Asia agglomeration: Strength in numbers?

Of the nearly 25 brands acquired to date by Singapore-based agglomeration platform Una Brands, Bellaforte might have the most compelling origin story. The founder, Australian Sam Richards, tripped and fell while carrying a tray of drinks, and searching online for replacement glassware, realised there was a gap in the market for unbreakable tumblers. He was 10 years old at the time.

Richards secured AUD 15,000 (USD 10,600) in start-up funding, found sourcing partners in Asia, and went live in 2019, using Amazon Marketplace. Last year, aged 15, he sold to Una for AUD 1m. The platform was drawn by Bellaforte’s strong sales, and the growth potential tied to product line expansion – unbreakable beer mugs and martini glasses are on the way – and entering new markets.

“Una making that acquisition tells me there is discipline in their process,” said Vishal Harnal, a partner at 500 Global in Singapore. “They are very data-driven in how they make decisions, thinking about brand positioning and forecasting growth. Something might come completely out of leftfield, from a 15-year-old, but it’s not a moon shot. They bought it because the data looked fantastic.”

500 Global joined a USD 40m seed round for Una, comprising debt and equity, in May 2021. An all-equity Series A of USD 15m closed in November and more funding has followed. This is part of an agglomeration effect being felt across Asia, most recently demonstrated by India’s GlobalBees raising a USD 111.5m Series B at a valuation of USD 1.1bn – eight months after its founding.

There are now two agglomeration unicorns in India, plus half a dozen less well-funded players and a few direct-to-consumer (D2C) brands looking to buy up smaller brethren. L Catterton made a move in China, targeting the country’s large pool of Amazon Marketplace vendors, while various global agglomeration platforms are targeting the region. It has all happened so very quickly.

“There will probably be pain, some platforms won’t work out. But right now, it’s too early to say,” said Karthik Prabhakar, a managing director at Chiratae Ventures – a GlobalBees investor – in reference to the India market. “Are there too many players? Not yet. And they aren’t falling over each other to win brands because they are targeting different segments and the market is so large.”

Industrial logic

Endorsement of Asia’s brand agglomeration opportunity has come from no less than Thrasio, which is credited with creating the model others now follow. The US-headquartered company has established a presence in China, Japan, and India in the past 12 months. Its first brand acquisition in India – announced last month – was accompanied by a pledge to invest USD 500m in the country.

Thrasio has raised USD 3.4bn to date and achieved unicorn status in 2020, two years after it was founded. An all-equity Series D of more than USD 1bn – at a valuation of USD 5-10bn – closed last October, by which point the company had accumulated over 200 brands, ranging from pet deodorizers to portable playpens. It claims one in four US households own a Thrasio product.

The proposition is straightforward: the company leverages its understanding of rankings, ratings, and reviews to identify and acquire emerging brands; and then it applies expertise across data science, logistics, and marketing – plus economies of scale that arise from running a consolidated back-end operation – to accelerate growth.

Most platforms buy brands outright. They pay a portion of the fee upfront and the rest in subsequent increments, with the final amount dependent on brand performance. Sellers tend to be small-scale operators who have launched these businesses on the side and have scaled as far as they can. Some are re-employed by the platform, but most cash out and move on.

“They are all bootstrapped, and the cap tables are clean, mostly founders and family members,” said Kiren Tanna, co-founder and CEO of Una. “They’ve been going a few years and they find it hard to expand overseas because they don’t know about customs, licenses, new entities, and distributors. They are thinking about what to do next and we come in as a viable option and give them full value.”

Moreover, these companies are distinct from classic VC targets in terms of philosophy as well as size. For agglomeration, it is all about creating a base platform of horizontal skillsets and plugging in brands that meet certain criteria. They value transparency, stability, and near-term profitability, relying on insights provided by customer ratings, supply chains, and inventory turnover.

A venture capital target may not demonstrate the same slow and solid growth, but there is scope for innovation that transforms a category or mode of consumption, potentially leading to an outsize return. High cash-burn is acceptable if accompanied by a strong team and a compelling vision.

“We invest in brands that have a unique setup and value proposition; they can’t just rely on data and algorithms. It is not easy to replicate founding teams or takeover businesses and operate them with a streamlined approach,” said Michael Zhang, co-founder and managing partner at BA Capital, a China-focused early-stage consumer sector investor.

"The founder taps into consumer insights and makes nuanced but critical decisions according to customer needs. The key is building the brand in the long term, not growing numbers in the short term. Sometimes there is conflict between those objectives.”

Machine gun mode

While Thrasio claims some crossover with venture capital investors, collaboration is more common than competition. According to Alan Lim, the company’s China head, most local VCs now have cross-border e-commerce teams, but progress has been limited by evaluation challenges, suspect financials, and mass expulsions from Amazon for rights infringement and review manipulation.

