Protocol | China

Investors are spending big to buy China’s hottest Amazon sellers

Well-funded aggregators are giving the creators of Amazon-optimized brands a lucrative way out of the business.

Amazon package on fulfillment center conveyor belt

An Amazon package rolls off a fulfillment center line.

Photo: Thorsten Wagner/Bloomberg via Getty Images

When Neo Zheng decided to sell his two Amazon stores in March 2020, there weren't many buyers on the market. By then he had built two brands, one specializing in kitchen products and another in travel accessories, which sold exclusively on Amazon Marketplace. But it was the early days of the pandemic, manufacturing supply chains were getting kinked up, sales were falling quickly and Zheng wasn't optimistic about the outlook. So, when he was approached about selling his two stores — brand names, supplier deals and all — for over $5 million, he decided to take the exit.

Zheng, a 31-year-old entrepreneur in Shenzhen, had worked at different subsidiaries of Alibaba for five years before starting his first ecommerce brand. Soon after cashing out, other Chinese Amazon sellers started to ask about his experience because they too were approached by buyers. Zheng sensed this was a business opportunity, and started to work as a broker between potential buyers and sellers of Amazon businesses.

In Q1 2021, third-party sellers accounted for 55% of the products and 63% of the value of merchandise sold on Amazon. Nearly half of them are based in China.

These are brands with quirky names you can never quite remember: A writer for Today.com couldn't place the Yincro brand, which is trademarked by a Shenzhen company, but liked its tunic top. Us Weekly liked a lace top from Xieerduo — a brand trademarked in Xiamen. On Amazon, an unfamiliar name doesn't matter if the price is right, the reviews are positive and the listings are optimized to pop up high in search results.

The pandemic wave in ecommerce has been good for giants, but it's also lifted these small sellers' boats. Now well-capitalized buyers are recognizing the value of these successful operations and acquiring them in bulk, hoping to grow them into real household names.

In other fields of business, these would be called roll-ups. In the world of Amazon sellers, they're known as ecommerce aggregators. These buyer-operators have received billions from Wall Street and Silicon Valley to snap up best-selling Amazon sellers. Acquirers keep the store listing, supply chain and employees while adding in their own marketing and logistics experts to hike up sales even more. These aggregators are also bringing in funding — tapping private equity, or acting like it themselves — that most sellers would struggle to raise, making it possible to scale up production or enter more markets.

In just the first half of 2021, almost $6 billion has been raised by aggregator businesses, observed Juozas Kaziukėnas, the founder of ecommerce research firm Marketplace Pulse. Flush with cash, these acquirers are increasingly on the hunt in China. "At a certain size of an aggregator ... it started to make sense to expand your view into looking at sellers globally. Because for an aggregator, the most important thing is where they are selling, not where they are based," Kaziukėnas told Protocol.

It's no secret that China-based sellers have been strong contenders in Amazon markets outside China. Perhaps the best-known example of such Chinese Amazon-native brands is Anker, which sells electronic accessories. It went public last year and is now worth nearly $10 billion.

Thrasio, one of the largest Amazon aggregators, is investing $500 million in the Chinese market alone and it expects its Shenzhen-based team to grow to 100 employees, Chinese media reported. FBAFlipper, the business brokerage Neo Zheng co-founded in 2020, will have completed eight sales totaling $70 million by the end of July, he said. (The name refers to Fulfillment by Amazon, the warehousing-and-delivery service most third-party sellers opt for to reduce logistics cost.)

Smaller aggregators with an Asia focus have emerged too. JJ Chai, co-founder of the Singapore-based aggregator Rainforest, told Protocol that Chinese sellers are "one of the main reasons we decided to launch this in Asia."

Suspicion on both sides

In China, most Amazon sellers congregate in Shenzhen, the southern city that has risen to become one of the most important technology hubs in China. When Jason Lee, Neo Zheng's partner at FBAFlipper, first came to Shenzhen, he was shocked by how omnipresent Amazon sellers were.

"The first night I got there, I told someone what I did in Chinese, and he was like, 'Oh, I'm a seller too. Let me show you my brand,'" Lee, who was born in the United States and worked closely with Amazon vendors in his previous job, told Protocol. "And I'm like, 'Huh, the owner of this hotel also owns an Amazon shop? How is that possible?'"

These are companies — sometimes one-person shops — that sell to Amazon markets outside China. The large number of factories in Southern China makes it easy for them to source inexpensive products with good quality or even work with the factories to develop items catering to the needs of Western customers.

They then come up with a brand name and decide on the portfolio of products offered under that brand. Once they ship the products to an Amazon warehouse in the destination country, Amazon's fulfillment arm handles the rest.

The sheer abundance of sellers in Shenzhen made Lee and Zheng decide to start their business brokerage there in 2020. Acquiring a Chinese brand instead of a Western brand that sources from China means the buyer is getting employees intimately familiar with local supply chains, they believe.

Lee and Zheng are confident that the interest in Chinese brands will only grow, but there are a lot of trust issues on both sides before that becomes reality. They said one of the first questions that sellers ask is whether the offer is a scam.

The suspicion has dwindled now that big companies like Thrasio are entering China and making headlines. Discussions about aggregators are also common in Chinese online forums for sellers. But there are still many barriers between Chinese sellers and the mostly Western aggregators.

Because neither the buyers from the West nor the sellers from China know the other side well, they need to actively learn the rules by which the other side plays. Most Chinese sellers have little experience dealing with aggregators and giving them the exact information they need. To help with that, Lee and Zheng coach sellers on answering buyers' questions and standardizing their accounting.

Western acquirers are often unfamiliar with selling tactics deployed by Chinese vendors. It becomes difficult to discern prohibited activities, like fabricating reviews and sales, from acceptable strategies, like creating two seller accounts to increase inventory flexibility within Amazon's warehouses.

"For us, how clean their accounts are is usually the biggest consideration," said Chai. "Part of understanding the landscape here is understanding what are the tools they use." If a seller's account is not "clean," it means the brand can be banned from Amazon in the future, and all the money will be spent on nothing.

The time is right

The aggregators' interest, which is providing an exit strategy that didn't exist for many Amazon sellers, is coming at a good time. Chinese sellers have been complaining about the business scene getting much more competitive. Many companies that had only sold on Chinese domestic marketplaces like Taobao are now venturing into cross-border sales, bringing strengths honed in the Chinese market. Amazon also banned some big Chinese brands this year, including Mpow and Aukey, likely for manipulating product reviews. The consensus is that the phase of high-speed, low-cost growth for Chinese Amazon sellers has probably ended.

People sell out of their Amazon businesses for all kinds of reasons. Some want to buy an apartment in China's priciest cities or to pay for a child's education. Some want to exit one product category so they can enter another.

Aggregators don't seem bothered by the competition. They see an opportunity in capitalizing on these sellers' supply chain and product design skills, and are eyeing marketplaces besides Amazon, like Shopee in Southeast Asia or Coupang in Korea.

Many plan to sharpen the branding of the sellers they acquired so, ironically, they can sell in a more traditional way. Besides Anker, the other talk-of-the-town Chinese ecommerce success is fast-fashion brand Shein, which reached a $15 billion valuation through selling on its own website.

As a business model, the Amazon aggregators are still very young. "I suspect that there will be several failures," said Jason Boyce, ecommerce strategist and author of "The Amazon Jungle," a book about brand-building on Amazon, "but the survivors and winners will create a very lucrative new asset class with a suite of brands that will become famous 21st century brands."

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