No. 313: The Secret Sauce

 

On McDonald’s, Uber Eats, and the effort to systemize last mile commerce in food retail. On a Wednesday night at home, I was looking to repeat order a frequent order at a local restaurant. For years, it’s been my go-to for a healthy dinner. Ohio’s Northstar Cafe is a fixture within the community, the food is great and trustworthy. It’s the rare meal that tastes great when delivered. But on that day, it was no longer present within the Postmates app. Neither were my second and third choices. A Postmates faithful, I chose to walk to a local restaurant instead. There is something interesting happening in the food delivery space. Vendor fragmentation is increasing and companies like Postmates and DoorDash seem to be positioning for their own eventual exits. Let me explain.

A four or five star hotel would prefer that you booked through their own channels rather than booking through HotelTonight. After polling 72 hotels that use HotelTonight, 2PM found that only nine viewed the partnership as “very positive”, the majority characterized the partnership as “fair.” The order communications between HotelTonight (now Airbnb) and the hotel venue is still analog and far from instantaneous (some hotels receive confirmation via fax). HotelTonight receives a margin of the sale that many hotels don’t believe should go to the booking app. This is also how many restaurants view food delivery apps. And rather than cooperate with Postmates, GrubHub, DoorDash or others – these restaurants often ask removal from the app or close their businesses to internet orders. Uber has found multiple solutions for this supply and demand issue. From No. 293:

By building digitally vertical restaurants, Uber has gained the ability to engineer product loyalty that competing platforms cannot yet compete against. Uber Eats’ explosive growth between 2017 and 2018 is a result of the logistics company incentivizing its regular drivers to become delivery hands and also by incentivizing Uber users to become Uber Eats users. By increasing supply and demand-side economics, Uber Eats has leverage to that Postmates cannot yet manufacture. This is essential when approaching existing restaurants and offering them a private label product opportunity.

This is just one of two recent developments in Uber’s competition for delivery market share. The partnership between McDonald’s and Uber may be one of the consequential deals in all of eCommerce by the end of 2019. Uber will provide the logistics to help McDonald’s build an efficient and sustainable direct-to-consumer sales business. This is a sales effort that both companies will need. Uber’s deal with McDonald’s will lay the groundwork for, what I believe will be the race to land exclusive restaurant deals. Here is a wonderful deep dive into Uber’s unit economics by Aswath Damodaran. A standout excerpt:

The first is that Uber is not a pure ride sharing company, since it derives revenues from its food delivery service (Uber Eats) and an assortment of other smaller bets (like Uber Freight). It is worth noting this table while suggests that while some of Uber’s more ambitious reaches into logistics have not borne fruit, its foray into food delivery seems to be picking up steam. Uber Eats has expanded from 2.68% of Uber’s net revenues to 13.12%.

Often characterized as the largest IPO of the year, Uber will go public in May to fanfare and, potentially, that glorious day one pop that will solidify gigantic returns for early and preferred investors. Like any public offering, there will be an initial discomfort on behalf of the retail investors when Uber’s stock settles. But this conversation isn’t about the IPO, or Uber’s uphill battle to achieve profitability (at the expense of public transportation – according to critics). This is about the long-term potential of its delivery business. With the $100 million raise that may allow the $90-100 billion brand to further invest in long-term partnerships like the one with McDonald’s. Uber’s market performance will be tied to the value proposition of Uber Eats. And for companies like Postmates, though it has raised nearly $700 million, Uber’s post-IPO advantages will be a concern within their San Francisco boardroom.

In 2019, Uber’s key partner will be McDonald’s. If successful, exclusive restaurant relationships will begin to place Uber Eat’s delivery competitors in regrettable positions.

More than two-thirds of McDonald’s business is earned through its drive-thru operations. And internal figures suggest that nearly ten percent of many franchisee’s 2018 sales were attributed to third-party deliveries from: Uber, Amazon, Delivery Hero, Zomato, Postmates, Deliveroo, Swiggy, DoorDash, and Grubhub. Of these services, Uber is best positioned to compete for the long game. To accomplish this, McDonald’s will:

  • streamline kiosk and drive thru order response and processing
  • cut hourly human capital in favor of kiosks and third-party delivery
  • and speed up delivery by using artificial intelligence to speed drive thru and kiosk orders.

With this context, McDonald’s acquisition of Dynamic Yield shouldn’t be a shock to those who’ve followed these developments. I’ll summarize why a bargain-driven fast food chain like McDonald’s would pay $300 million to acquire an artificial intelligence company. McDonald’s revolutionized the kitchen. With Uber’s partnership, McDonald’s is aiming to revolutionize the speed of order processing and delivery while shifting labor costs to Uber.

Dynamic Yield’s AI-powered omni-channel personalization engine helps businesses personalize every customer interaction to improve performance and overall customer satisfaction.

