Memo: On Paradoxes and Reading Waves

2PM-Surf

The spring months will prepare communities but the autumn will define them. I suspect that the advantage will go to the digitally-native. This is how I concluded the memo “When The Dust Settles.” Written in the first week of April, the inspiration for it was a private conversation with a large publicly-traded retailer. Their ask was simple: what metrics and indicators would you use to forecast the following fall and winter? I responded, “Wait until May and then we will know.” We will know how the United States will respond to the urges and political pressures to reignite our economy.

Scenarios A and B: A Catch-22

As I explained to them, “If we wait as long as we’re supposed to, our economy will face some hard and immediate changes in the interim. Our welfare will suffer in the short term but we will be prepared for the longer term.” This is scenario “A.” They sigh, it’s uncomfortable. “But if our state and local governments begin to signal normalcy in early May, then we’ve elected to shorten the scientifically-backed timeline. And we will see a few things that will make us uncomfortable – one now and one later.” This was scenario “B.” In Joseph Heller’s famed Catch-22, one line stood out above the rest:

The enemy is anybody who’s going to get you killed, no matter which side he’s on, and that includes Colonel Cathcart. And don’t you forget that, because the longer you remember it, the longer you might live.

A popular use of Heller’s famous title, a “Catch 22” refers to a paradox where the two sets of rules or limitations are contradictory and a success is improbable as a result.  Barring some unforeseen change in the circumstances, the individual cannot escape this scenario unscathed. This story can be useful to navigate the difficulty of decision-making in the present day.

We all want the economy reopened as soon as possible, but doing so too soon would be a big mistake. That could lead to a spike in COVID-19 cases, which would then result in another shutdown and we will be right back where we started. It makes no sense to resume business as normal if employees and customers are concerned for their safety.

At the same time, social distancing is not a sustainable strategy. We can’t keep doing this for another 12 to 18 months until a vaccine is available. When the time is right, we’re going to have to figure out a new normal to do business in a modified fashion until then. [1]

Continuing shelter-in-place policies [A] would embolden the healthcare industry, enabling the physical welfare of our communities. Reopening businesses [B] would enable the economy’s recovery – in theory. If successful, it would begin to repair the financial welfare of our communities. The welfare of our businesses and the health of our citizens are critical to society’s functioning; they both require a collective focus and participation. The difference between scenarios “A” and “B” is about 60-90 days, according to cited epidemiologists and other public health experts. As indicated by the reopening of local economies, we’ve chosen the first scenario. This is the one anticipated by Dust Settles.

No Title

By opening the economy, we are guaranteed to see a 25%+ eCommerce penetration rate by September 2020. Conservative projections didn’t have us exceeding 25% for another 8-10 years.Spring: 11.2% to 20%Summer: 18-20% to 14%Fall: 25%+ of retail is through eCommerce channels

A collapse in our enthusiasm for social distancing implies a return to traditional retail  customs. The result will be a seasonal drop in eCommerce penetration, during the summer months, as consumers venture out to malls, restaurants, and urban retail developments. But the end of social distancing customs may likely coincide with a second wave of spread that emerges during the fall.

One of the worst cases of the 1918 epidemic occurred after Dr. William Crusen, the city’s public health director, allowed a parade to continue as scheduled despite fair warning. On September 28, 1918, that parade drew 200,000 to Philadelphia’s streets and within 72 hours, the city’s 31 hospitals were filled. Every bed was taken. The parade was called to sell war bonds. [2, 2PM Inc.]

The second wave of COVID-19 will be compounded by colder weather and a potent flu season that will undermine most of our social distancing efforts. It will cripple traditional retailers who failed to take drastic action in updating technologies, forging online communities, and developing last mile strategies. And unless we’ve mastered the medical tools that have, thus far, been in short supply – we can expect five months of the sheltering policies that were instituted as a result of the first wave.

