The Very Failed Blog

The year 2015 is calling, and it has an opportunity for you! A new way to live that 4 hour work week you’ve been dreaming of. It’s called Amazon FBA. And it’s the wet dream of every rent-seeking scumbag who wants to make money while providing the minimum possible value. Grift in dollars, spend in pesos, and enjoy a life of leisure! What could be better?

A little too close too close to home? Congrats, you’re like me. You heard alluring tales of “passive income” and couldn’t resist. You’ve heard people are making a killing on Amazon. No one you know, of course, but people on the internet. And Amazon is on the internet, right? So that adds up.

I jest, of course. There are real businesses on Amazon that provide real value. And you can make real money. Although, anyone who’s actually done it sees red when they hear grifters call it “passive.”

This is a story about how to do Amazon the wrong way. Three separate times.

I’ll go into detail on how we messed up the first FBA business we built. Then, I’ll explain how we lost over $600k on two Amazon FBA acquisitions. And I’ll distill some Amazon- specific learnings that you can apply yourself. (If you still want to try your hand at Amazon after reading this!)

If you’re just looking for the learnings, jump to the end.

Origin

I first got into Amazon in late 2016. I had read Tim Ferriss’s 4 Hour Work Week and was seduced by the siren song of a life of leisure. I had also watched a Grant Cardone video about how to use a side hustle to decrease your taxes. This was idiotic for me to care about, since I wasn’t making enough to worry about taxes. But boys will be boys!

This origin story is not flattering. I mock gurus and influencers out of resentment, because I’m such a sucker for them. But hey, they got me started, so that’s something.

So I set about deciding what kind of online business I wanted to do. I tried a couple abortive projects with my brother related to leather goods. Nothing came of them. Then, I ran across an ad for an Amazon FBA course by Marketplace Superheroes. It drew me in. And it was one of the better courses available. It seemed like the perfect thing. Low-maintenance income? Sign me up!

The basic business model will be familiar to everyone now, but at the time it struck me as genius. We mined Amazon listings to find niches that fit certain criteria. They had to be small enough that big players weren’t interested, but large enough to provide meaningful profit. We looked for listings that were poor quality but still had a strong best seller ranking (BSR). This indicated that if you came in with a stronger offer and listing, you could take a lot of that business. In in some cases even dominate the niche. The basic playbook was to look at the“frequently bought with” tab, and use that information to create a logical bonus or pack size. The bonus or pack size had to allow us to outclass the competition and still turn a profit. We would then source the products from Alibaba, make a listing with excellent pictures and copy, and watch the money roll in.

I quickly realized that product research was a brain bleeding task that I was not suited for. So I brought in an unemployed friend of mine as a partner to handle that part. We found a product in the first couple weeks that fit the bill. Rain chains, if you can believe it! We sourced it, got pictures done, wrote a great listing, and got it in stock in FBA. Then nothing happened.

One day in April 2017, about two weeks after launching the product, we were at my parents’ house drinking some homemade saki my brother had made. My partner looked at his phone and made an exclamation. We had made a sale. Over the course of that day we made 7 sales.

This was back in the day when a good value proposition, a well-written listing, and good photos could move you up organically in the rankings without any PPC. Such is no longer the case.

Our offering quickly gained ground in the category, averaging over 10 sales per day in May. And then we made the same error everyone makes by running out of stock for a month. It hurt our ranking, but we recovered shortly after coming back into stock. We ended 2017 with about $80k in sales.

First Error

Here’s where we fumbled the bag. Our listing had come to dominate the relevant keywords. But it was a category with a lot of variations. We could have increased our take simply by launching new variations on our strong listing. They would have benefited from its reviews and ranking, and we would have taken over the category. Had we done this, it’s likely we could have exited at the top of the aggregator bubble for 7 figures.

But we didn’t do that. We wanted to diversify! Let’s get 10 more products like this, we thought. We spent the next several years trying, in an ever more saturated market. We wasted countless hours and thousands of dollars. We had gotten in at around the last moment it was profitable to do FBA arbitrage, and we threw the opportunity away.

The takeaway here is, if you’re doing something that’s working, double down on that until it stops giving you additional results. Only then should you move on.

So the next several years Amazon was always a side hustle for me. I was always “reinvesting” chasing new products, so it never made me much.

In late 2019 my current partner, an old friend, bought out my previous partner . (He wanted to focus on another business.) He and I laid plans to accelerate the Amazon business. I committed to funding a rapid product expansion. This push went about as well as the last one. No winners.

