Moonshot Brand Research Report: The Aftermath of Covid for Ecommerce
Published by Moonshot Brands’ Chief Investment Officer Jesus Sotelo Ayuso.
- Net gains for the market with an initial burst in demand followed by high inflation and missed expectations.
- Moonshot identifies early on the dynamics at play to pick winners.
After personally reviewing and analyzing 100s of Amazon seller accounts over the past year we see a distinct pattern of high sales during the onset of Covid-19 in Spring 2020. Looking at public data sets, we find the Google trend data when searching Amazon is a very good representation of the dynamics at Amazon’s market.
- Each year we see a large spike from Black Friday through the holidays. In addition there is a second spike around Amazon Prime Day.
- In March 2020 there is a clear uptic in spending driven by covid, then a spike for a “late” amazon prime day and holidays.
- As the US opened up in the summer of 2021 there is a distinct underperformance both Y/Y as well as against expected trend lines.
- As omicron hit this correction reversed and we saw sales close to the expected base level which is an upward trend.
- Looking forward we expect a continuation of difficult Y /Y comps through Q1 due to stimulus checks driving sales in Q1 2021.
Effect on Pricing for Seller Accounts
Amazon accounts emerged as a new asset class thanks to the innovative debt financing available that looked at the previous twelve months EBITDA. For sellers in the first half of 2021, they were able to fully reap the rewards of inflated EBITDA. In addition, with the entrance of many new buyers looking to close their first deals, we observed an increase in purchase multiples during the summer of 2021.
2021 Pressure on EBITDA
A few things happened in 2021 that put e-commerce companies EBITDA under pressure:
- Most sellers and people in the industry didn’t see that the huge demand for ecommerce would drain dramatically when brick and mortar retailers open up doors postlock down. In anticipation of a very strong 2021, many sellers overstocked and tried to retain revenue as much as possible. When 2021 came down, most sellers invested in marketing to attract back customers, but
- In 2021 cost of advertising went up across many advertising platforms. Just at the time sellers needed advertising the most, channels like Facebook became unprofitable.
- Supply chain costs and complexities piled up to the tumultuous year. With container prices exploding by as much as 5x-10x, cogs inflation, and advertising costs on Amazon increasing, we have observed a compression of profit margins across the industry.
Aggregator consolidation
The aggregator business model typically includes leverage. For discussion sake let's assume aggregators can access capital at 14% and leverage 3X EBITDA on a 20% margin business. So for a $5,000,000 Revenue Business with a $1,000,000 EBITDA there will be $420,000 interest payment or ~8% of revenue. If top line revenue shrinks and margins compress an aggregator will depend on cash reserves. We’ve also seen aggregators “invest ahead” on staff and drive diseconomies of scale by having very large payrolls.
This strategy can still work in a “blitzscaling” scenario where there is so much equity capital on the balance sheet that the aggregators can burn significant cash. For those pursuing this strategy but unable to backfill the equity they have and will enter a distressed situation.
A second approach, the one pursued by Moonshot, is to seek out the best companies to buy, look for correctly priced assets, and utilize a smaller team of experts and technology to manage a large portfolio of targeted verticals. We were able to purchase the assets of one distressed aggregator in late 2021 and have reviewed a number of others. We anticipate this trend to increase through the summer.
Seller Expectation Realignment
Given the generally compressed margins and lower top line revenue most sellers are seeing over the last twelve months vs this time last year, we believe there will be a period of pricing realignment. Sellers still have the frothy numbers from last summer in their minds, but the fundamentals of the business cannot support it. This is leading to a slow down in deals being consummated while the market realigns around the new reality: Although the frothy numbers of 2020 are gone, the long term macro trend of growth on Amazon and online selling in general remains a strong business for the future.
Normalcy ahead?
We expect that the second half of 2022 and beyond will bring a sense of normalcy in the market. In the industry many things have changed, improvement in technology, customer adoption, and increased investment from companies. All these elements contribute towards a recovery and a continuation of ecommerce growth. But the war in Ukraine, inflation, and supply chain issues continue. We continue monitoring these trends to find our next big winners.
About Jesus Sotelo Ayuso, Chief Investment Officer
Jesus has 12+ years of experience in entrepreneurial finance and world-class centers of excellence (e.g., MIT and Bridgewater Associates). At Bridgewater, Jesus joined the Portfolio Management group, contributing to the investment and oversight of Bridgewater’s ~$150 billion USD AUM. As an executive and advisor, Jesus has led the creation of different investment vehicles: structured and managed portfolios in Mortgage Backed Securities (USD 4 bn), established operations of recently listed REIT in Energy (USD 1 bn), amongst others. Jesus completed his MBA at MIT Sloan with a GPA of 4.9 / 5.0. While at MIT, Jesus developed a system to merge stock and debt fundamental analysis with quantitative finance techniques