Memo: The Rise of the Holding Companies

One side has the advantage of distribution, the other side has the advantage of brand equity. I believe that the holding company trend will favor brand equity in the long run.

As the rumor persists that Thrasio is nearing a public offering, its competitors are growing in force, with Branded Group, Elevate Brands, Unybrands, Technology Commerce Management, Boosted Commerce, Heyday, and Win Brands Group among them. While technology may play a role in quantifying each investment’s viability and potential upside, none rely solely on an algorithm to determine a brand’s fate. That is, until recently.

OpenStore has raised $30 million to grow its business rolling up Shopify sellers, Axios reported this week. The emergence of a cottage industry of merchant holding companies on Shopify, also a thriving business for Amazon sellers, is telling: Shopify has built an eCommerce universe with gravitational pull. Here is how OpenStore works:

  • retailers hand over login credentials
  • OpenStore verifies sales and other inventory data
  • bots determine the acquisition offer by the next business day

OpenStore is now valued at $250 million and has already launched its automated acquisition tool targeting thousands of brands. While Shopify merchants sell on their own sites with no centralized selling platform, OpenStore can benefit from the richer nature of these sellers, who have direct relationships with their customers, unlike Amazon sellers. OpenStore is targeting sellers that are struggling to stand out in a vast sea of eCommerce players – a smart tactic as customer acquisition, marketing and brand awareness are among the most expensive parts of building a merchant business, and Shopify lacks the promotional algorithm and search functions of Amazon (though that’s beginning to change with Shop).

Amazon is the queen of discoverability.

According to Bloomberg, Shopify is leaning into the roll-up functionality, having built its own exchange for storefronts. The offer process will soon become part of the Shopify platform: any merchant can log in and, using OpenStore’s bots, receive a bid for selling their entire business. Shopify’s roll-up business has room for scale but is still far off from Amazon’s, and that’s for good reason. While Amazon sellers tend to have more scale than the traditional small business merchant, Shopify sellers tend to score higher on a measure of brand equity and net promoter score. For Amazon sellers, few own the relationship to the customer. It requires a bit of sophisticated advertising and sales funnel development to target Amazon customers, driving them over to the brand’s native cart. Shopify brand acquirers see one less step. For companies like Win Brands Group, a backend system of operational excellence is used to improve operations, grow margins, and trim duplicity. Time will tell whether or not OpenStore has a similar strategy in the works.

Amazon’s advantage remains product discoverability. The roll-up companies devoted to that format usually acquire FBA brands with less short-term risk but higher long-term risk. This is the key question:

Are nascent Amazon brands capable of the same successes if sold through Shopify, BigCommerce, or another commerce provider?

OpenStore competitors like Perch, Thrasio and Elevate Brands are focused on nascent businesses. This makes sense for them. It takes much less work for Amazon retailers to exceed $5 million or higher in run rate. For Shopify merchants to accomplish the same, it requires a better sales funnel, a stronger operational team, and a brand that consumers are drawn to. To lower risk of failure, Win Brands Group acquires brands earning eight figures or greater in annual revenue. When assessed through traditional methods, this seems to be the best method. But OpenStore can revolutionize the Shopify side of the brand acquisition spree if it can identify strong businesses as well as Win Brands Group can, but much earlier in their growth trajectory. Can OpenStore detect these types of brands algorithmically? And when they acquire them, can they streamline operations in a way that is conducive to proper retail brand development?

Right now, the business of Amazon brand acquisition is the prefered channel. Consider this recent commentary about the state of digitally-native brands. In one of those contributor posts for Forbes by Chris Shipferling, the Managing Partner at Global Wired Advisors, provided a bull case for Amazon brand acquisitions:

I believe that campaigns prioritizing keyword rankings, earning reviews and driving conversions will all but replace traditional branding strategy within the next three to five years. And as many of these practices are already ubiquitous in the marketplace, the definition of what comprises a premium brand will evolve to reflect best practices for e-commerce.

There has never been a more incorrect assessment of retail brand psychology. While these quantifiable metrics will continue to serve a role in how a consumer assesses their purchasing options, brand has likely never been more important as algorithms shift, third-party data diminishes, and platforms cultivate their own private labels. Brand is important. And this is where OpenStore can succeed in a model that more resembles an Amazon acquisition (quantitative) than a Shopify buy (qualitative).

Retailers want one-to-one contact with their customers. They want their brands to have a message, a purpose and a point of view. More of these exist on than (natively) on now, and this may lead a defection away from Amazon-hosted brands. See below for a relevant example. As the industry shifts toward the roll up of Shopify brands, fewer non-VC backed brands will need to wait to maturity before interest from investment vehicles like Win Brands Group. OpenStore is in good position to scale the Shopify strategy if its proprietary technologies can select brands as well as the digitally-native brand veterans at Win Brands Group and their Shopify-focused contemporaries.

By Web Smith

Note: this memo is an expansion of the short analysis from Friday’s member brief. That version had a few grammatical errors. This version has been improved and is worth your time. To all who emailed in, I apologize for the errors.

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