Dynamic Yield

To do this, store owners are on the hook for a redevelopment effort that will take time and trust between McDonald’s corporate and their franchisees.  McDonald’s is essentially building infrastructure for omnichannel excellence at scale. With net sales being affected by smaller margins typical of third-party delivery, McDonald’s management is positioning to offset those shrinking margins by equipping store owners with artificial intelligence and automation to cut their own payroll liabilities. This, while increasing third-party sales from 10% to 30% per store.

With McDonald’s prioritizing technological redevelopment at kiosks and the drive thru, it casts a new light on the potential of a McDonald’s partnership with Uber Eats. And Uber will mostly benefit by establishing a growth path that may be as lucrative as the app’s digitally vertical restaurants (DVR). For Uber, DVRs may earn the company a higher margin than what’s typical but Uber’s partnership with McDonald’s will drive critical market share.

2PM summary:

Key takeaway no. 1: McDonald’s Corp will partner exclusively with Uber. Other delivery apps will no longer be able to sell McDonald’s products within their apps.

Key takeaway no. 2: McDonald’s Corp will invest and promote Uber’s value. With institutional support from one of America’s greatest consumer brands, retail investors will be assured that Uber is a long-term value despite its glaring profitability concerns.

Key takeaway no. 3: Uber will negotiate for more national restaurants to agree to category exclusivity. This will increase pressure on DoorDash, Postmates, and GrubHub to do the same.

On the night of April 14, Postmates earned a bit of social media buzz with an easter egg promo for HBO’s “Game of Thrones.” Founder and CEO Basti Lehmann retweeted praise from droves of users who admired the savvy brand gamesmanship. To celebrate the premiere of HBO’s last season of Game of Thrones, Postmates added an illustration of a dragon flying over your in-app mapping experience. It was clever and it will likely earn major media for the effort. But flying dragons are not trademarked, so it’s not clear that HBO had any role in the marketing promotion.

In this way, we’re witnessing another contrast between Uber and Postmates. One company is solidifying exclusive, long-term relationships with strategic growth partners. The other is still shifting away from driving growth with flimsier marketing and logistical decisions like featuring restaurants without signed agreements in place. Postmates is growing up and I remain a frequent user but it’s hard to ignore the infrastructure that Uber Eats is building, in anticipation of its May IPO. By capturing the most well-known restaurants in America, Uber Eats is positioning to be the preferred food marketplace of middle America. And it just might work.

Read the no. 313 curation here.

Report by Web Smith | About 2PM 

Member Brief: The New Oil

In this week’s Retail Dive, Corrine Ruff wrote on the “DNVB University.” In it, she illustrated the influence of Bonobos alumni over a number of the younger brands that began in the DTC era. Care/of, Native, and Rockets of Awesome are but a few companies that launched with the help of former Bonobos employees. She went on to write:

यह सदस्य संक्षिप्त विवरण विशेष रूप से के लिए डिज़ाइन किया गया है कार्यकारी सदस्यसदस्यता को आसान बनाने के लिए, आप नीचे क्लिक कर सकते हैं और सैकड़ों रिपोर्टों, हमारी डीटीसी पावर सूची और अन्य उपकरणों तक पहुंच प्राप्त कर सकते हैं जो आपको उच्च स्तरीय निर्णय लेने में मदद करेंगे।

यहाँ शामिल होएं

No. 312: The Evolving CMO

On Accenture’s acquisition of Droga5 and the evolution of the full-stack, digitally-native agency. A lot can be said for the evolution of the early-stage CMO. It’s now common to spot data-driven, b-school graduates employed at early-stage retailers. Just five years ago – chief marketing roles were typically reserved for sales-minded creatives. This shift may be influenced by the position’s updated responsibilities; in earlier years, these responsibilities would resemble more of a CEO or CFO’s stake within the company.

These priorities include: cost accounting, personnel accounting, attribution sciences, and applications of Six Sigma principles: define, measure, analyze, design and verify. Equipped with paid marketing budgets and a creative director on staff, the traditional CMO is more data-driven than ever. In a early-stage meeting with a DTC retail CMO, I asked what his priority was over the next 6-12 months:

Paid, for now. It’s measurable.

This pivot towards the data-driven marketing approach is not without consequence; blind spots can develop. Modern CMOs are more likely to focus on shorter-term, tactile decisions at the cost of the brand-building strategies that may lead to better long-term outcomes. If there isn’t an ROA or an ROI assigned to the opportunity, it is rarely justified in the DTC era. As the adage goes, what can’t be measure cannot be improved. Droga5 founder David Droga suggests that this approach to marketing is incomplete at best. Here’s a recent quote by Droga:

CEOs, CMOs, and CIOs all need to be on the same page, because they all affect each other now. This isn’t a nice-to-have. I think it’s going to be crucial for any brand going forward. This is future-proofing.

On Droga5 and Accenture

Accenture. Spun-off from Arthur Anderson in 2001, Accenture serves as the leading management consulting firm that provides services to include: operations management, strategic insights, and consulting. A Global Fortune 500, the company serves clients in over 120 countries with over 250,000 employees. Accenture reported net revenues of nearly $40 billion in 2018.

