Acquisition market for e-commerce is maturing

The Dutch e-commerce sector is growing like crazy. Yet the size of the acquisition market for online shops remained modest for years. That now seems to be changing. There areMore webshops with revenues above ten million, with a healthy profit margin and with a loyal customer base.' 

According to Statistics Netherlands, the Netherlands currently has 80,000 webshops. Some 37.5% were founded during the coronapandemic era, when we all went home shopping en masse. In 2021, Dutch consumers spent as much as 30.6 billion euros online, 16% more than in 2020.

Corona temporarily accelerated e-commerce, but even before that the sector was growing rapidly. Especially in fashion and lifestyle it is going fast. For example, ING predicts that during 2022 there will be more Web shops than "brick-and-mortar" non-food stores in the Netherlands. Research by ShoppingTomorrow shows that Dutch consumers expect to do 40% of all their shopping online by 2025.

E-commerce is a pyramid

Until recently, there was relatively little evidence of the turbulent growth of online shops in the takeover market. Buyers and investors were not queuing up and the prices paid for webshops lagged behind those paid for brick-and-mortar stores. This is partly because more than 80% of webshops are one-man businesses with little revenue.

'Newcomers often start a webshop from home, but soon find out that it is a lot of work,' says Marlene ten Ham, director of interest group Thuiswinkel.org. 'The webshop market is a pyramid, with a few very large parties at the top and a huge number of small players at the bottom,' concludes founder of Webwinkelkeur Marcel Landeweerd.

Another reason for the modest takeover market for e-commerce was cold feet on the part of investors. They saw a sector in which profitability lagged behind offline, marketing costs were skyrocketing and there was much dependence on the whims of Google. The dominant role of marketplaces such as Amazon and Bol.com also caused reservations on the part of private equity and venture capital.

More demand for webshops

There is a turnaround on both fronts. The number of web shops with revenues of more than 1 million euros is still in the minority, but it is increasing. According to the annual ranking of trade magazine Twinkle, over 200 webshops even have revenues above 10 million. At the top end of the market, the big guys are only getting bigger. While in 2019 a revenue of 250 million was enough to get into the Twinkle top10, in 2021 the number 10 of the list (HelloFresh) already noted a revenue of 350 million.

More web shops with mature revenue leads to more acquisition activity. Brookz and other sales platforms are seeing a clear increase in demand for web shops. Especially niche players and webshops with revenues over 1 million euros can count on a lot of interest.

Investors, too, have discovered e-commerce. There have been several high-profile deals by private equity parties in the past few years, including the acquisition of Pluto Sport, which specializes in sports and leisure articles (a 'pure online player', i.e. without a physical store) by H2 Equity Partners, the acquisition of Vitaminestore (omnichannel) by Nobel Capital, and the acquisition and merger of SportShopsDirect and Sportshop.com by private equity company Nederlands MerkGoed.

Appetite at PE and VC

'The M&A market for e-commerce remained fairly immature for a long time,' says Maarten Kuil, TMT Industry Leader at BDO Corporate Finance. 'Investors looked at e-commerce from a distance, but were not willing to step in with all their knowledge and expertise. Since 3 or 4 years I have noticed a turnaround. There is an increased appetite among private equity and venture capital toward e-commerce.'

This has everything to do with the maturing of e-commerce, thinks Kuil. Investors are seeing more webshops with revenues of over ten million, businesses with a healthy profit margin and a loyal customer base. In addition, quite a few e-commerce companies used to have trouble getting their marketing costs under control - too much money was disappearing to Google and affiliate marketing parties - but that too seems to be improving.'

Kuil argues that for private equity investors, excessive dependence on a marketplace is an unacceptable risk. 'If a product runs well, Bol.com and Amazon start developing it themselves and you have to start competing with the platform. Also, manufacturers like Unilever are increasingly going to sell directly through platforms, which makes it more complicated for retailers. Your only differentiator then is the lowest possible price. So if more than 15 percent of your revenue comes through a platform, PE investors are seriously concerned.'

Enough room for niche players

Yet investors' fear that marketplaces are becoming more dominant, especially in the Netherlands, is not justified, according to Kuil. 'It is a risk that existed mainly in the minds of investors. In Germany and the U.S., the e-commerce market was dominated by Amazon from the start, but the Dutch market has a different dynamic. We were quick to adapt to e-commerce. Amazon did not see us for a long time and Bol.com was late. Many niche players can still manage just fine without the platforms. Some larger Web shops generate 70 to 80% organic traffic thanks to their brand recognition and have a loyal customer base. I consider the chance that those consumers will still switch en masse to marketplaces small.'

