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On Aggregators and Dis-Aggregators
One of the most interesting, recent phenomena in the world of e-commerce is the emergence of a new breed of firms: Amazon Aggregators.
The idea is quite simple: rather than building new brands and products from scratch, these aggregators acquire tens (many times hundreds) of small merchants that have already proven successful on Amazon, along with their products.
Some of the already known aggregators are Thrasio and Perch, but this concept seems to have blown up in 2020. The Financial Times reported that during 2020, seven start-ups, both from Europe and the US, raised a combined $950M to buy small, yet promising, Amazon sellers. Most of these aggregators — including Berlin-based SellerX and Razor, Heroes, and Heyday — did not even exist at the beginning of 2020.
Things only became more intense in 2021 when Thrasio, the most prominent and earliest aggregator, announced that it had raised another $750 million at a valuation ranging somewhere between $3-$4 billion.
But, rather than just analyzing these aggregators, I would like to add one more business, which seems somewhat similar: Vacasa. When renting an apartment or house on Airbnb or VRBO, the following might have caught your eye at the bottom of the page:
Vacasa started in 2009, providing, among other things, full-service property management primarily to those who offer their apartments and houses for rent on Airbnb and VRBO. It also provides the property owners with additional services ranging from having local teams manage the rental, to a tech platform that makes the managing process easier. The firm will be going public very soon with a valuation close to $4.5 billion.
Vacasa is different from the Amazon aggregators since it does not own the properties it manages, and this may prompt you to ask why I compare it to them. The way I see it, we are witnessing an interesting phenomenon where new players emerge: firms that thrive on an existing and fast-growing marketplace. In both settings, these firms solve a problem for the small players (merchants or hosts), and also, potentially, for the platforms (Amazon and Airbnb), at least in the short run.
The long run is another story.
Ben Thompson coined the term aggregation theory to describe the model adopted by Amazon and Airbnb (as well as Netflix and Google).
In the cases of Vacasa and Amazon aggregators, these firms disaggregate a business offered by an aggregator (platform) only to aggregate it again.
My main question in this post is whether this is a viable, long-term business in its current model. First, let's outline the main benefits for each different player: Hosts and Merchants, Amazon Aggregators and Vacasa, and for the platforms themselves. Then, we can delve into what seems like the main risks and downfalls.
What are they Gaining?
The first important question refers to what each player gains from this emerging business model:
The Airbnb Host or the Amazon Merchant:
In the case of Vacasa, the Host (property owner) secures the ability to better manage his asset. While Airbnb has been trying to help hosts make better decisions on pricing and advertising, this is clearly not enough. Vacasa makes it easier to list on multiple platforms (a.k.a ‘multi-homing’), thus increasing the asset’s utilization. Vacasa claims that the rental income generated from properties managed by the firm may increase by 20%.
The case of Merchants (brand owners) and Amazon Aggregators is different. Unlike Vacasa, Aggregators acquire the business while the initial owner gets payouts from continuing to run the brand (now under the management of the aggregator).
If the hardest thing to do is start something new (e.g. a new brand), the second hardest is to scale it. Most of these merchants are probably a little exhausted from trying to scale. Amazon is pressuring them to offer better customer service and continue to meet demand. They start to realize that stocking and restocking are more complicated than they thought; growing the business is not easy and advertising on Amazon is not trivial (and very costly).
These small brands lack the necessary skills to manage, scale and enjoy economies of scale. They may not have the required cash, interest, or fortitude, and many times, they need the stability that comes with selling the managerial aspect of the business in order to focus on what they do best; innovate and solve problems.
Often, agreements between Merchants and Aggregators are structured to include earnouts for the former. This arrangement allows the seller to continue to profit as the Aggregator grows the brand. Thrasio claims that earnouts have increased the total payout to sellers by an average of 37%.
The Platform (Amazon vs. Airbnb)
Both platforms gain better management of the supply side of their marketplace. A marketplace is only as good as its ability to ensure an ample supply of products (in the case of Amazon) and homes (in the case of Airbnb).
For a while, Airbnb faced issues in bringing more hosts to join the platform. Just recently, Brian Chesky, founder and CEO of Airbnb, stressed, in an interview on CNBC’s TechCheck, the need for millions of more hosts in order to meet demand over the coming years. In this case, having Vacasa aid in listing and managing properties will help reduce the friction that comes with listing your house and keeping it on the marketplace.
The same is true for Amazon: as we mentioned before, Amazon's growth engine on the retail side is its marketplace. There are many great products that are not well managed when they reach a different scale. By having professionals manage such products, Amazon can make this engine even stronger (at least in the short run), but maybe not in the long run, as we will discuss.
The Amazon Aggregators or Vacasa
This is probably a more straightforward case, especially after seeing the valuations. Amazon Aggregators observe which businesses are doing well and, given that customers are already there, they bet on cash-flow-positive businesses that have growth potential. Thrasio, for example, is the fastest profitable firm to achieve $1B valuations.
Amazon aggregators are the equivalent of private equity firms, just with a different number of firms, at a much smaller scale, and in a clearly defined niche. The aggregators build a diversified portfolio of firms with low risk and potentially significant economies of scale in terms of vetting, onboarding, and managing every aspect of their growth. Thrasio claims to have increased the profit of the brands it has acquired by 156%.