Droga5. Based in New York and founded in 2006, Droga5 is an award-winning, global advertising agency with a roster of high-impact, advertising successes. William Morris Endeavor invested in Droga5 in 2013. This allowed Droga5 to combine their advertising resources with WME’s entertainment connections, allowing Droga5 to develop a cache of major advertising partners. Accenture’s acquisition suggests that the combination was a successful one, and WME reportedly profited on the Accenture acquisition. The impact of this deal is a significant moment. Fast Company explained:

In easily the highest profile deal the ad industry has seen in recent memory, Accenture Interactive announced this morning that it has fully acquired creative advertising agency Droga5, which counts Under Armour, HBO, the New York Times, Amazon, Covergirl, and more major brands as clients. The deal will see all of Droga5’s 500 employees across offices in New York and London become a major creative cog in Accenture Interactive’s massive $8.5 billion digital customer experience and marketing services machine.

The report goes on:

Droga5’s founder and creative chairman, acknowledges that folding his company into Accenture Interactive reflects a larger reality: Brand communications have gone far beyond just advertising, into every time and place a consumer interacts with and experiences a brand–from retail to e-commerce to, yes, even ads.

The Droga5 Signal

This new category of full-service agency will surely influence other mergers and acquisitions. But most importantly, this will require new brand CMO to reimagine their roles and address the brain lateralization that has led to an increased dependency on Facebook and Google over the last five years. In June 2018, 2PM published “The Patreon Signal.” In it, I wrote: “Patreon’s acquisition of Kit and Memberful has signaled an uptick in M&A and partnership activity throughout the creator space.” This is a similar moment for the agency space.

Accenture has invested in sponsored media to advertise Accenture Interactive for some time and was best-positioned for this type of partnership. More agencies in the shape of Droga5 will be sought after as top management consulting firms like Deloitte, McKinsey, and KPMG look to compete with Accenture’s groundbreaking acquisition. Just this week, eCommerce and branding agency BVAccel acquired Katana, a paid media agency that may help BVA address more of the needs of its clients.

Agencies that combine the best practices of traditional advertising, data science, and creative expression will make its way to the DTC space. Accenture’s acquisition of Droga5 signals that for chief marketers, relying on the instant gratification of data-driven marketing will be an insufficient strategy – especially for those early stage companies that seek to develop lasting brands. AdAge’s Penry Price on these developments:

Rising agency players like Giant Spoon, gyro, Heat, Oberland, and Phenomenon are leaving their marks on the industry by combining speed, data, creativity, digital products (apps) and marketing optimization. Rest assured that Accenture Interactive and Droga5 will do their level best to provide a similar combination of services as soon as possible, and they will likely succeed.

Late-stage digitally native retailers will seek out the style of full-spectrum services offered by the Accenture-Droga5 partnership or the many creative consulting hybrids that this acquisition will further influence. This is not only attributable to the services that Accenture will give, rather due to how their offering influences the agency’s overall approach to problem solving. But for the brands that feel their strategies should stay close-to-vest, the CMO role must evolve to meet four goals that the new consumer economy will need.

  • CMOs will be responsible for digitizing all traditional (offline) marketing communications. These marketing leaders must apply a layer of measurement to in-store marketing, physical retail operations, print marketing, and other forms of traditional marketing.
  • Marketers must be tasked with leading workforce education and evaluation. Rather than partnering with agencies to discuss in-house weaknesses, CMOs will lead training efforts that insure that their teams are aware of the latest data, industry developments, and technologies that are most useful to the company’s revenue targets and brand defensibility.
  • CMOs must be able to find and invest in the brand, agency, and media partnerships necessary to move concepts and strategies from proof of concept to reality. These partnerships must be prioritized to keep up a forward-thinking posture and an emphasis on the insights necessary to pursue longer-term goals.
  • And CMOs must combine skill in data-driven marketing with the willingness to adjust to a rapidly changing digital environment that may offer better, more cost-effective opportunities elsewhere – both online and offline.

Coaches tell their quarterbacks to keep their eyes down the field when they leave the pocket. For marketers, that analogy is more relevant than ever. Within digitally native brands and traditional retailers-alike: chief marketers have long-leaned heavily on what was measurable, even if that approach has cannibalized longer-term prospects. The Droga5 acquisition suggests that marketers may begin realigning their resources to pursue a more holistic approach to brand messaging, awareness, and sales – efforts beyond the dependency on paid media spend.

Marketers will tolerate more brand-side experimentation and risk-taking. But unlike the marketing and advertising efforts of earlier years – the goal is to use observations to de-risk opportunities as quickly as technologies will allow. Risk aversion is still an objective but more chief marketers will grow to become the explorers of their industry. More than ever, these executives will be tasked with forging new paths and modernizing their approach to measuring the data that tells the story.

Read the No. 312 curation here.

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