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Memo: Ads, Marketplaces, and Inflation
Mitigation strategies are top of mind as brands continue to navigate the many changes facing today’s global market. Some have been covered by 2PM including:
- Inflation and other persisting macroeconomic pressures
- A growing preference for marketplace economics over direct-to-consumer
- Brand advertising preferences (data privacy bolstering Amazon’s advertising businesses)
- Apple’s sneaky approach to its advertising platform (the Apple Property Tax)
Macroeconomic Pressures
Inflation is the most troubling issue for many in retail, though there are silver linings. In April 2022, more than half of people with household incomes under $50,000 said they already cut back on multiple expenses due to prices, and for those with income of at least $100,000, the cutback levels are similar when it comes to dining out, taking vacations, and buying a car. Over the pandemic, consumerism benefitted from the upper-middle class and wealthier Americans consuming at a pace that seemed to ignore logic. Many are still comfortable paying more for less.
While retail’s gross sales are still climbing, value isn’t and it’s beginning to impact the most economically challenged Americans. A new report by the Wall Street Journal affirmed this shift in consumer sentiment:
Data last week revealed new evidence from companies and the government that household spending is increasingly strained. Families are paring back purchases of items such as electronics and furniture as prices for essentials like food and gasoline have become more expensive. Inflation drove consumer spending in June to a new four-decade high while personal incomes fell when adjusting for inflation and taxes.
But the report went on to explain that there is a disconnect between sentiment and action for many consumers. In the same report, Moody’s Chief Economist explained:
There’s all kinds of disconnects in this economy, but there’s a very strong disconnect between how people say they feel and how they’re behaving. This gap between sentiment and behavior is the widest I’ve ever seen.
There are still opportunities for retailers; they just need to read the tea leaves. Online sales skyrocketed during the pandemic but then crashed as stores reopened. Or did eCommerce crash? According to Benedict Evans, how we currently define eCommerce sales is limiting proper analyses of retail as delivery methods and modes of consumerism evolve.
The lines between online and offline retail have blurred. Consider all the ways to order something online and all the ways it might arrive to your house: Uber, UPS, USPS, local courier, or BOPIS. Or maybe you pick it up in an Amazon locker or curbside at your nearest Target. Does a retailer count that curbside visit as eCommerce?
Evans writes that “addressable retail” is becoming less significant – what matters is how retailers actually fulfill orders. It doesn’t matter if retail is defined as including auto sales or restaurants. They’re all operating within the Amazon model now:
However, I think one could argue that ‘addressable retail’ is becoming less and less useful over time. Not only does Tesla sell cars online, but around half of US restaurant spending has been ‘off-prem’ (collection and delivery) since before the internet, and it’s not clear to me what it means to count tapping the phone icon as ‘offline retail’ and tapping the Doordash icon as ‘online online’ if it’s still a pizza on a bike. And, of course, retailers have talking for years about sales journeys that start online and finish offline and vice versa.
I think it might be more helpful to stop talking about what is or is not ‘addressable’ and just talk about different logistics models – everything will be sold online, but the delivery will vary. What can come through the mail, what needs a cold chain, what needs a truck, and what needs a bike? In other words, what fits Amazon’s commodity, packetised logistics model, and what needs something else?
This will culminate in small and medium sized brands needing their own logistics operations – or needing to join larger marketplace machines.
Marketplaces and Opportunity
That writing has been on the wall. Being a successful brand that will last through the next decade will rely less on brand equity and more on supply chain innovation, delivery efficiencies, and inventory management. What this class of brands needs is a marketplace that can provide the back-end logistics as well as front-end curation. From our report from last week:
Consumer behaviors seem to suggest that they want simplicity in how they buy goods and services, whether offline or online. Marketplaces benefit consumers and brands alike. For consumers, it means more products in one place. For brands, it means more visibility and less reliance on performance marketing spend. Like China’s advanced market suggests, Shopify could add to its resilience by becoming the marketplace for its many brands. If not, Amazon may pursue that strategy on their own.
The marketplace model will become more relevant for digitally-native brands as eCommerce continues to evolve and lines blur. The most capable retailers will reach customers where they are.
In our recent report on the emerging 90s nostalgia and how it may impact our consumer habits, I explained that nostalgia may begin to influence consumerism beyond the television and computer screens:
There is a chance that this next decade will see reality imitating art with more brands handing over their acquisition strategies to physical and digital marketplaces – this could lead to an emphasis on platforms like Amazon, JD.com, and others over individual storefronts like BigCommerce or Shopify (who is undoubtedly struggling).
Today Glossy published a report affirming the notion that eCommerce brands see marketplace strategies as an opportunity for growth.
In a survey of 46 fashion and beauty brands and retailers, more than 37% have introduced a third-party marketplace to their online stores, 35% of which did so in the last year.