In late 2021 or early 2022 we had decided that we wanted to move the supply chain to Mexico. Covid and trade tensions had us worried about China. We were too delusional to realize that a low 6 figure business needed to focus on short-term sales figures. Worrying about long-term trade risk was like someone with a gunshot wound agonizing over whether they should do keto. We spent a lot of time and money learning about Mexico and hiring a Mexican sourcing agent.

Acquisition #1

In my article on my acquisition journey I mentioned that in 2022 my partner and I decided to buy Amazon companies. The Mexico project was a big part of it. We thought that the future of the US supply chain was there (still do, in fact). We figured if we were doing that for our company, we could do it with others. We could realize synergies, as well as better cash flow with shorter lead times.

We were also realizing that Amazon was getting saturated. Finding new products to sell with our old method was harder and harder. But why not buy existing companies? Find products already embedded in the algorithm. The conventional wisdom was that real estate on Amazon was like actual real estate. It had inherent value. By buying existing brands we would get the benefit of seasoned listings that would only become more seasoned with time. We would avoid the red ocean of brands fighting to establish themselves from scratch.

We started looking for brands. We looked at several brokerage and business listing sites. We were a little surprised to find that the asking prices were still high, despite the aggregator bubble bursting. But not to worry! There were several smaller brands still priced under 3X earnings.

I will be writing in depth case studies on each brand in the future, detailing all the due diligence and thought process that went into each deal. But this article is about Amazon-specific learnings rather than acquisition. So I’ll condense things a bit. We’ll summarize the deal details and then jump into the list of what went wrong.

The first deal was a company that sold felt cat caves. They were #2 in the space. The trailing 12 month SDE was $117k. They wanted $239k for the company plus inventory, which was about $100k. We offered the asking price, plus $25k of inventory ,and financed the rest on a seller note. This would pay out as inventory sold through. The initial equity came from a business partner in another venture.

This cat cave brand had priced their products about $10 above the competition. This excited us, because it still had strong sales. We thought this meant that it held a position as a premium product, despite not being different in nature. Sales had also been declining the last few months, but we thought this was due to avoidable stock outs. The manufacturing happened in Nepal, so logistics were even harder than usual. We thought we’d fix this by getting them made in Mexico.

We had our Mexican agent source them. He told us that he could definitely get them done at the price point and quality we needed. I’ll go into the details of the Mexican fiasco in another article. But to summarize, it turns out that he wasn’t in a position to make that judgment. We visited Mexico shortly before closing and realized this was the case. But we were emotionally invested in the deal, and had major FOMO. So we turned a blind eye to this and other red flags, and plowed ahead. We figured we could continue the Nepal supply chain in the short term and figure out a better solution later.

A couple days before we closed was Prime Day. The seller wasn’t paying attention or didn’t care, and sold out of the most popular skus. We didn’t realize until after closing. So we started off with a sales slump due to stock out for a couple weeks.

But we were optimistic because we were going into Q4, and the product was strong in Q4 and through the winter. We were wrong. Sales continued to drag, dramatically underperforming the prior year. This should have been a big warning sign. But we were busy with another deal and weren’t paying close enough attention.

New products had entered the scene that were eating into the cat cave market. And within the cat cave market, a flood of cheap Chinese competitors flowed in. Our price was $10 above standard, so were losing a lot of ground.

What we needed to do at this point was lower our price and scramble to get new variations launched. This could have prevented a total catastrophe. But it would have cut the profits we were expecting (based on the TTM numbers when we bought it) in half. Our failure to do this was part distraction and part denial. To acknowledge it would mean that right at the outset of our promising M&A careers, we had already failed to deliver value to investors. I had tied my own identity to making money, so I wasn’t able to process this possibility. Things had to get much worse before grim reality muscled its way into my consciousness.

The spring continued in this vein, as we lost more and more market share. In April we hired the agency My Amazon Guy to help us try to recover the brand. They lowered the price to a competitive level and did some SEO work. This raised sales, but with a razor thin margin. After their fee I was coming out of my own pocket to finance it. This is when I should have known the brand was dead.

But I was still in denial, so I kept going. In the spring a Facebook ads guy that specialized in pet brands reached out wanting to work with us. An opportunity to have someone else fix our business without us having to do anything? A godsend! I mean, how cool is that?

It will shock you to learn that it didn’t work out. This wasn’t a great DTC product, and there was so much competition available on Amazon it didn’t make any sense. Also, in retrospect, the guy sucked at Facebook ads.  We spent several thousand in fees and ads before getting fed up and jumping ship. 