In contrast, Vacasa has some elements of traditional verticalized SaaS firms (making it very scalable), while also employing teams on the ground to help with managing the asset.
Given the growth of both Airbnb and VRBO, and the lack of knowledgeable hosts (for most, this is not their primary job), there is enough headroom to take a cut from their revenues.
Both Vacasa and the Aggregators enjoy economies of scale by managing a complex set of small businesses, including online elements (such as pricing and advertising) and a physical component (logistics, cleaning, etc.). They solve a problem for the platforms that are unable to deal with the needs of their “sellers”, and solve a problem for the sellers that do not have access to the skills needed to compete in an undifferentiated market.
Both Vacasa and the Amazon aggregators create significant value to their shareholders by solving these problems.
What are they Giving Up?
If you believe in free lunches, you may want to stop reading here. Otherwise, the next obvious question is, what are these different players losing?
The Small Player
Merchants lose the upside of their business. The brand founder, who worked hard and built a business, may lack the tools to understand the total market size and the skills to bring the business there. But it is also clear that the moment they sell the business, they will never fully materialize the entire value of their innovation.
Hosts offer up a share of their revenues, through someone’s tenuous belief that it will generate enough upside. I don't have the statistics to back this up, but I would assume it's true. However, the 20% additional income that Vacasa reports sounds relatively low, compared to what I would expect.
Here is the most interesting discussion.
Vacasa lists Airbnb and VRBO as partners and when I speak with Amazon aggregators, they claim Amazon wants them to exist.
I highly doubt this is the case, and is, by far, the most evident misalignment here.
As someone who continuously studies platforms, I would like to take a moment and list some fundamentals regarding platforms and how they operate:
Rule #1: Platforms cannot monetize what they cannot control in terms of information or product flows. By allowing these firms to come between them and the customers, platforms have less control over the information or fulfillment of a product.
Rule #2: Platforms cannot allow their “sellers” to differentiate themselves. The entire basis of platforms is that no single player can have the bargaining power that comes with differentiation. This is why Disney left Netflix, and precisely why many sellers do not use Amazon. Contrary to what platforms desire, the entire goal of aggregators is to help sellers differentiate their brands while gaining potential bargaining power.
Rule #3: In order to be a winner-takes-all venture (and platforms strive to dominate their market), sellers must not be allowed to multi-home and sell on multiple markets simultaneously. Both Vacasa and the Amazon aggregators help their sellers multi-home (on VRBO and Shopify, for example).
Both Vacasa and the Amazon aggregators take a group of successful platform players (merchants and hosts) and help them build their clout and, with it, their bargaining power and ability to sell across platforms.
This is the biggest threat to any platform’s financial growth, making long-term success for aggregators a questionable endeavor.
Vacasa and Amazon Aggregators
These firms face minimal risk in the short run. It is clear that there is a gap in the market that they are filing, and it is also clear that both firms thrive on a vast market that is only growing.
But there are no insignificant mid-term and long-term risks, following exactly what I discussed in the previous section. Realizing the risks these firms pose to its model, Airbnb may start offering these services to its hosts. Some are harder to deliver (having a local team), but some are within the wheelhouse of what Airbnb can do well. For aggregators, the mid-term risk is continuously living by the rules of Amazon. If Amazon starts to view them as a risk (as it should), it may make it harder for these firms to manage their brands.
But this is not the long-term risk. In my opinion, the long-term risk is that it is just hard to truly differentiate in the long term by being a middle-of-the-value-chain-player in a platform.
To explain further, let me go back to the Shih smiling curve. Both the aggregators and Vacasa insert themselves in the middle of the value chain and thrive on market weakness on both sides of the curve, while enjoying economies of scale. But they are not the ones that bring the unique R&D or differentiation (left side), neither are they the ones that bring in the customers (right side). So, they will always be squeezed in the middle, either by the two extremes or by someone else that competes, given the lack of their differentiation. And indeed, we see many aggregators emerge recently. The entry barrier is low, and the only way to convince sellers (in the case of the Amazon aggregators) is by offering better terms. It’s a “land grab” with little ability to differentiate.
In other words, although I see why these businesses are very profitable at this stage, unless they begin to truly differentiate, the long-term vision, and whether VCs are a suitable funding model, are less clear.
Are We, as Consumers, Better Off?
Did I get better service under a Vacasa-run Airbnb? Absolutely not! Very anecdotal, but I did get a much better service when a single person owned and managed the house.
Are the products you will get from Amazon aggregators going to be better? Probably not. These aggregators are prioritizing returns over service and innovation. As I showed before (albeit in a different context), this doesn’t mean that we are going to see better products. Since they will be professionally managed, we might see more of them in terms of ads and reviews, or maybe the cost will be lower due to economies of scale.
But are we, as consumers, better off with a weaker Amazon and Airbnb? Absolutely yes! So, I absolutely hope to see more of these Amazon aggregators and verticalized services to Airbnb hosts.
Are we going to see more innovation of this type? Aggregators and middle layers, that build on the existing behemoth of Amazon, Airbnb, Uber, and the like? Absolutely.
At least, I hope so.
Jim Barksdale famously said that there are “only two ways to make money in business: One is to bundle; the other is unbundle.”
And if I may, I will paraphrase: There are only two ways to make money: One is to aggregate; the other is to disaggregate, only to aggregate again.