Amazon, Walmart, Apple, and Advertising
In 2018, I wrote on Amazon, advertising, and crashing the duopoly of Facebook and Google’s pay-per-click businesses. Though this was written four years ago, it has never been more relevant: “Long term: Amazon will benefit from the use of less intrusive data. Consumer profiles will track on-site purchase behavior and product affinity, not web-wide browsing behavior. The eCommerce giant tracks KPIs like add-to-cart, average order value, and likelihood for add-on products in order to segment and serve higher converting advertisements for merchants who bid on ad space and keywords.” Apple’s privacy directives helped accelerate this idea by five to seven years. The softening of Google and Facebook’s advertising business has Apple’s privacy initiatives to thank. Fast Company published a great report detailing the timely juxtaposition of Apple’s impact, Amazon’s advertising growth, and Facebook’s struggles:
The rise of retail media ad networks is now intersecting with a softening of the digital ad market, brought on by a combination of macro-economic factors, and more secular shifts in the online-ad business resulting from Apple tightening the ability to track user behavior across the Web. Facebook, for instance, just posted a 36% drop in profit from last year, citing ad-market woes.
But Apple’s impact on privacy is also beginning to jumpstart its own advertising fiefdom, as many analysts predicted. This recent quote would have seemed nonsensical just a few years ago. Brooke Tarabochia, the direct of growth marketing for Peloton:
Apple Search Ads was the most efficient, scalable paid channel for our relaunch. We captured a broader audience with higher intent while maintaining efficiency.
The silver linings suggest that though everything around the industry seems to be impacted by the stresses of technology’s innovation cycles and economic fluctuation, there remains opportunity to find success.
By Web Smith | Edited by Hilary Milnes with art by Christina Williams and Alex Remy
Memo: Betting His Hat
The pandemic was supposed to change how we shopped forever and it did, for a moment. But then things began to resemble the pre-pandemic way of life. This reversion to the mean is not as simple as it seems. In March 2020, as Americans were shaken by a once-in-a-century disruption, lawmakers passed a $2.2 trillion stimulus package within days of the initial shock. Two more installments followed in late 2020 and then in 2021. The Washington Post noted in March 2021:
The United States appears to have spent more than anywhere else on coronavirus relief. The U.S. economy is the largest in the world, so the country has more to spend.
This was a justified economic calculation, even if it was driven by political convenience. It lessened the blow of a 100-year shock. Even so, unemployment rose to about 14.1% as Spring 2020 turned to summer and poverty rates in the United States fell from 11.8% to 9.1%. The negatives began to emerge as consumer prices rose, reflecting the unintended cost of market manipulation: inflation. And this is but one of the forces to include recessionary forces and supply chain inconsistencies. The American GDP has fallen for two consecutive quarters, by 1.6% and 0.9%. Supply chain backups dominated retail headlines last year. In October of last year, we broke down the cascading effects caused by supply chain disruptions. Recall where the international supply chain stood in October of 2021.
There are currently 90+ ships drifting off of the coast of Los Angeles and Long Beach, California. Nationally, truck drivers are employed at historic lows. Internationally, retailers are concerned by the news that China has begun limiting power at its many factories and shipping facilities, further hindering import timelines. And some of the most fortunate brands are buying the ships necessary to move products from A to B with some semblance of reliability.
Consider March 2020 through early 2022 and the three market forces (stimulus, supply chain shortfalls, COVID restrictions) interfering with one another. These simultaneous influences meant that the demand for consumer goods skyrocketed as availability was limited. The US economy was artificially influenced by the three largest stimulus packages on Earth and physical stores were closed as COVID restrictions hindered operations. That was then, this is now.
The most important industry trend influencing eCommerce may not be the two consecutive months of falling GDP. Rather, it lies at the intersection of our consumer price index (9.1+%) and the overstocked issue plaguing many of America’s largest retailers. A recent CBS report made the astute connection between October 2021 and today’s very different circumstances. Because of issues related to understocked shelves and warehouses, retailers overcompensated on product orders for Spring, Summer, and Fall 2022 without considering the effects of the economic stimuli and the reallocation of spend from events to products throughout the two-year period of COVID restrictions:
In a big surprise for shoppers who have been burdened by rising prices, there are deep discounts in stores across the U.S. The merchandise on cargo ships stuck at sea during the supply chain crisis is now crowding store shelves, prompting big sales. “It’s a retail armageddon,” Burt Flickinger, managing director for Strategic Resource Group, told CBS News.