Landeweerd also believes that there is enough room on the Dutch market for webshops that focus on a niche. 'You just have to make sure you are the best at what you do,' he argues. A marketplace can help starting Web store owners increase revenue with limited resources, but in the longer term, predominantly selling through a marketplace is a risky business model, Landeweerd believes: 'You have to do a certain trick as cheaply and efficiently as possible. The disadvantage is that your added value is limited. You soon start competing on price. Then it becomes box-shifting.'

In addition, the percentage of returned products at marketplaces is very high and little customer data is shared, partly as a result of privacy legislation. Moreover, marketplaces want to optimize their profits. Landeweerd: "And what could be easier than taking it away from the seller?

Marketplace aggregators

Not all investors see marketplaces as a risk. The Dutch 'marketplace aggregator' Dwarfs specializes precisely in webshops that generate at least 80 or 90 percent of their revenue through Bol.com, Amazon or other marketplaces. Preferably webshops that are or can become market leaders in their product category, with revenues between 1 and 20 million euros.

Dwarfs launched in May 2021 with a war chest of €7.5 million in venture capital, supplemented by €30 million in debt financing from a British venture investor. In ten months, the Utrecht-based business made ten acquisitions.

The search for acquisition targets is partly automated, says chief investments officer Kenny Vaes: 'We have developed software that helps us identify which targets are interesting to us. Based on revenue, product category and profit margins, we make a first sift. But we also get many leads from our own network, through business brokers and through our own research.'

There is enough supply, says Vaes. 'Last year, when corona made e-commerce grow enormously fast, many sellers wanted the maximum price. Some were not realistic in that. Now that that covid boom is over, those people are coming back. It's becoming a buyer's market again, which is good news for us.

Dwarfs pays between two and four times the gross profit for acquisitions. Much depends on the potential on Amazon, Vaes says. 'With smaller targets, we usually do not go beyond 2 to 2.5 times EBITDA, but we also look, for example, at how strong the branding is and what the competitive position is. We don't use a fixed formula.

More challenging capital market

In the Netherlands, Dwarfs is the first and, for the time being, the only marketplace aggregator. In the U.S. and Germany, many more of these kinds of buyers are active. The largest online bead-maker is the American Thrasio, which has already made hundreds of acquisitions since its founding in 2018. In Germany, pioneer Berlin Brands Group (founded in 2005) has faced stiff competition from Razor Group for a few years now. Internationally, there are now so many aggregators that service providers have even emerged that advise entrepreneurs which aggregator they can best sell to.

The "marketplace first" business model of aggregators benefits from marketplace dominance. Vaes is therefore convinced that marketplaces will continue to grow. 'I don't think Amazon will easily gain a foothold in the Netherlands, but for Bol.com there is still a lot of potential. Bol.com simply has a very strong brand. The conversion rate is higher than for separate webshops.'

Vaes' confidence in marketplaces is not shared by everyone. In the U.S., Thrasio's acquisition machine is faltering. An IPO had to be called off and founder and CEO replaced. Dwarfs was also forced to put on the brakes. A new round of financing is proceeding with difficulty, which meant parting with some of the staff.

A temporary bump, Vaes hopes. 'Partly because of the war in Ukraine, the capital market has become more challenging; it is no longer as easy as it was last year. We are therefore more critical how we deploy our assets. Moreover, we made many acquisitions in the last quarter of 2021 and the first quarter of this year, we now want to take the time to integrate and optimize.'

Scenarios

Whether the future of e-commerce lies with marketplaces is difficult to predict. Ten Ham of Thuiswinkel.org does not have a crystal ball, but he does have a scenario team with several scientists, visionaries and experts from the market, which has been thinking about the future of e-commerce. The team arrived at two possible scenarios.

Ten Ham: "In the most pessimistic scenario, large platforms will gain all power, the added value of retail will disappear and we will be completely at the mercy of big tech. That's not a bad life, because anything is possible and we have access to everything we want in that scenario. There is just absolutely no control over what happens to our data. We don't know why we are presented with certain products or why things are the way they are. In the optimistic scenario, the technology is your own and your own data is not being used as someone else's business model. The parties you do business with only know what they need to know about you and nothing more. Logistics is sustainable, there is a level playing field, and retail works together.'

According to Ten Ham, retailers would be wise to take both scenarios into account. But whatever turn e-commerce takes, the takeover market for Web shops has definitely come of age. The number of webshop takeovers is expected to increase again this year.