Online retail will become the primary commerce channel for an even greater subset of the American consumer, as a result. Conservative estimates place eCommerce at 20% or higher penetration rate by September, a number that wasn’t to be reached for another 5-10 years. This number reflects a total addressable market (TAM) of nearly $1 trillion, a figure that represents a nearly $ 400 billion growth in eCommerce market share. This figure was $611 billion in 2019.

On Reading Waves

As the TAM has grown, you’ve likely observed a change in tone from many retail analysts. In Fall of 2019, you’d find reports on “the optimization of the CAC:LTV ratio of x brand” or “on the payback period for y retailer.” I’ve tended to avoid the analyses of minutiae.  Rather, 2PM’s reports tend to focus on larger influences. In The Netflix Boom, I explained that we were in the early stages of eCommerce as a channel:

By comparison: thousands of direct brands are competing over what amounts to just 12% of all retail volume. In this way, DTC brand retail is closer to the Blockbuster Video phase than the Netflix era that succeeded it. [3, 2PM Inc.]

Thus far, the online retail economy has been stunted by America’s over-reliance on brick and mortar retail. As our social behaviors have changed, retailers have begun to observe shifts in preferred goods, sales channels, and expectations. This tipping point is best visualized as a physical wave, consider the following analogy:

We pay instructors to teach us to stand atop of a surfboard or navigate small breaks near the beach. This is the gift of education; we can pick up the basics in just a few weekends of study. Eventually, this surfer becomes technically sound enough to pursue big waves. But to take advantage of great waves, our education has to include more than skill. It must also include foresight. This is a difference between a novice, who is training to ride small breaks, and the elite surfer that catches a big wave. One surfer [1] has novice skill, one surfer [2] has expert ability, and one surfer [3] shares that expert skill with the addition of foresight.

Right now, it is important to identify the small crests that result in big waves. As commerce begins to move into the mainstream, it will impact industries within and adjacent to retail. Addressable markets will grow for digitally-native brands and traditional companies who’ve invested in their digital futures. In a recent article, the Founder of Common Thread Collective shares insight into the second order effect of the mainstreaming of eCommerce:

Across CTC’s portfolio of more than $600M in GMV, we’ve seen revenues rise every week since the nationwide lockdown. Staggering figures to rival Black Friday, Cyber Monday. In some cases, smashing it. [4]

Similar reports have been shared by a number of retailers, indicating a directional trend. What does this growth mean for other industries? Business leaders can still be heard saying things such as direct-to-consumer isn’t our industry. This is akin to the capable-yet-novice surfer who cannot yet read waves. In non-retail industries, you’ll hear resistance from businesses who focus on their existing competencies. “The revenue isn’t a big enough opportunity, as it stands,” is one. Or, “we need to stay focused on what we’re great at.” As Taylor Holiday noted in a recent conversation:

These are quotes on tombstones of the future.

In Heller’s famed Catch 22, the protagonist was in an unsavory, paradoxical situation. Neither of Army pilot’s outcomes were plausible. And barring some unforeseen change in circumstances, he couldn’t have expected any relief. For the pilot, there was an unforeseen change in the circumstances that saved him. And though it wasn’t ideal, it was far better than the alternative.

Scenarios A and B are our own version of this paradox, neither of the outcomes are plausible. And barring some unforeseen change in the circumstances, we can’t expect any relief. But for third suffer, an unforeseen change in the circumstances was identified early. And though it wasn’t ideal, it was far better than the alternative.

There is a wave in the distance. Consumers will depend on digital commerce and community to mitigate changes in retail, events, healthcare, and gathering spaces. Economies will be required to shift to digital formats to account for these new audiences. Business that anticipate these shifts are preparing for them early. Businesses that fail to anticipate these shifts will continue to harm their prospects by prioritizing conventional methods. The “unforeseen change” will be seen by the digitally-native and those who think like them.

Think of that change as a wave to be caught.

