to create “high-quality, engaging listings” on Amazon.

Profitability

Amazon reported net income (operating income less taxes and extraordinary items) of nearly $37.7 billion for the 12 months ending March 31, up 778% from $4.3 billion a year earlier. Yet the company sees further improvements ahead.

In the April earnings call, CEO Andrew Jassy stated he “doesn’t believe that we’re at the end of what we can do in terms of improving our cost structure on the Stores side [i.e., “Products sales”]. Yes, I think there are really unbelievable growth opportunities in front of us, and on the Stores profitability.”

He added, “We’re looking for ways to, again, turn over every rock, look at every process and everything that we do on the logistics side, and see how we can get our cost structure down and get speed and selection up. So, it’s working on a lot of fronts there, but cost is certainly front and center as we meet and improve customer experience.”

Profits grew immensely over the year, but the company’s operating margin percentages have not, which may be a driver of the cost concerns. Amazon reported a global net sales operating margin of 8% for the 12 months through March 31, compared to 2.5% a year earlier. That figure for North America totaled 5.2% through March and -0.1% a year earlier. The figures for international net sales improved to -0.4% from -6.6%.

Global Logistics

In September 2023, the company introduced Supply Chain by Amazon, offering third-party logistics worldwide.

“It really kind of, in some ways, mirrors some of the other businesses we’ve gotten involved in, AWS being an example of it,” Jassy said on the call.

The service helps sellers get items across borders and through customs. It also ships items from customs to various facilities, including allowing sellers to store items in warehouses that they can automatically replenish into Amazon’s fulfillment centers or move elsewhere.

“It turns out to be pretty hard work to actually import items from overseas, get them through customs and the border, and then ship them from that point to various facilities,” Jassy said. “We built that capability for ourselves first, and then we opened up those services as individual services to our sellers.”

Supply Chain by Amazon is “growing very significantly. It’s already what I would consider a reasonable-sized business,” Jassy said, adding that it’s still early for the low-capital program.

Amazon Marketplace Fears

The Amazon marketplace is a jungle. Savvy merchants can reach a massive audience and sell a lot of merchandise, but like a real jungle, there are reasons to be afraid.

Contributing to sellers’ fear are Amazon’s dominance in the U.S. market, advertising challenges, and Google’s generative search results. Let’s consider each.

King Amazon

In 2023 Amazon Logistics transported more packages than each UPS and FedEx, a first.

I set out to address the amazing Amazon Logistics and how it helps small and mid-sized ecommerce businesses.

The impetus was an annual Pitney Bowes report stating, “2023 is the first time in the Index history that Amazon Logistics surpasses UPS in parcel volume.”

The king of the ecommerce jungle, Amazon, transported 5.9 billion parcels in the United States in 2023, compared to 4.6 billion for UPS and 3.9 billion for FedEx.

Only the United States Postal Services (6.6 billion boxes and envelopes) had more parcel volume than Amazon Logistics. Of the big four — USPS, UPS, FedEx, and Amazon Logistics— only Amazon’s parcel volume increased in 2023, up some 800 million parcels from the prior year.

I asked a few Amazon marketplace pros about the impact on SMBs.

Two services — Amazon Logistics and Fulfillment by Amazon — streamline storage, packing, shipping, customer service, and returns, freeing sellers from the complexities of order fulfillment. Consumers love the service, with many packages — purchased on Amazon from small businesses and emerging DTC sellers — delivered the same day as ordered.

It is a strong opportunity, but not without risks. Those same experts noted that while Amazon’s dominance enables SMBs to sell and compete with massive retailers, it also makes them dependent.

“It shows how reliant sellers are on Amazon,” said Jon Elder, the founder of Black Label Advisor, a Texas-based Amazon consultancy.

“Amazon is nearing 50% of all ecommerce revenue in America, so it’s almost a monopoly now,” Elder said, adding that the dominance has allowed Amazon to raise its selling fee significantly.

“Margins are getting crushed,” Elder said.

Some in the industry have estimated that new logistics-related fees in February 2024 add about 15 cents to the cost of each item sold on the marketplace and managed via FBA. In Amazon’s defense, the increase was reportedly consistent with or even below the increases by other parcel carriers.

Nonetheless, a merchant that depends on Amazon for most of its revenue has no obvious choice but to pay.

Effective Advertising

Many marketplace sellers are reliant on more than shipping and fulfillment. Amazon Ads is vital, too.

Amazon’s advertising platform has several advantages over Meta Ads and Google Ads, such as:

• Large, high-intent audience. Depending on the study, between 50% and 57% of all shopping intent searches in America start on Amazon.

• Seamless shopping. Amazon Ads are integrated into the platform’s search results and product pages, enhancing visibility and conversions.

• First-party data. Most Amazon shoppers are logged in when they see an ad. The hubbub about tracking cookies has little impact on performance.

Amazon Ads drives the bulk of sales for many sellers. That’s the opportunity. The concern is increasing costs and a disruption of some sort.

AI Search

Some marketplace professionals believe that Google’s AI Overviews (previously called Search Generative Experience) could drive some ecommerce and D2C companies to Amazon.

AI Overviews may reduce organic search traffic to sellers’ own ecommerce sites.

Imagine a consumer seeking trail running shoes. She searches Google for “the best running shoes for Appalachian trails.” An online shoe store has a comprehensive, search-optimized article about that very topic, pairing the perfect shoe with each type of Appalachian terrain.

Before Overviews, this query could lead her to the article on the store’s website, with its branding and merchandising. The odds were good she would click a shoe in the article and add it to the cart.

Google’s AI Overview can now provide the answer from the article without a clear link to the store.

In February 2024, research firm Gartner predicted that AI would reduce overall organic search traffic by about 25% by 2026.

Meanwhile, in May 2024, Raptive, a company that places ads on creators’ and publishers’ websites, expressed concern “about the implications of AI Overviews. Our initial analysis suggests it will significantly reduce search traffic to content creators’ websites, directly impacting their ad revenue and, by extension, their livelihoods.”

Ecommerce stores with a meaningful reduction in organic search traffic could seek new sales channels such as Amazon’s marketplace, resulting in more competition.