If Lim finds a vendor that is suitably compliant and sophisticated, with revenue above USD 300m, he notifies counterparties at VC firms. They pass him anything in the USD 5-50m revenue range.

To some extent, encountering VC investors might be a function of targeting larger, more mature brands. China was already a significant part of Thrasio’s business from a supply chain perspective – over 90% of manufacturing happens there, irrespective of brand location – and the company is now pushing ahead on acquisitions. Lim described the approach as “machine gun mode.”

Thrasio made its name in the home and living and sporting goods categories but establishing a foothold in China – and doing so quickly – requires a broader focus and a willingness to write ever larger cheques. Brands with less than USD 500,000 in EBTIDA are generally avoided.

The common denominator in these investments is Amazon. Targets must derive significant revenue from the marketplace, typically relying on Fulfilment by Amazon (FBA) to handle order reception, packing, shipping, customer service, and returns. It is the apogee of plug-and-play: Thrasio knows what it is getting, which simplifies due diligence and value creation.

Nebula Brands, which received USD 50m in Series B funding led by L Catterton last year, takes the same approach, guided by the same logic. China accounts for one-third of Amazon's vendor population, with around 600,000 third-party operators generating transactions with a gross merchandise value (GMV) of USD 135bn per year. The China share is expected to reach 45% in 2025.

“We have been studying this model globally – in the US, Europe, Asia and Latin America. In Asia, our team developed higher conviction that the Chinese third-party Amazon vendor community represented the biggest white space,” said Charlotte Chang, a vice president at L Catterton. “We ultimately chose Nebula because its team has deep knowledge of the market and extensive on-the-ground sourcing, underwriting, and operating experience."

Channel challenges

Concentrating on the Amazon channel in China essentially restricts platforms to players that serve an international audience. Emerging local brands favoured by VCs – known for their understanding of domestic consumers and of the native marketing and distribution channels used to reach them – don’t really appear on the agenda, although some are beginning to target global markets.

Targeting local-facing brands requires a mastery of marketplaces like Tmall and JD.com, which operate by their own rules and therefore skew platform economics. Amazon’s top-selling vendors are invariably those with the most reviews and highest number of five-star ratings – it is a flywheel approach that brings stability to the system.

In China, high-end brands are actively sought out and command a consistent following. However, for third-party vendors that enjoy less branding on e-commerce marketplaces, rankings in search results tend to be less stable.

“Taste is fickle, trends change quickly, and consumers are less likely to leave authentic reviews without incentives. There is also more of a human moderating role when it comes to the exposure different stores receive,” said Chang. “As such, an aggregator that buys third-party vendors on such marketplaces would be less able to predict their future performance and replicate success.”

The implication is clear: why risk straining resources to address a challenging market when there is an abundance of targets in the predictable Amazon ecosystem and a proven strategy for helping them grow? Thrasio’s Lim echoed this view, emphasizing the complexities of systems integration.

“We can leverage our resources to improve packaging, search engine optimisation, content, copyrighting, and we do this while going from one marketplace to another and sometimes bringing in offline retail,” he added. “There is so much we can do to grow businesses exponentially, rather than focus on a completely new thing and try to bring it into our ecosystem.”

Similar observations are made of Southeast Asia. It is difficult for brands to achieve scale without addressing the region in its entirety, yet this involves accommodating the nuances, languages, and cultures of individual countries while operating across multiple marketplaces.

Una has been mindful of this from the outset, assembling a team of more than 150, one-third focused on acquisitions, one-third on technology, and the rest on operations and growth initiatives. There is also a proprietary system that tracks brands in different markets and digests the various data streams into a single comparable format.

“It is not just data collection, but also fulfilment. We solved this by working with logistics partners across the region and integrating them with our technology. It makes us scalable,” said Tanna, adding that Shopify, SEA-owned Shopee, and Alibaba Group’s Lazada are bigger channels than Amazon for Una.

“I think everyone will be multi-channel eventually. But what we’ve seen global platforms do is identify the largest Amazon markets and work their way down the list. Southeast Asia is different because it is dominated by local distribution channels.”

Into the unknown

India, on the other hand, offers a large-scale single-market opportunity, multiple e-commerce marketplaces, and many small brands. Unlike China, Amazon has a significant vendor pool targeting local consumers, competing with the likes of Flipkart, Myntra, and Snapdeal. GlobalBees has already made half a dozen acquisitions, while Mensa Brands, the other local unicorn, has twice that number.

“The arbitrage in enterprise value between where rounds were happening and where platforms were buying assets was wide last year, so they snapped up a lot of brands. And then those early acquisitions have performed well, demonstrating improvement in growth and profitability,” said Vinod Murali, a managing partner at venture debt provider Alteria Capital, which has backed Mensa.