Report by Web Smith | Edited by Hilary Milnes | About 2PM

Memo: When The Dust Settles

That summer’s flight was the last that I took before things changed forever. It was a pleasant trip but, knowing me, I found a way to complain about a minor inconvenience. The simplicity of walking to my gate and the ease of being unconcerned about domestic flight safety were privileges that I didn’t know that we had until they were gone. For a while, I thought we’d see those privileges again but I was wrong.

The next time that I’d fly out of Providence, Rhode Island, it would be to see my family for Thanksgiving 2001. By then, everything was different. As a global culture, we moved 20 years in just two months. The new customs were tolerable because we thought that they would be temporary. They weren’t. The new customs set like concrete. We adjusted.

Industrialism implies technology and the cutting of time into precise fragments suited to the needs of the engineer and the accountant.

Harold Innis, Author of “Changing Concepts of Time”

Welcome back to the sensation of the autumn of 2001. Eventually, the planes will take flight. Anxious consumers will roam their local malls. Colleges will salvage what’s left of their value propositions. And work in offices will be the default for some.

Though the signs are still up, your spin studio or fitness shop won’t be taking any new clients. The economics no longer support the real estate costs. Your favorite independent restaurants will be in a fight for stability. Your place of worship spaces the chairs six feet apart; the sense of community is lost. The strip malls that adorned every suburban corner appear the same as before but the activity reflects a disruption. The signs are there but the employees and customers are not. At the big box stores, you’re surveilled as though you’re a shoplifter. In reality, you needlessly touched a few items, setting off a quiet alarm that notifies the manager-on-duty. Your temperature is tested on the spot. The consequences of this type of in-store behavior are more severe than the penalties for shrinkage.

Your neighbor’s children play their sports but only after digital temperature measurement each time that they leave the field. You hug your neighbor but you do so with an eye for what onlookers may think about you. Dining out is reserved for the most exclusive restaurants, the type that can inforce price minimums that begin to address a lacking volume. Functioning movie theaters are rare in September 2020.

The middle-class is on edge. It’s harder to sell a home in a community ravaged by idle storefronts, shuttered amenities, and skeleton-crewed local governments. It’s even harder to buy one of those homes. J.P. Morgan Chase set a standard that other major lenders followed: 700+ credit scores and 20% for down payments. Only the wealthy can stand up to those requirements in an economy with double-digit unemployment.

Traveling is intrusive. Even a visit to the gas station elevates your heart rate. You’re watched as you pump gas to assure that you cleanse the area. This is a new social contract. This is September 2020 and nothing is the same. The second wave of viral infections has arrived but – by then – there are ventilators awaiting the distressed. We made a decision to pump the economy in May 2020 and the result was a free for all. The sentiment shifted from “we’re in this together” to something closer to “whatever it takes to survive.” Between the economic pressures of supporting a family and the real dangers of viral contraction, the word “survive” is no longer figurative. There will be two existences living chaotically together: the prepared and aloof. If you’re reading this, you’re the type to prepare.

Two forces are positioning for a primary role in this near future. Government stimuli and initiatives are in place to aid a return to a sense of normality. This is the traditional normality, the one that we remember from January. Over-retail was the norm and 88% of the shopping was done with a physical cart, in this version. Technology companies planned an enduring version of the future but the transition from one to the other is expected to be violent. Casualties are involved  Again, another word that is no longer figurative.

The truth is that the long-term advantages are held by the digitally-natives. These are the cultural customs, businesses, and institutions that operated as a layer atop of society for decades. By September: these tools, platforms, and experiences will no longer sit atop of society – awaiting their turn. Rather, society will be reliant on many of these tools. Call it an operating system or infrastructure but when the dust settles, these digital tools are the equivalents of our new roads, our new stores, our new theaters, and our gathering grounds. In September, these elements may not be absolute or even primary but their collective presence will be felt.

So which September will you prepare for? In the previous weeks, I’ve heard “What will the autumn of 2020 look like?” “How do we position ourselves to survive it?” “Is growth possible? If so, how?” Business books issue dictums on preparing for the future. But no one discusses the practicality of operating in the in-between. It can be difficult to predict what unemployment will be in September or how steep the curve will appear on government PowerPoint presentations. But in ways, the autumn is a second chance.

