Saturday, May 25, 2024

Pharmapacks Ceasing Operations: What effect does it have on other third party sellers?

Update: Pharmapacks has formally filed for bankruptcy on August 28, 2022.

Following a botched SPAC attempt, Pharmapacks will be shutting down. Pharmapacks has been a top third-party Amazon seller for a long time, and for the majority of 2022, it was included in our list of the top 100 Amazon sellers.

What does this mean for the other top sellers on Amazon who primarily deal in reseller products, like Pharmapacks? What does this imply generally for Amazon sellers?

What is Pharmapacks?

In 2010, Packable—better known as Pharmapacks, an Amazon seller—opened its first physical location in Brooklyn. It eventually became one of Amazon’s leading third-party sellers. It was the third-biggest third-party seller on Amazon as of July 2022. According to Packable, their average daily revenue is $1.6 million, or roughly $48 million per month, as of January 2022. They declared revenue exceeding $450 million for 2021.

Reselling popular health and beauty products like Colgate and Q-tips is their main line of business. To gain an idea of their company, visit their Amazon store. By early 2022, they claimed to have employed about 1,000 people.

Why Is Pharmapacks Shutting Down Its Business?

The business model of reselling low-margin commodity products and fighting with hundreds or even thousands of other sellers for the buy box may already be raising red flags for seasoned Amazon sellers. But the real death knell arrived when Packable declared last year that it was merging with Highland Transcend Partners I Corp to offer a SPAC (Special Purpose Acquisition Company), which is essentially a different approach to raising capital via an initial public offering. As the economy began to slow down, the market for SPACs and Packable’s plans to provide a SPAC also came to an end.

In a notice to employees on Monday, Packable stated that it was terminating 138 employees, or approximately 20% of its workforce. The remaining 372 employees are anticipated to be let go once “individual winddown responsibilities are completed.” CNBC was able to view the documents in question. We must now shut down the business, including the facility you report to, liquidate any remaining collateral, and cease operations as the company has no other viable financing options.

Are There Any Bigger Amazon Resellers Left?

The third-party sellers on Amazon continue to favor the business strategy of reselling enormous quantities of consumer goods at extremely low profit margins. Our July 2022 calculations place Royal Meds and MYBATTERYSUPPLIER as the fourth and twelfth largest resellers, respectively, with substantially similar business models. Can they endure in a world where margins are narrowing and competition is growing?

Pharmapacks has consistently placed in the top 5 of our list of third-party sellers.

It could be argued that Pharmapacks’ pursuit of hyper-growth, driven by their aspirations of a SPAC offering, is what got them into trouble (more on that in a moment). On the other hand, it is also possible to claim that the era of prosperous big resellers is over. Over the years, it has become increasingly apparent that true direct-to-consumer brands like YETI and Anker are dominating the list of top third-party sellers.

Do Aggregators and Amazon Resellers Share the Same Risk?

Following a run of negative announcements for Amazon aggregators, Pharmapacks, one of the biggest third-party sellers on the platform, announced that it was closing its doors. So, are aggregators and resellers doomed to the same end?

Although they may appear to be very different, the business models of aggregators like Thrasio and resellers like Pharmapacks are actually quite similar. Resellers like Pharmapacks purchase other products to resell them, while aggregators like Thrasio pay high valuations to purchase other brands and sell them on marketplaces. The two business models have one thing in common: instead of actively creating their own products, they pay to purchase them from other companies or business owners.

Do Smaller Amazon DTC Brands Face Difficulties as Well?

Pharmapacks’ imminent demise serves as evidence that the reselling of goods—basically, retail arbitrage—is, at the very least, a challenging business model to grow. The demise of the aggregator market has demonstrated that the notion of combining many smaller brands to achieve enormous economies of scale may actually have the opposite effect, resulting in dis-economies of scale manifested in bloat and excessive overhead.

What then does that mean for smaller DTC brands, such as the ones that the author of this article (and likely a large number of its readers) operate? In the realm of third-party marketplace sellers, it is evident that there are a few prevalent trends:

  1. Being an Amazon third-party seller requires scaling, especially at the level needed to go public.
  2. Because of the actuality of margin compression, bloated overhead can be lethal.
  3. Innovation and catalog growth are essential.

A few things could come from these trends. Maybe as a result, rather than being dominated by a small number of very large companies, the Amazon marketplace is made up of a greater number of smaller DTC brands. It could indicate that DTC brands employ more product designers and engineers and fewer product financiers and marketers. Or maybe it just means that more foreign sellers eventually arise from reduced margins.

One thing is for sure: expect to see more news like this from other Amazon-centric companies whose hopes rested on an eventual IPO, regardless of what Pharmapacks’ demise means for other third-party sellers.