No. 316: The Rise of “O2O”

In a recent report in the Minnesota Star-Tribune, Jackie Crosby details Target’s latest plan with their recently rebranded media company – Roundel.

Target Corp. does more than just sell merchandise to shoppers. Since 2016, it also has operated a separate, in-house media company that creates digital advertising for a host of major brands and businesses, not all of whom sell products at Target stores.

According to the recently-named president of Roundel, Kristi Argyilan believes that the in-house agency “represents a different way of thinking.” Target serves as a bridge between its customers and nearly 1,000 business partners in a novel way: “We infuse math — the insights and analytics that make our media company successful, with magic — the great, guest-focused design and shopping experiences that differentiate Target.” Roundel develops ad campaigns for Target.com and about 150 digital platforms like Pinterest and Instagram.

Facebook’s foray into Instagram eCommerce was more defensive than analysts have so-far remarked.

The Star-Tribune report noted that the retailer isn’t the only company reconsidering the strength of an in-house media business. Walmart debuted an overhaul to Walmart Media Group in recent months. In addition, Amazon generated $10 billion in advertising in 2018 per the report. With Target, the report indicated, a new advertising identity would show to potential new clients that offerings extend beyond Target.com display ads. For Roundel – data and advertising design aren’t the differentiators, the physical stores are. The agency’s hope is to pioneer the analytics to correctly determine online-to-offline sales efficacy.

Target gets you every time

Most of us underestimate the potential at the intersection of performance marketing and physical retailers like Target. Outside of Foursquare’s private data, there isn’t yet a sufficient means of quantifying the marketing influence that the internet has on the traditional DTC-era consumer who also shops in physical environments. I’ll try to explain with my recent, one-off anecdote.

On a recent visit to Target, I was searching for place mats when I walked past the Quip display along the main corridor. On a mission to spend no more than $30, I felt pulled to the display like a tractor beam. Without the physical display, a Quip purchase would have remained a long-term “maybe.” As such, I disregarded my $30 commitment and picked up a Quip box. But this funnel began long before that walk past the display of battery-powered toothbrushes.

Observations:

  • Awareness of the product: I’d read about it in tech media and retail publications (top funnel), I’d seen the product in searches (middle funnel), and I’ve passively noticed a few retargeting advertisements over the past several months. None of this visibility moved me closer to the sale.
  • The packaging design: structurally unique when compared to the incumbent brands like Oral-B, Philips Sonicare. The box, itself, was taller. Target stockists have no choice but to place the product on the top shelf – prioritizing the Quip over the likes of traditional devices.
  • Branding: The colors popped and the design was superior, because the incumbent devices all possessed some variation of blue and white packaging.
  • Value: The price was 30-60% cheaper than the conventional, powered toothbrush.

Familiarity, appeal, and price were factors in my decision to purchase. But Target isn’t the only retailer that is competing to develop an O2O-capable, in-house media business. Walmart has overhauled its team – with the anticipation of a long period of growth. And Amazon generated $10 billion in advertising in 2018. Display advertising through Target, Walmart, and Amazon has been used to offset the rising costs of traditional advertising services like Facebook and Google. We expect this to grow. Digiday+ recently surveyed 71 media buying executives in March 2019. Nearly 80% anticipated increased spend on Amazon.com, 20% of the executives were planning to spend more on Walmart.com, and 14% were scheduled to spend more on Target.com through their reinvented advertising house.

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Target is a retail marvel, you walk in for one $20 item and you leave $140 poorer. There isn’t a brick and mortar retailer that is better for certain DTCs. It’s the ultimate retargeting ad.

Fostering DTC brand relationships has been a strategic advantage for the Minnesota retailer; no marketplace retailer has more of them. There are few companies with DTC recruitment initiatives to match Target’s recent partnership speed. The retailer selects rising brands, markets them with prime real estate, and presents great products within an environment known for soliciting impulsive purchases. Even so, the largest DTC brands have taken the digital-to-physical sales funnel into their own hands.

The online-to-offline Sales Funnel

In No. 272: A Path Forward, I discussed the positives of DTC brands operating within existing retail developments, improved sales potential, foot traffic KPIs, and the decline of Tier B and C malls.

There are 1,100+ malls in America and approximately 320 are graded Tier A. We have an oversupply of malls but that does not mean that traditional, anchored shopping centers no longer have a place in modern consumerism. Tier A malls have yet to see their best years. We expect their footfall traffic KPIs to grow, while B and C tiered malls continue a drift toward repurposed real estate.

O2O or “online-to-offline” commerce is a strategy that develops consumer affinity through digital channels and then brings consumers into physical settings to purchase in-store. The brand treats online and offline channels as complimentary offerings. The advantage of this model is three-fold: these retailers can assess consumer behaviors, share payment information between online and offline channels, and targeted consumers can be served at the top of the digital funnel for eventual offline purchase (or vice versa). Facebook’s foray into Instagram eCommerce was more defensive than analysts have so-far remarked.

We compiled a list of 14 brands that have publicly reported revenues in the Top 1000 and one retailer who has yet to publicly report revenue. The following DTC brands have almost exclusively avoided marketplace wholesale deals in exchange for focusing on direct sales through physical locations.

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Whether through advertising agencies like Roundel or through their own channels, these brands have benefited from a growing means of commerce: online-to-offline. With the exception of Casper, which is partially owned by Target, these top digital natives have insourced all brick and mortar sales to their direct channels. As the ability to attribute sales improves, we anticipate an increased use of O2O for customer acquisition. For performance marketers who are judged by conversion rates and return on ad spend (ROAS), O2O is a welcomed opportunity to develop new methodologies for sales attribution and new advertising models to increase targeted foot traffic for retailers straddling the digital and the physical.

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Report by Web Smith | About 2PM

Member Brief: 2007 – 2019

2007

In this report, I review and update two assertions from the archives:

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No. 315: The Digitally Natives

Native

Aggregation defined an era. The aggregation throughout media, retail, and service platforms determined the economic viability of many in the vendor-class throughout the modern digital economy. Uber began as a luxury black car service. Spotify streamed music. Youtube published silly videos. Amazon began by selling books. And Netflix rented films by DVD. Imagine a world without these companies as aggregators. Companies grew market share by adding products and services, rendering their analog competitors incapable.  Like the inevitability of westward expansion, the aggregation theory continues to move certain platforms towards critical mass.

The theory is akin to the digital version of Manifest Destiny. For a time – platforms maintained an advantage, much like physical retailers possessed an early advantage over e-tailers. In the traditional retail model, individual product brands were less important than the shelves that they were marketed on. Consumers came for product selection, ease, and the universal checkout process. The one stop shop was the draw; product loyalty was a secondary feature.  In this way – content publishers, product brands, and services were merely value-additives for existing platforms. Few learned this hard lesson like popular musicians at the beginning of the streaming era. Podcasts seemed to have learned from those difficult lessons.

Gaining leverage is the mission.

The market-making opportunities that began with early digitally vertical native brands (DNVBs) began to influence adjacent industries as that sales model had its success. For decades, it was nearly impossible to achieve critical mass in retail without partnering with a brick and mortar retailer or a department store. To defend against what seemed (for a time) to be physical retail’s Manifest Destiny, digitally natives circumvented the infrastructure and went direct to consumer (DTC). This meant that they had access to increased margins, efficient customer acquisition, access to data, and stronger relationships with the consumer.

With little access to mainstream consumer channels, physical brands launched native channels with the help of platforms like Shopify and BigCommerce. It’s unclear whether or not the intent of the DTC industry was their indefinite independence from big box retail. I’d argue that it wasn’t the goal. But, regardless, the result of the last ten years has been palpable: product brands have never possessed more leverage than they do right now. Even if that leverage is temporary.

As newer platforms go to market, vertical brands are beginning to notice a shift in leverage from platform to the vertical. This is an untimely shift in momentum for platform companies, businesses that once had the leverage to act indiscriminately.

DNVB-speak in digital media

In early April, comedian Russell Brand was interviewed by the host of the Joe Rogan Experience (JRE), a wildly popular podcast that covers everything from combat sports and geopolitics to archaeology and sociology. It’s important to note that JRE is consistently ranked in the top five of the most downloaded podcasts. Toward the end of the discussion between the two men, Rogan prompted Brand to promote his business interests. And though it was a subtle promotion, this is where things became interesting.

Luminary is the premium audio publisher and content aggregator that has set out to become the Netflix of podcasting. Founded in 2018 by Lauren Sacks, the company raised $100 million from New Enterprise Associates. The funding equipped Sacks and team to recruit several sizable podcast networks and high visibility media personalities to include: The Ringer, Guy Raz, Trevor Noah, and Wondery Media. Wondery is the last remaining podcast network known for its original programming and Ringer, a successful podcast network in its own right, is still in search of Barstool Sports-level network effects. In hindsight, Spotify’s acquisition of Gimlet and Parcast were as defensive as they were offensive developments.

In the episode – Russell Brand promoted his latest venture, a podcast with Luminary. The elevator pitch had somewhat of a dual purpose: (1) use one of the most influential platforms in audio to promote a business interests and (2) recruit Rogan into the fold of the Luminary-faithful. The second part did not work, the jury is still out on the first proposition. But the effects of that conversation were immediate. Within 72 hours, JRE was pulled from Luminary’s catalogue. From Hotpod News: 

The [JRE] team explicitly cites licensing issues as the reason behind the intent to withdraw. “There was not a license agreement or permission for Luminary to have The Joe Rogan Experience on their platform,” a representative from the team told me last night. “His reps were surprised to see the show there today and requested it be removed.”

The Joe Rogan Experience wasn’t the only big name in podcasting that removed content from the platform. Spotify denied Luminary access to their shows and the New York Times pulled The Daily. PodcastOne, Barstool Sports, Endeavor Audio, and many others followed suit. From No. 304: In-app audiences:

The pending acquisition of Gimlet Media is about more than building a direct-to-consumer podcasting powerhouse, it’s about monetizing DTC audio in new ways. Spotify doesn’t own the music that millions of us listen to, they license the rights from three music labels: Universal Music Group, Sony Music Entertainment Group and Warner Music Group. With Gimlet’s pending acquisition, Spotify is positioning themselves squarely as the Netflix of audio. And Gimlet’s portfolio of audio properties could be another tool that Spotify uses to convert casual subscribers to premium, paid users.

And here’s Luminary CoFounder and CEO Matt Sacks:

We want to become synonymous with podcasting in the same way Netflix has become synonymous with streaming. I know how ambitious that sounds. We think it can be done, and some of the top creators in the space agree.

Spotify and Netflix were exclusively aggregators before they began to pursue their modern subscription growth strategy. By acquiring popular properties (like Gimlet and Parcast Network) or by investing in the development of  the native properties that Netflix is now known for, both companies moved further away from aggregation and closer to becoming digital natives. For Netflix, this was timely. Media companies like Disney have begun to pull their properties to develop their own digitally native businesses. Another sign of aggregation theory’s diminished role for newer companies.

Perhaps, the age of aggregation is nearing its maturity. According 2017’s Defining Aggregators by Ben Thompson:

Aggregation Theory describes how platforms (i.e. aggregators) come to dominate the industries in which they compete in a systematic and predictable way. Aggregation Theory should serve as a guidebook for aspiring platform companies, a warning for industries predicated on controlling distribution, and a primer for regulators addressing the inevitable antitrust concerns that are the endgame of Aggregation Theory.

Two years later, we’re witnessing a war over proverbial land rights. As platforms have begun to lose leverage over specific verticals, they’ve heavily invested into the development of their own properties (private labels / native brands / native media projects). In some cases, like Spotify’s acquisitions – they chose to acquire the properties to move consumers along the content-to-subscription funnel. For Luminary Media and their Head of Partnerships / Business Development Meaghan Quindlen, the stakes are much higher than they would have been 3-5 years ago.

She has an unenviable job; she must convince alienated podcasts to work with them by communicating her vision, by employing a new licensing compensation structure, or a combination of both. Even Spotify and Apple Music had their own similar episodes. But with $100 million in funding and grandiose aspirations – Luminary will have to out-Spotify Spotify on its way to becoming the Netflix of podcasts – a title that the first audio platform to achieve 100 million paid subscribers wants all to itself.

Who is to say whether digital media properties returns to the types of  platforms that were once required for growth; there is now a dueling loyalty between independence and potential reach. This contradiction didn’t exist a few years prior.

Digitally native retailers are open to working with big box retailers (the original aggregators) as long as they can maintain a unique in-store appearance with access to some form of consumer data.  In this way, DTC retail is a decent enough analog for what’s happening in podcasting today. Product and media brands now hold the levers – they’re the draw. Consumers walk through the door, proverbial or otherwise, for their beloved brands. Aggregators must learn to operate in a world where the leverage exists with digitally natives. At the very least, aggregators need to learn to develop real symbiosis.

Luminary may need to raise more money.

Report by Web Smith | Join the Executive Membership