The winners of September 2020 have already begun preparing. Like the autumn of 2001, things will change in an instant. But this time, we can see it coming. The catalyst won’t be a broadcasted surprise on a Tuesday morning. And yes, there will be an untold number of variables that go unmanaged. There are dozens of scenarios, ripe for quantitative analyses. But the larger themes will remain in nearly all of the potential outcomes. When we’re given the order to return to normalcy, it will act as a recoil that brings us back and shoots us forward – all at once. Some of our old customs will return as though they never left. These customs will serve as a comforting facade. But when you’re waiting in the slingshot, the position is never permanent.

The spring months will ensnare communities but the autumn will define us. I suspect that the advantage will go to the digitally-natives: the retailers, the utilities, the communities, the entertainment models, the fitness providers, the essentials (and the non-essentials), and the professionals who are defined as such. What was once a layer atop of society, eCommerce will become its core functionality. That’s what you’ll see when the dust finally settles.

By Web Smith | Editor: Hilary Milnes |  About 2PM

Memo: On New Mutualism And Media

Ecosystem

There’s an awe-inspiring scene in Master and Commander, the film set in the Napoleonic War based on the series of novels about fictional Commander Jack Aubrey written by Patrick O’Brian, that establishes the climax. Aubrey is portrayed as a leader, mathematician, astronomer, and musician. His appreciation for deep generalism plays a role in the film’s conclusion.

In the penultimate scene, the British frigate’s physician Stephen Maturin (portrayed by Paul Bettany) is also a deep generalist. Maturin, an accomplished cellist, is an avid naturalist and life scientist. While shored on the Galapagos Islands for a short time, the character treks out with a small contingent to find and document new wild life. Unable to find the “flightless bird”, he stumbles on a walking stick insect (phasmid) and he brings it to the ship. As the story goes, Aubrey marvels at the insect’s abilities. As the story progresses, he applies the discovery to his own circumstances.

Captain Aubrey’s ship, the HMS Surprise, is inferior to France’s HMS Acheron in size, speed, and durability. After observing how well the phasmid deceived him, Captain Aubrey (Russell Crowe) has an idea to disguise his ship as a civilian whaler. It allows the Surprise to appear harmless; the Acheron pulls in close enough for the HMS Surprise’s cannons to finally damage the hull of the much stronger ship. Ultimately, the Surprise defeats the Acheron. It’s a moment in which biology serves as an applied science. In one of O’Brian’s final novels (The Hundred Days), the author summarizes a running theme throughout the twenty-part series.

Wit is the unexpected copulation of ideas.

I began thinking about other biological concepts and applied sciences. I landed on symbiosis and its role in evolving ecosystems. Symbiosis is a biological concept that defines a partnership between two organisms. It’s allowed wildlife to defend from agitants, it’s produced energy from sunlight, and it has provided food. We are all engaged in symbioses of some sort. A form of symbiosis is called mutualism.

Mutualism is the association of two organisms of unrelated species that provides benefits between the two organisms. None of the examples that I found were more critical than the relationship between humans and plants. Humans use the oxygen that plants provide, exhaling the carbon dioxide. Plants use the carbon dioxide to create the oxygen needed by humans.

Bees and The Flowers: Media and Commerce

For a number of years, media and commerce operated in a mutualistic manner. For a time, sites like Amazon, Target, and Walmart needed product demand and digital publishers would provide that demand for a percentage of each sale made. It was a win / win. Media could monetize its traffic in new ways and brands could advertise without upfront costs. Affiliate commerce has been around for nearly 30 years; Amazon launched Amazon Associates in 1996. Hundreds of publishers depend on Amazon for revenue today, including BuzzFeed, Vice, and Vox Media. On the about us page of Skimlinks, a leading provider of affiliate commerce technology, it makes note of the how ingrained affiliate marketing has become in the media industry.

