After Arbitrage

Bulldogs, growth hackers and the next era of commerce

A realist portrait of a bulldog as Ridley Scott’s Napoleon by DALL-E

On the surface, there are many disparate meta narratives currently swirling around the Amazon ecosystem. Amazon is increasingly squeezing third-party vendors to a near existential breaking point. The largest aggregator of Amazon brands is bankrupt. Temu basically bought out Google Shopping in continuation of China’s mission to cut out the middleman in getting goods from its factories to your doorstep. 

But dig deeper and it’s all one tale. The arbitrage era in commerce is ending and we don’t really know what comes next. 

Hell, the entire American economy just went through a decade of arbitrage where fortunes were made drafting off the coattails of technologies invented in the 2000s. Gradually, it got weirder and weirder until ultimately the most powerful man in tech was a soon to be felon who made his “legitimate” fortune exploiting the kimchi premium, a difference in price between what a series of digital sudoku puzzles were worth in Korea and Japan vs. the rest of the world. 

In commerce, the Amazon marketplace originally launched in 2000 while Shopify’s API hit the scene in 2009. Both were among the most egalitarian value creators in tech, enabling thousands of people to become millionaires and creating millions of jobs. But they made for a counterintuitive profile of who was best suited to build commerce brands. The most important skill for making it as an eCommerce entrepreneur wasn't crafting great products or making grown men cry from nostalgia. It was being a little better than the next guy at finding arbitrage opportunities in nascent ad tech ecosystems. CPG, long the domain of the pitch man, temporarily went to the hackers. 

There were also plenty of hilarious get rich quick schemes. My personal favorite was the period of a few months in 2017 where Instagram was flooded with ads to skeleton Shopify storefronts for hyper patriotic brands like “Faded Glory.” Many of them were such lazy Chinese drop-shipping schemes that they never even changed the tags on the products. I fell for one and paid $100 for a  jacket that was “made in Detroit” whose only label reads “Yi Jian Mei.” Truly the wild, wild east.     

But to truly understand the last decade of commerce, I implore you to consider the bulldog.  

Disrupting The Bulldog:

While I love bulldogs, they are an absolute affront to natural law. Every time a new bulldog puppy is born (almost always as the result of artificial insemination), we stray further from God. 

As a bulldog dad, there are two substances I regularly abuse. The first is zinc oxide, a magic elixir most commonly used to treat diaper rash that also prevents a bulldog’s face wrinkles from serving as a greenhouse for yeast. The second is glucosamine, a hip and joint supplement that makes it possible for 50+ pounds of love to balance on a wobbly foundation designed to support considerably less weight.  

Both of these substances offer the perfect lens through which to view the last decade of commerce as each spawned a litany of seven and eight figure Amazon and Shopify businesses. Prior to the rise of FBA, each of these products was a near monopoly for the incumbent brand. 

To treat diaper rash or yeasty folds, you used Desitin, a J & J brand. For dog joint supplements, you used Dasuquin or Cosequin, both products made by a lab in South Carolina called Nutramax for more than three decades. 

Once Amazon entered the picture, a host of savvy entrepreneurs realized that each of these products could be essentially white labeled, given a fresh coat of packaging panache and blasted out through FBA. The formula was simple: 

  • Find a high gross margin category that could support multiple winners, currently dominated by an incumbent slow to embrace digital 

  • Launch a direct competitor and go hard as hell on Amazon or Facebook ads

Hip and joint supplements in particular were the perfect arbitrage product. From a unit economics perspective, they were the closest you could come to playing the eCommerce game on easy mode: 

  • Daily use, naturally recurring product ->  ideal for a subscription model  

  • Small & light product -> lower Amazon storage and 3PL fees 

  • Macro trend of consumers willing to spend far more on their pets -> demand capture vs. demand creation business

By and large, this era belonged to operators who were absolutely world class at what I’d affectionately call growth hacky shit. You could launch a highly generic product with a mediocre brand and a few static product images and win if you were first in category and early in spending big on Facebook or Amazon PPC. Today, Zesty Paws is a world-class operation purchased for $610M in 2021 with a plethora of product lines for dogs and cats. In 2015, they launched two SKUs: salmon oil and “mobility bites.” They are one of many brands in the space that came from nothing to be worth nine figures in less than a decade on the back of FBA mastery. Today, a search for hip and joint supplements on Amazon contains dozens of brands, with Amazon Basics even getting in on the action. 

Wuffes followed a similar growth trajectory, just DTC vs. Amazon first. They began as essentially a white-labeled hip and joint supplement built on Facebook ad mastery. As competitors flooded the market, they invested in building best in class creative capabilities.  Finally, they poured their profits from the arbitrage era into building owned formulations and unique upmarket products like laser therapy.  