While India’s leverage market is not deep, agglomeration platforms raised enough debt - Alteria's USD 20m commitment to Mensa is its largest across all sectors - to spur equity investors. Premji Invest, Steadview Capital, and SoftBank are investors in GlobalBees, while Mensa had Alpha Wave Global, Tiger Global Management, and Prosus Ventures in its USD 135m Series B. Tiger Global is also a backer of Goat Brand Labs, alongside Flipkart Ventures and Mayfield.

Platforms tend to be helmed by e-commerce veterans. The founders of Mensa and Goat Brand Labs previously held senior positions at Myntra and Flipkart, respectively, and GlobalBees is a spinout from FirstCry, a baby and kids online retailer that enables third-party vendors. (In Southeast Asia, Una’s Tanna was previously Asia CEO at Rocket Internet, which incubated Lazada.)

These founders now face competition from brands that emerged from the infrastructure they helped build. MyGlamm, a D2C beauty marketplace, is expanding through M&A; so are cloud kitchen operators Curefoods and Rebel Foods. They pursue agglomeration within specific industries, relying on domain expertise as well as user bases or communities that exist around their core businesses.

“The model has picked up quickly and it is still to be proven. Historical wisdom suggests M&A is difficult and so there must be strong interest alignment,” said Prabhakar of Chiratae, also an investor in Curefoods. “But we have seen versions of this work before: just look at Tencent, Prosus [a unit of Naspers], and Modern Times Group in gaming.”

There are many unknowns around agglomeration, but the importance of discipline in selection and execution is apparent to all concerned. Platforms raise debt to fund new acquisitions – equity often serves as a buffer, enabling investment in technology, teams, and growth – and so if a few brands underperform and fail to reach profitability, the consequences can be severe.

 

"We expect venture businesses to burn money for expansion, working capital and marketing, and then scale fast, maybe 3-5x a year. If brands on these platforms grow 30-50% a year, that’s good. But they need to grow without losing money, that’s the key. Operating profitability allows the platforms to increase their leverage multiples,” said Alteria’s Murali.

To this end, they play safe on categories. Una, for example, focuses on products that appeal to young mothers and millennials. A deep understanding of the commercial landscape translates into fewer due diligence errors, a wealth of cross-selling opportunities on the front end – the company knows all the relevant online influencers used in marketing – and efficiencies on the back end.

Even Thrasio and Nebula, which are being deliberately broad in their approach to China, adhere to strict criteria when filtering the Amazon vendor universe. They avoid categories that fall victim to fashion and fads, or where products are likely to be technologically obsolete in a matter of months. Rather, emphasis is placed on barriers to entry, which might be product or supply chain driven.

Chang of L Catterton also flags up the platform’s ability to operate a portfolio of assets: “When we underwrote Nebula, we paid a lot of attention to the post-acquisition management part, and assessed whether the team could continue to maintain a high level of performance and help grow the vendors it buys.”

Faith in numbers

Taken together, these factors can be distilled into a general comfort with process. Harnal of 500 Global cares less about the categories a platform targets than how decisions are made. An apparent scattergun approach might in fact be based on clear-sighted market projections underpinned by data and operational insights.

“How are they being benchmarked? What are the metrics they’re looking at? Is there consistency in the numbers? Is what they are looking at relevant to the decision making? Is there a feedback loop to understand how decision-making can improve over time? That’s what I care about,” Harnal said.

The overriding challenge is that consumer markets, especially in Asia, are in a constant state of flux. Brands stumble most often in cultivating and maintaining a sustainable customer value proposition – marketing spend is high but repeat buyer rates are low. Data insights and operational best practices can help navigate around or out of these situations, provided they are relevant and sophisticated.

Yet the relationship between brand and consumer is increasingly multi-faceted – direct and intermediated, online and offline, content-light and content-heavy. China has arguably seen the biggest step-change as commerce, content, and social networking have become entwined and modes of engagement have proliferated, but similar phenomena may emerge in other markets.

Agglomeration platforms embrace complexity, claiming their knowledge, networks, and technology represent a competitive advantage. As the intensity dials up, it remains to be seen whether this holds true or greater nuance at the brand level pokes holes in the plug-and-play model.

“Brands used to rely on traffic within Taobao, essentially keyword search, but now it’s more like a checkout counter, and you get traffic from outside," said BA Capital's Zhang.

"Official websites are hard to do, so you must understand all aspects of consumer engagement, from digital marketing such as TikTok and Bilibili influencers to post-sale community building. It adds so much more complexity to your operation.”

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• Topics
• South Asia
• Southeast Asia
• Greater China
• Consumer
• Expansion
• China
• India
• M&A
• Growth capital
• L Catterton
• BA Capital
• 500 Startups
• Alteria Capital
• Chiratae Ventures