The leading publishers in the market have developed to such a place that in the last few years they’ve now spun off commerce content into its own dedicated brand. Publishers like New York Magazine are so successful they can dedicate entire editorial teams and brands to creating commerce content that helps them earn up to 25% of their revenue from affiliates.

As the ecosystem changed, publishers changed with it, from banner advertising during web 1.0, to programmatic ads, from the “pivot to video”, to native advertising and branded content, and to today’s content-pumping commerce teams. But no change has occurred more suddenly than COVID-19. And the juxtaposition is noteworthy. When else has physical biology required renewed wit? An actual virus has altered the symbiosis of media and commerce.

Seemingly overnight, COVID-19 altered the symbiosis between publishers and the brands and marketplaces that need its demand generation. In some cases, the symbiosis was ended altogether. In a recent report by The Information, Jessica Toonkel explains:

BuzzFeed is more exposed than other digital media firms: It got about 20% of its revenue last year from the business, with half of that coming from Amazon and Walmart, the people say. […] With some deals, including ones with BuzzFeed, the retailers guarantee a minimum level of payment regardless of the traffic generated by the posts on the websites. That could explain why Amazon and Walmart have suspended the payments now. [1]

Like a virus, itself, Amazon’s decision to change and / or withhold payment structures had industry-wide implications. A number of the top marketplaces followed suit.

Walmart’s rationale for cutting its affiliate marketing program is not clear from the information available. It could be a cost-cutting measure in response to the COVID-19 pandemic, but it could also be a way to reign in a channel with a reputation for being a free-for-all prone to high levels of fraud.

Yet, Walmart isn’t alone in cutting affiliate programs, per the Business Insider report, which notes that retailers Macy’s, Patagonia and Victoria’s Secret have taken similar steps. These moves are likely to impact the ability of influencers and other creators to generate revenue. [2]

Across the board, online retail penetration has skyrocketed, spurred by social distancing mandates and demand for essential goods. Amazon has accounted for this by advertising the hire of 100,000 warehouse workers and delivery drivers, a clear sign that this demand may become a new normal. Couple this with retail’s retraction in advertising spend and the calculus is altogether different than it had been in December 2019.

These changes are affecting the most diversified and well-positioned of media brands. Consider Highsnobiety’s layoff of 50% of its workforce, setting off a far-reaching effect on retailers, influencers and public relations firms.

Highsnobiety was one of a few publishers who invested in product creation for its commerce business, rather than just peppering its site with affiliate links. The problem is that, in times of economic downturn, restricted movement, rapid changes in consumer demand and a knock-on effect on all elements of the supply chain, the latter is much more flexible and risk-averse. While affiliate models present challenges like stock shortages for publishers during the spread of Coronavirus, those relying on brands for their supply chain and co-creation will be left exposed. [3]

Highsnobiety has been a success story. This makes the news even harder to fathom. Founded 15 years ago by David Fischer, the early shoe blog evolved into a multi-faceted media operation. Snobiety employed workers on multiple continents and continued to follow the tides of media’s evolution. Though young, its online store was reportedly successful, selling out of limited runs of aspirational goods. When Fischer finalized the $8.5 million round from Felix Capital in 2019, TechCrunch editorialized its success:

The company claims that for the past three consecutive years, it’s grown 100% year-over-year, and its employee base grew from 15 to over 100 across its offices in New York, London and Berlin. [3]

But a former employee’s recent post facto clearly describes the cracks in today’s form of modern luxury, new luxury, and leanluxe™ ecosystems.

What happened at Highsnobiety on Monday is not an isolated incident. It’s an indication of how quickly the ground is shifting for new media companies, especially those heavily invested in brand-sponsored, hype-based journalism. A business model laser-focused on shilling a lifestyle of “new luxury” via designer goods and overpriced apparel, it seems, is only as good as the economy health of its global readership. [4]

We’re observing how delicate the ecosystem has become for retailers and media sources alike: the bees and the flowers. This has compounded matters. For the vast majority of direct-to-consumer brands who’ve grown dependent on earned media, affiliate commerce was that engine. As such, many brands are drowned out by COVID-19 coverage. Meanwhile, retail media sites like Gear Patrol are marketing designer masks with some of its most precious real estate, and Goop is explaining how to decontaminate the home above its fold. And in a fit of irony, Highsnobiety is advertising a series called “Quarantine Home Entertainment.” When the dust settles, there will be a few short-term takeaways with long-term implications (Nos. 1-5):

No. 1. Amazon doesn’t need publishers for demand generation any longer.

It took less than 30 days for Amazon and other top marketplace retailers to punish its media partners. In A Familiar Strategy, I discussed this:

Unlike Facebook, Amazon will have their own products, a proven sales funnel, and consumer demand to rely upon. Amazon’s ad partners are fueling an unparalleled shopper acquisition machine. [5]

With historic levels of organic demand, there is a diminished need for media-driven traffic. Though this will likely subside, Highsnobiety’s layoffs are an indication that a number of less-suited media brands may not be around for the v-shaped recovery.

No. 2. Streetwear culture isn’t as critical as we once believed.

The streetwear movement (and the modern luxury culture that it spurred) is at risk without a digital media industry to support it. With a decrease in discretionary spending and a shift away from non-essential goods, there’s been a redefinition of luxury.

No. 3. We only care about the lives of others when ours are safe.

The influencer economy is at risk and so is the appeal of proximity to aspiration. In a recent report by Vanity Fair, this vignette illustrates the divide between the fortunate and the

Now authenticity is colliding terribly with a lack of self-awareness in the face of crisis. The most flagrant version made the rounds on Tuesday due to a Twitter thread. A few weeks ago, [Arielle] Charnas took up a doctor friend’s offer for a coronavirus test; tests were especially hard to come by then, and still are. She broadcast it to her 1.3 million followers. This did not go over well in her comments section and on other internet forums. [6]

No. 4. It’s increasingly difficult for brands to earn media.

It’s often the case that the mechanics of a brand requires earned media. A growing number of them are reporting on the compounding effects of a loss of revenue due to decreased affiliate sales and a loss of opportunity due to insufficient earned media. Product releases, hires, partnerships, endorsements, collaborations, and other brand developments are not covered through traditional public relations channels. This will force more brands to redirect resources to other forms of creative marketing. Even so, a number of retailers have still found ways to generate media attention.

In a conversation with Jack Carlson, the founder of Rowing Blazers explained how he’s navigated this over recent weeks:

The truth is that I think the way we do things is a lot more work than pumping money into digital ads or buying up big media partnerships. The way we do things requires constant newness; it requires producing limited runs of product and sometimes, even to my chagrin, selling out right away; it requires our products to have a robust sense of story and meaning behind them; it requires thoughtful copy and rich, meaningful projects and collaborations (collaborations that you do for the right reasons); and it requires a little bit of luck or whatever magic dust has help us to start establishing a cult following of highly loyal customers who actually want to read about our latest projects. These ingredients are all fundamental parts of our business model anyway, but this way of doing business is almost the exact opposite of how most DTC brands function.

No. 5. Publishers must create new, profitable partnership formats.

Advertising spend is down, non-essential affiliate marketing is on life support, subscription strategies are nascent, and direct-to-consumer commerce is a rarity. Media is being forced to evolve, once more. And so are brands.

The climax of one the great war movies isn’t about war at all. Rather, a moment of inspiration led to an improbable outcome. “Natural symbioses occur between the most unlikely of partners,” writes Rafe Sagarin in an HBR report on limitations in professional settings. Like the symbiosis of bees and flowers, digital publishing and retail are a form of mutualism under siege. The relationship has faced a costly disruption, damaging untold numbers of businesses. What new relationships will take its place? For either industry to identify steps to regain equilibrium, some measures will be reinvented. If weeks turn into months, this will require even greater thoughtfulness and swifter action. Wit is the unexpected copulation of ideas.

By Web Smith | Edited by Hilary Milnes | About 2PM