Guarding Against Supplier Disruption

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Guarding Against Supplier Disruption


In football, a defensive coordinator must defend against an “end run” tactic where the opponent’s running back tries to evade tackles by going wide around the offensive line. Similarly, in business, you need to protect against a supplier attempting to bypass you and directly reach your customers. The more dependent you are on a single supplier for your inventory, the more vulnerable you become to such risks.


Let’s examine the case of TheAmazeApp to illustrate this point. Sebastian Johnston co-founded TheAmazeApp in 2014 with a simple concept: social media influencers would upload pictures of their outfits, tagging the items from the app’s e-commerce wholesaler database. When followers liked an influencer’s look and wanted to buy the showcased items, TheAmazeApp would receive a commission, sharing a portion with the influencer.


To fund their venture, TheAmazeApp’s founding team secured $800,000 through the San Francisco-based accelerator, 500 Startups. Leveraging their influencers, TheAmazeApp rapidly grew to attract four million active users per month.


While the app appeared successful on the surface, a flaw in their model hindered their valuation. For the system to work, influencers needed access to a comprehensive catalog of the latest fashion items, requiring TheAmazeApp to rely on data feeds from five e-commerce wholesalers.


Over time, TheAmazeApp became increasingly dependent on Zalando, one of their five data suppliers. Zalando, a major European fashion wholesaler, controlled approximately 70% of TheAmazeApp’s inventory. As this dependency grew, TheAmazeApp found itself with diminishing leverage during potential sales negotiations.


To explore selling the business, Johnston approached all five data providers, and two expressed interest. This gave Johnston some negotiating power, knowing that multiple bidders could work in his favor. However, as the process unfolded, one of the potential acquirers withdrew and decided to create a competing app, bypassing TheAmazeApp entirely. This left Zalando as the sole interested party. Recognizing their control over 70% of TheAmazeApp’s inventory and the importance of a comprehensive selection, Zalando knew they held the upper hand.


Johnston also understood that pushing Zalando too hard could lead to them executing an end run by creating their own competing service. In the end, TheAmazeApp was acquired by Zalando for a modest multiple of two to three times its revenue, considering the significant traffic the app generated just eight months after receiving funding from an accelerator.


The lesson learned from this case is that relying heavily on a single supplier exposes your business to risks. It reduces your company’s value and weakens your negotiating position when it’s time to sell. Therefore, it’s crucial to diversify your supplier base to enhance the overall value of your business and safeguard against supplier disruptions.


Contact Investment Business Brokers to learn more about ways to play defence for your business.