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Transformational Capital Sees Opportunity to Turn Around Distressed Ecommerce Brands

While e-commerce continues to grow, many online retailers have struggled to achieve profitability. Some of the biggest players in the space have seen billion-dollar valuations evaporate as they failed to achieve profitability.

For one Canadian company, that’s an opportunity.

Since July, Toronto-based Transformational Capital has acquired five e-commerce brands—most of them struggling.

“Transformational was really founded on a basic but critical premise which is that e-commerce requires scale and scale is expensive to arrive at,” says Ghassan Halazon, the company’s CEO.

To solve that, Transformational’s brands share resources, including office space and sourcing, Halazon says, giving them the benefits of scale at a lower cost.

“We are running an efficient, lean model,” Halazon says. “Our company is premised on sustainability from day one.”

At least for Canadians, Transformational’s most notable acquisition so far is Shop.ca. The Canadian e-commerce site raised over CAD$72 million between 2011 and 2015. In July it filed for bankruptcy.

Still, Halazon says Shop.ca built a strong brand, with a large customer base and high brand awareness.

“The problem with Shop, and other e-commerce companies, was that margins were too low, cost base was too high, and marketing dollars were too high,” he says.

For Transformational, Shop.ca’s financial troubles were an opportunity to buy its brand—and its customer base—in a cost effective way.

Halazon says there are many e-commerce companies—he calls them “loss-making giants”—that have raised significant venture capital investments and invested heavily in customer acquisition, warehousing, logistics, and inventory, rather than sustainability.

“It’s a great buying opportunity for us,” he says. “We think that by M&A we can build a substantial presence globally, and do so cost-effectively.”

So far, Halazon’s approach seems to be working, he says Transformational turned Shop.ca into a cash-flow positive business in under a quarter.

It’s a similar story for the other companies in Transformational Capital’s portfolio, Halazon says they sold over $800,000 worth of merchandise between Black Friday and “Cyber Monday.”

“The kicker is this, we deployed zero marketing dollars during that period,” he says.

While e-commerce companies normally drive traffic and revenue through expensive marketing campaigns, Halazon says Transformational’s portfolio companies leveraged their existing customer bases, allowing the company to cut marketing – the single largest expense that most e-commerce companies have.

Along with the Shop.ca acquisition, Transformational acquired Shop.us.

The company has also acquired two companies in the United Kingdom, MightyDeals and DealMonster.

It also acquired Buytopia.ca, though Halazon says that deal was not typical for Transformational. Buytopia was not struggling financially and was acquired as Transformation’s  operating partners. One of the Buytopia’s co-founders, Ryan Marien, also joined Transformational as its COO. Halazon says it was particularly attractive for its connections in Shenzhen, China.

All together, Halazon says Transformational’s portfolio companies have 3.5 million members in Canada, the United States and the UK.

And more acquisitions are in the works, he says.

“The bottom line is e-commerce does not make sense at a small scale, your margins are too low, you need to invest in certain infrastructure so you’re not going to be left with much, so that’s why scaling is important but scaling takes big capital or an efficient way to grow, which we believe we have,” he says.

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