Later in the summer, we were working with a new agency on one of our DTC brands, and asked them to look at the cat caves. They expressed lots of optimism for its DTC success. (Surprise!  An agency advised us to do something that benefited them financially!). Between agency fees and ads, I spent another $15k of my own money on this losing proposition. The pain of accelerating my own indigence was the only thing that finally brought the circus to an end. When you wrap your identity up in certain beliefs, they become impervious to logic. Then the only solution is to run out of money. At least that’s the case for me. Maybe you’re hubristic. Good for you, Socrates.

That’s Brand #1.

Acquisition #2

Brand #2 was one we had looked at before we bought Brand #1. It was another FBA store that sold a generic product #2 in its category. In this case, aluminum griddle covers. An aftermarket thing to protect expensive griddles. The trailing 12 month SDE was $157k. They were asking $400k. We had offered $280k, and they declined and went with an aggregator.

The aggregator later pulled out because their inventory performance score was bad. Should have been a red flag for us. But we thought hey, we can handle inventory. After all, we’re going to use Mexico!!! Sound familiar? Some lessons you have to learn twice. Or at least I do.

We offered $280k again, but they declined, and we ended up settling on $325k plus inventory. Which again was over $100k, and financed on a seller note, with us paying as it sold through. It was too early after the first deal for us to have realized the mistake and learned from it. So we committed the same error twice in two months.

There were scads of problems with this deal. To start with, the seller sold out of the hero ASIN on Black Friday. We were out of stock until the second week of January. So we started out negative, and then went head first into the low season.

We had also agreed, in our boundless stupidity, to let the seller keep unrelated inventory in the seller account until it sold through. (It would only be about a month, he said! No biggie!). We were still dealing with that accounting nightmare in August.

Shortly after we bought it, we started to see alternative products like silicone covers eat up much of the category. At the same time, cheap Chinese competition flooded the market for aluminum covers.

But we were still optimistic that we’d start seeing strong cash flow come springtime. We had a rocky start, and there were some headwinds, but hey, we still had a strong listing and the high season was coming! In 2022, the high season kicked in mid-April. In 2023, the shift didn’t happen until late May, and even then it was sluggish. The competitors were eating up the category and driving prices down to break even or below. We had a large competitor who did frequent flash sales, dropping their price by 30-40%. This invariably shut off our sales. We couldn’t afford to price-match them. This meant we had to be ever-vigilant, switching off PPC on those days, otherwise we would lose money on ad spend. So this added an enormous labor burden to this failing enterprise.

My partner also realized, several months in, that the method the seller had used to send inventory to Amazon was… gray hat. The item was bulky. If Amazon gave us a fulfillment center outside California, shipping fees would erase our profitability. To get around this, the seller used a software called Shipment Maker Pro. It placed scores of inward FBA orders until it got an LA warehouse. Then, it canceled the others. Of course, Amazon caught on that people were doing this, and disabled the API in the late summer of 2023. This left us in the position of having to eat unknown shipping costs. Or, we had to do the excruciating process of working the system by hand.

Add to this the fact that Amazon wasn’t moving inventory to fulfillment centers like it used to. They would do some limited distribution. But if you wanted your products to get shown with 2-day shipping, it was on you to ship to various warehouses across the country to get in range of customers. This removes one of the primary benefits of Amazon, and for this brand it was disastrous.

The final blow came in Q4. Inventory had been moving slowly. Sales ground to a halt in late October. Sellers across the category had realized the game was up. They were trying to liquidate inventory to prepare for the down season. Prices cratered. Distracted by our larger DTC brands at this point, we missed the change. By the time we realized it, we were also getting hit with massive storage fees for aging inventory and Q4 surcharges. Our inventory position had gone from an asset to a liability overnight.

By this time, we had given up on making the company profitable. We just wanted to sell through the inventory to pay liabilities. But the sales volume wasn’t enough to offset all the Amazon fees. We considered liquidation off of Amazon. But because the size of the product meant it would cost more to ship to a reseller or liquidator than it would fetch. So we liquidated the bulk of it through Amazon liquidations, to escape the onerous fees. We kept just enough on hand to sell for about 45 days.

And that was the end of brand #2.

Learnings

So what do we learn from all this? Well, for one thing, we learn that I’m an impossibly stupid and delusional knucklehead. But that doesn’t do much for you except provide some entertainment value. You’re welcome. I’m also low on cash now (surprise!), so I’m offering my services as a kind of ecomm M&A advisor. I’ll sit with you on video calls with sellers/brokers and scream “No, you fucking idiot!” and hang up the call and then berate you and tell you to start the same business for 1/10 of the money. I will thereby save you hundreds of thousands of dollars, which you can use to invest in real estate and crypto scams on Twitter. So there’s that.

But in all seriousness, there are some practical lessons you can take from all this. So far I’ve distilled 10 discreet lessons:

1. Amazon exists to accelerate the commoditization of products. Every product on Amazon lacking meaningful brand power will go to break even or below. Fast. Only the very best product in each category will survive on Amazon in the long run. Massive competition, coupled with rising Amazon fees ensure this. If you have a wonderful, unique product with a wide and deep moat that you want to get in front of a large pool of high-intent buyers, Amazon is the way to go. Otherwise, it is a road to bankruptcy.

2. Corollary to #1. If you have a generic product on Amazon, you will sooner or later compete on price. The longer you wait, the more your ranking will suffer, because Amazon is optimizing for value to the consumer. A review moat can slow this process, but not by much.

3. If you’re priced above the competition, there needs to be a compelling reason. If there’s not, that price will get cut down to the market rate, or your market share will crater. So if you’re looking at a business with this price discrepancy with the competition, you need to ask why. Do they have brand power that enables this? (Hint: they don’t). Or is it a transient first mover advantage that gives them a little review moat? Or worse yet, floated by a macro demand surge like Covid? If there’s no brand power, you need to discount the P&L to reflect pricing the products at parity with comparable alternatives.

4. If a company is generic and easy to compete with, it makes more sense to compete with it rather than buying it. Unless you’re getting it for pennies. I already mentioned this learning in the acquisition article, but I’m using it here as well because it’s even more true on Amazon.

5. Inventory is a huge risk on Amazon. They penalize you for having too much, they penalize you for having too little. And those extra fees consume your margin. If you’re considering buying an FBA brand, find out how often the brand is out of stock, or overstocked. Don’t assume you’re going to do better than that. Managing inventory on Amazon is a herculean task.

6. When pricing a deal, adjust for anomalous market conditions. In this case, we failed to discount the effect of Covid on revenue. This was because it was late 2022, and we live in Kansas. Covid had been over here for a year. We were oblivious that it was still having an effect on buying behavior in large swaths of the country. So we thought the TTM numbers were representative of what we could expect moving forward. Big mistake. Make sure to understand the macro conditions that affect your deal before you dive in.

7. Logistics is critical. Understand shipping costs. This means bulk shipping plus customs to get it from the manufacturer, and inward freight charges to get the it to Amazon. How is the seller sending items to Amazon? Are they following best practices? Are you exposed to extra fees to get your items shown with 2-day shipping?

8. Understand the size and weight of the shipping cartons. Larger inventory is more risky and harder to liquidate. A large inventory position of bulky/ heavy items can go negative FAST if sales slow down.

9. If you’re going to buy an FBA brand, do a colonoscopy-level audit of their seller account. Look at every detail. Make sure that everything they are doing is compliant with TOS. Make the seller indemnify you for any financial damage resulting from account violations they failed to disclose during due diligence.

10. Most important of all, understand Amazon’s incentives. Amazon is a public company. As such, their incentive is always toward growth. Amazon has already saturated the US consumer market. They’re approaching saturation in global markets. Which means they’re not going to grow the bottom line much through growing their customer base. They’re growing it by making more money from sellers. (See their Q3 2023 earnings call). This means three things: 1) More sellers. 2) More fees. 3) Higher fees. Forever. Amazon’s take of any sale has ballooned from about 35% when I started, to around 50% now. Their fastest growing revenue channel is PPC. So they’re going to make it harder and harder to avoid spending massive amounts on PPC for the same customers. The value proposition of Amazon was always customer acquisition. By using Amazon, merchants could access large numbers of high intent customers. You pay a flat commission, so that CAC was always a fraction of revenue, thereby reducing risk. But now, Amazon is adding advertising to their princely fees. Now, you need to advertise with them like you would with Google or Facebook. This craters the value proposition of Amazon for sellers.

There it is boys and girls. The ugly underbelly of Amazon FBA. I learned these lessons at great cost in money, pain and humiliation. I hope that they prove valuable to you. I’ll write more detailed breakdowns of the individual deals, including numbers. Stay tuned if you’re interested in that.

Until then, good luck out there. Stay safe, and stay solvent!