Stores like Walmart overbought to account for previous supply shortfalls. Those retailers bet on persisting consumer demand and higher wages. Now, these same consumers are incentivized to shop at the large retailers with excess inventory. Thanks to the rising consumer price index and rising layoffs, sales at retailers like Walmart, Target, and others have driven the return of traditional consumer behaviors (in-store shopping, value-searching, convenience over luxury). This brings us to one of the biggest developments in retail. One of the most well-run companies in all of retail announced layoffs.
This week, Shopify announced a 10% reduction in a workforce. CEO Tobi Lutke took the blame for betting that eCommerce would leap 5-10 years forward.
Shopify has always been a company that makes the big strategic bets our merchants demand of us – this is how we succeed. Before the pandemic, ecommerce growth had been steady and predictable. Was this surge to be a temporary effect or a new normal? And so, given what we saw, we placed another bet: We bet that the channel mix – the share of dollars that travel through eCommerce rather than physical retail – would permanently leap ahead by 5 or even 10 years. We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to expand the company to match.
Lutke cited a figure that many analysts use to determine the influence of online retail on the American consumer market. But despite the well-written letter, I am not sure that his reliance on this figure is fair or accurate. While the image used in the open letter showed a sharp crash in eCommerce interest, the reality behind the trend line is not as dramatic. We have designed the one below based on the census data that he cited. We have also projected out where we feel eCommerce will land as a percentage of all retail when the new census data is reported on August 19, 2022.
In the May 2020 essay on J-Curves and Agglomeration, I explained that the online retail industry’s recent rise was a product of political and societal influences. And so would its temporary return to normalcy:
The recent shift to online retail has been reactionary. The next phase of eCommerce growth will be more intentional. But first, the bottom of the J-curve.
The market is nearing the bottom of that J-curve. But despite the shift in retail from digital back to physical, eCommerce is still “approaching a $1 trillion annual run rate” according to Marketplace Pulse, Insider, Forbes, and Retail Dive. This means that eCommerce is in a much better place than it was in 2019. Marketplace Pulse added:
Despite only a slight increase in market share, the e-commerce market has almost doubled in three years.
In that time, Shopify’s workforce doubled over the period represented by the last three bars from the right (2019-2021).
To Lutke’s credit, no one could have determined how the numerous forces would impact eCommerce growth. But there is an aspect of online retail’s next several years that analysts may be able to project and this could help Shopify maintain the rest of its workforce in the coming years.
The final market force weighing on eCommerce is the DTC industry’s battle for profitability. Performance marketing has become a less reliable tool and inventory costs continue to fluctuate. Fast Company published a recent report on Customer Lifetime Value (CLV) as a better measure for brands pursuing profitability:
Despite dramatic swings in e-commerce growth pre- and post-COVID, the fundamentals revealed in the IPOs of direct-to-consumer (DTC) darlings like Allbirds and Warby Parker present a serious wake-up call for the retail industry. As it turns out, customer growth does not generally equal profitable growth.
I believe that marketplace strategies for brands is the answer to customer lifetime value. Just this week, Glossier signed to sell within Sephora. Just a few years prior, Glossier was adamant that it would remain a direct brand. More DTC retailers will move to develop wholesale relationships with top marketplaces.
There are indicators that suggest that online marketplaces are more resilient during periods of economic distress. If you look at a cross-section of eCommerce retail stocks (Amazon, JD, Alibaba, Ebay, Etsy, etc) and compare them to software stocks (Shopify, BigCommerce, etc), marketplaces performed better than software companies. And this is where things can take a positive turn for Shopify.
Online retail remains important to the market, customers are reacting to a number of macroeconomic and acute economic pressures, and Shopify has access to countless desirable brands on the market. In China, where Shopify recently chose to partner with JD.com, marketplaces dominate online retail. There are lessons there. The majority of sales occur through online and physical retailers that aggregate brands. In fact, the top eCommerce presences in China (the most advanced eCommerce nation), are marketplace retailers. I believe that consumers want their eCommerce to resemble their real lives.
We visit Target, Walmart, Best Buy, or our favorite mall to discover new goods and easily access what we’re already aware we want to purchase. Amazon Prime Now’s key feature is that it already knows which items you’re most likely to purchase again – so it makes it easy to do so. Shopify’s super power is its access to its brand merchants and their data. And what the market is telling Shopify is that marketplaces are rewarded even during times of economic distress. Aggregating and organizing thousands of its top brands would change Shopify’s strategy but it may also save an ailing DTC industry as a result.
Consumer behaviors seem to suggest that they want simplicity in how they buy goods and services, whether offline or online. Marketplaces benefit consumers and brands alike. For consumers, it means more products in one place. For brands, it means more visibility and less reliance on performance marketing spend. Like China’s advanced market suggests, Shopify could add to its resilience by becoming the marketplace for its many brands. If not, Amazon may pursue that strategy on their own. I’d bet my hat on that.
By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams