Many brands don’t make profit on Amazon: Understanding sales, competition, & outlook of any Amazon brand

The 2020’s have been the age of “turn key amazon brands”

The last several years on Amazon have been defined by VC money scooping up brands at insane prices and everyone knowing someone who is starting a brand on Amazon. The idea was simple, that if you could build or buy an established brand on the largest e-commerce platform – there would be almost unlimited profit as FBA workers did your logistics for you.

As many now know, retail is complex and online retail is no less so; this means you cannot simply expect to succeed starting a brand on Amazon by watching YouTube videos.

People forget: Amazon FBA requires capital

One area I think gets left out a lot is that retail is capital intensive, its not that different from real estate; you must own all of your product before you can actually sell it at a profit. This means that to make $100,000 in sales in one year you will like need to invest 20 – 30K in product and that is only 1 line item expense. You cannot start selling until you have inventory.

Higher interest has increased pressure on retail margins & acquisitions are increasing as brands go bankrupt

Rising interest rates put pressure on one of the main input: capital used to hold inventory and the general operating cost of a brand. Additionally, in the Amazon aggregator space we have seen that several of them were dependent on continuing to raise capital and when they could not they had to seek other options.

So far the most notable bankruptcy in the Amazon space is probably the Instant pot / Tupperware bankruptcy but there are literally hundreds of brands going dark every quarter.

Brand failures are not happening at just a small scale; In May of 2023 Seller-X a large Amazon aggregator bought Elevate Brands and the initial investors of Elevate Brands had to add additional capital to make the deal happen. This suggests a negative return on the initial money they raised and that even Seller-X was not confident they could get value from the sale without fresh cash infusions.

So how much are Amazon brands worth?

As brand owners saw operating profit shrink, and some faced the possibility of bankruptcy many went back to the drawing board to try to understand what makes an Amazon brand valuable. A lot of these same owners may feel that nice branding, a good website and thousands of reviews constitute some type of “brand value” but when it comes the brass tax of it – most of these brands are so small that the only thing that matters is profitable forward looking cash flow.

Many brands sell products at a negative margin to boost revenue and their valuation – its better to just exclude these products until their proven when you are trying to look at a brands total revenue/profit. Other companies sell products DTC with no intent of making money because they want to maintain a consistent connection to their customer and they have other channels which are profitable.

Make a list of ASINs for a brand

I randomly picked a brand on Amazon that I believe was designed principally for the Amazon market but I have no relationship to this company. I don’t actually know their strategy, and I am using them as a positive example of how you can evaluate different competitors. I arbitrarily picked Beaniac simply because they have clean marketing and relatively few ASINs.

Beaniac is owned by Club Coffee which happens to be a large private label manufacturer for Nespresso and K-cup pods. They do contract manufacturing specifically for coffee and we can assume they have a very large scale. The other thing we can assume is that Beaniac is a longer-term investment for Club Coffee and likely not a super high priority for them to see a lot of profit.

The majority of Beaniac’s sales are on 30-count K-cups but 3 of their flavors are available in 72-packs.

Next use Keepa on those ASINs to pull sales estimates

Keepa will allow you to paste your list of ASINs in and get back all the data you need to begin. You do this by going to their data tab and click product viewer.

After you input your ASINs you will get a screen back like this:

From this screen you can export to your computer and start evaluating the data in Excel:

Estimate cash flow

As of this year – its now incredibly easy to come up with these estimates because most of the data points are semi-public. Amazon started sharing unit sales in results, and Keepa now offers estimated sales for every ASIN they track. Estimating profit is about being familiar with the category and having a couple of benchmarks at hand.

Forecast likely cash flow scenarios

The basis of your valuation of an Amazon brand, in particular one with less than 10M in revenue should be their likely cash flow scenario. You can get this number by taking Keepa Estimates and scaling them across a year (take seasonality into account).

Benchmark the brand & review any gaps in the brand

Since we are looking at coffee pods single-serve we want to use the data that is most closely aligned with that. Depending on the source you use and whether you look at specialty coffee over the next 10 years coffee brands should expect to grow 10 – 20% to maintain their position.

Product expansion is important to consider, in this case I looked at 2 things: the product and the reviews. Beaniac’s products are differentiated from other single serve by quality but also because they don’t use plastic (compostable). This feature is echoed back in their reviews which suggests a good product/customer fit.

Beyond that when you research “compostable k-cup” you can see that Beaniac is well-positioned behind a few market leaders to be able to gain share with new packaging alone. They have introduced 72 pack k-cups which are selling well and have a much better chance to be profitable over the long-term.

Value the business only if its cash flow positive

I want to reiterate I don’t know Beaniac’s goals which likely don’t focus on profit or their long-term market strategy. They look to me to be a showcase brand for Club Coffee and potential a new DTC strategy for them.

However at this point I suspect this individual brand on its own is cash flow negative based on so much of their selection is 30 count cups. This is a good example of a company that may not care if its profitable or if does it may be working toward that at a different point in the future.

In order to get a good valuation Club Coffee would need to be able to articulate a clear path to profitability and how much it could make. I suspect they are in the position to do this if they wanted, by offering larger pack sizes and raising prices. At this point though, I would put no real value on the brand because it hasn’t proven profitability.

Why are 30 count k-cups unlikely to be profitable?

First – this is a newer brand and they are just getting established. However, the big issue for profit is on the30 count k-cups – it is a brutal segment to try to price and make money in. That’s because the best selling products in the 30 count range are all around 15 dollars – the product cost itself and S+H eats up the full retail price.

Even at the scale Club Coffee has 1 lb of coffee + the compostable packaging will run between 10-11 dollars to get it packaged / at an Amazon FBA warehouse at scale. Amazon takes the rest of the profits AND then some.

It looks like Beaniac is an investment of Club Coffee at this point – they are likely exploring the channel and spending a couple hundred thousand dollars on their sales right now. Its worth noting there is no line item for advertising – which they are spending on.

72-count profitability and future profit

Beaniac sells some 72-count ASINs (3) which they may be able to realize a profit on but its unlikely to offset the overall profitability of their main business in 30-count yet.

Be careful who you compete against, you don’t know their goals

Beaniac seems to know exactly what it is doing, and investing for some long-term goals. Trying to market and spend against them will take effective strategy and execution. However it might be worth knowing when you bid against them in Amazon Sponsored Products that they don’t necessarily care if they make money.