Among the Desitin disruptors, Wrinkle Paste is my personal favorite. Created by a company called Squishface, Wrinkle Paste is simply zinc oxide with a slight repackaging of inactive ingredients, specifically marketed towards snub nosed dog owners. A super simple, highly elegant positioning spin on a tried and true product that is now a multimillion dollar brand. 

The queen and her wrinkle cream. Don’t tell Squishface she’s still primarily a Desitin girl

This era was a wrinkle in time. At this point, the window for launching a new brand that is essentially a wrapper around white-labeled glucosamine or any other legacy pet supplement is slammed shut. The category is so crowded on Amazon that CPCs can approach $10 for an item that retails in the $40-50 range. Anything that needs a 25% conversion rate just to topline breakeven ain’t gonna be long for this world.  

There’s a near consensus view in the commerce ecosystem that with iOS 14.5, Apple cynically obliterated billions of dollars in market cap in the name of nebulous privacy. Make no mistake, Apple is a ruthless despot acting partially in its own self interest and partially just because Tim Cook thinks Zuck has weird energy. But in a decade, I think we’ll look back and realize Cook did the whole commerce ecosystem a favor. At the moment when commerce was getting dangerously stale, templatized and hyper-dependent on optimizing pixels, Apple dared us to be weird again. 

Artisans and Raconteurs

As Amazon and Meta become perfectly competitive platforms, everything gets commoditized except crafting great products and telling resonant stories around them. Since few can do this well, there will be far fewer winners. But those winners will be far larger than the DTC darlings of the 2010s. Ironically, the best eCommerce brands founded today will have venture sized outcomes, right as venture capital flees the space. For a taste of what this looks like, check out Spoiled Child. That sure as hell ain’t no Shopify template

All that said, my somewhat lame prediction is that the next decade won’t see a platform shift in commerce akin to that which AI brings about in other industries. In 2030, the majority of Americans won’t shop via livestreams, personalized chatbots or creator storefronts. We’ll continue to buy things largely by entering text based searches onto giant marketplaces and clicking buttons next to digital rectangles. And even more than today, we’ll do it on Amazon. 

But as standing out on Amazon gets tougher, growth hackers and financiers will cede power to artisans and raconteurs. Break out the carousel. 


A collection of the week’s top stories in and around Amazon

Amazon Aggregator Thrasio Prepares for Bankruptcy (WSJ Pro): Highlighting just one story this week as it’s one quite close to me. 

The entire history of Thrasio would be different if they never publicly broadcasted that they were the fastest company ever to profitably reach $1B in valuation. OpenAI’s blog removing Sam Altman notwithstanding, this might go down as the most damaging press release in American corporate history.

If your business is essentially a novel form of arbitrage, the worst thing you can do is publicly broadcast exactly how that arbitrage works and how obscenely rich it is making you. With a single stupid press release, Thrasio sent the going rate for high growth Amazon businesses from 2-3X EBITDA to >5X, basically breaking its own business model. 

It is a huge misconception that Thrasio didn’t have capable operators at the controls. While many aggregators plugged in MBAs with no knowledge of Amazon’s idiosyncrasies, Thrasio hired many world-class Amazon operators and trained an entire generation more. Many Thrasio employees built 7 and 8 figure Amazon businesses of their own or were best in class in the esoteric corners of the business that they managed. But  Amazon is fundamentally a mature ecosystem and Thrasio by and large bought brands towards the maturity stage of their growth cycle. Even the absolute best optimizers at the margin can’t salvage wildly overpaying for assets with variable rate debt.  

This is why I find the gravedancing against Thrasio so insufferable. The company gave 200 small business operators life changing money, brought a ton of fresh talent and interest into the Amazon space and took a huge swing for the fences. Our space is better for it. 

Dispatches from America

A potpurri of vibes from across the land

Black Friday Fakeout: Amidst a rush of complaints that Black Friday sales ain’t what they used to be, Americans spend a record $9.7B, further continuing the trend that everyone says the economy sucks but is spending like sailors on their tenth shot of Bacardi. Suffice to say, I don’t envy Biden’s re-election campaign right about now.

Mary Magdalene of Congress: If the George Santos saga does truly end with his third expulsion vote, pour one out for your favorite fake Division three volleyball player. After all, it is easier to spend your campaign money on having your junk rated on OnlyFans than for a rich man to enter the kingdom of God.

Sweet Home Chicago: Mike Ditka’s condo in the heart of downtown Chicago recently sold for only $575K (!). Only plausible explanation I can think of is that the smell of kielbasa is so deeply permeated in the joint that it’s a home only fit for a true sausage king.

Thanks again for reading! There are a couple hundred of y’all subscribed to this little ditty now and while this thing is a long way from even funding the beer I need to write it, I can feel some early momentum and plan on picking up the pace.

Back in your inbox next Tuesday!

Ever thine, ever mine, ever ours,