Daily Consumer #33 - More On TikTok's Ecommerce Push
And another Chinese tech giant enters the US ecommerce fray.
Author’s Note
I hope you are having a great Martin Luther King Jr. Day. He was an inspiring man who made our country better.
I wanted to highlight SiO Beauty, a medical grade skincare brand. They are donating 1% of all revenue to a network of non-profits, assembled by Beam, that support racial equality in the US.
Unpacking the Industry
🤳🏻 TikTok is driving >$200B of commerce, and it’s still early days.
Bytedance generated $208B in GMV on Douyin, their Chinese equivalent of TikTok. This is an increase of 76% from 2021 and reaffirms that 1) commerce and social media can be connected and 2) that the prize is tremendously large (the $208B is just China). However, the US continues to lag in social commerce in part due to the backend complexity of integrating with merchants and in part due to user behavior challenges. On the latter point, users spend most of their social media minutes consuming content from friends and from influencers, not by following brands directly. Influencers increasingly seem like the gateway to enabling social commerce. TikTok seems to be aware of this and is launching Talent Manager, a way for agents and managers to negotiate brand deals for their TikTok influencers. Ultimately, it’s clear that we’re in the midst of a large paradigm shift - social media is becoming centered around personalized video content and the ways to monetize this attention continue to be discovered.
⭐ Influencer brands don’t seem to have longevity nor do they seem worth the risk.
We have seen hundreds of influencer-driven brands launch in the past few years as celebrities experiment with new ways to profit from their reach. Kim Kardashian scaled Skims into a fashion brand valued in the billions and is now tackling skincare with SKKN by Kim. Her success seems to be an outlier. Most influencer brands have struggled to achieve $10M+ of annual revenue which would be a conservative barometer of success - some of the few are listed in the image below. Perhaps this is due to a lack of deep motivation or creativity. After all, it is an influencer’s second job to build a product line and, when it struggles, they likely retrench to their main job. Sometimes failure is due to the reputational collapse of the person behind the brand. We saw this recently with Kanye and his horrific outbursts, after which Adidas quickly shuttered his Yeezy footwear line. This decision which will cost Adidas $1.8B of annual revenue (7% of total company revenue) and leaves them stuck with $500M of unsold inventory. At the least, longevity seems to be an issue with influencer brands given that most media talent has a finite shelf life. Morphe, a brand that scaled behind product partnerships with popular YouTubers like James Charles and Jeffree Star, this week filed for bankruptcy. Meanwhile, Sephora pulled Addison Rae's beauty line off of its shelves supposedly due to weak demand. Despite the lack of evidence that celebrities can build viable brands on their own, we’re still seeing new attempts. Gigi Hadid is giving it a shot with her new fashion brand Guest In Residence and John Legend is launching a skin and body care brand called Loved01.
🛍️ Pinduoduo makes its push into the US with an app, now downloaded 13M times, for low-priced goods coming directly from Chinese factories.
Bytedance (partner company of TikTok) is a pioneer of social commerce in China and Pinduoduo ($102B market cap) is the pioneer of a discount goods marketplace in China that uses group buying mechanics (another form of social commerce). TikTok has successfully scaled in the US and now PDD is aiming to do the same. In September 2022, PDD launched Temu, a marketplace for low-priced, made-in-China goods that are sourced from >11M suppliers,. The app has scaled to 13.6M installs by year end 2022. This model resembles Wish.com ($400M market cap) in many ways.
🛠️ Amazon’s launch of Buy with Prime shows that it is truly a infrastructure technology company, not a consumer company.
In Q3 2022, Amazon generated $106B in revenue from its retail business (inclusive of the emerging ads business unit and Prime membership revenue) and $21B from its cloud/technology services business. The retail business generated -$3B in operating income compared to the technology business’ +$5.4B. Amazon’s crown jewel is its ability to build and sell technology services to other companies. It now seems that Amazon wants to make its retail business a set of services that other companies can also use, starting with Buy with Prime. Buy with Prime extends fast + free shipping, a seamless checkout experience, and easy returns to online stores beyond Amazon.com. Early users of the service, like Trophy Skin, are seeing a 25% conversion lift on average. For a merchant to participate however, it must become a customer of Fulfillment By Amazon, Amazon’s logistics service. BigCommerce is pushing this service for Amazon. Meanwhile, Shopify is suggesting that its merchants avoid it and Walmart seems to be trying to copy the strategy by making its delivery capabilities available as a service to Salesforce Commerce Cloud merchants.
👚 Aritzia - the Canadian fashion brand that is winning over American women.
Aritzia ($4B market cap) is a Canadian fashion retailer that was started in the 1980s. In 2007, the company expanded into the US, and its business is thriving. Over the past 12 months, US revenue grew 78% to $745M which is now bigger than its Canadian business. The company is a pioneer of “everyday luxury fashion” with a goal of serving young women who “have significant disposable income, but don’t want disposable clothes.” The underlying business model is unique. Revenue comes from the company’s collection of 10 owned brands that the company uses to target different audiences, all of which can be found in Aritzia stores. The company is doing something quite rare for retail - showing that it can develop new brands while building on its existing portfolio at the same time. It is also extremely disciplined - it does little marketing, almost no discounting, has a tight return policy, and stands out for its meticulous focus on customer experience. My girlfriend Colleen really opened my eyes to this business with her excitement for her new puffer jacket from one of Aritzia’s brands, Super World.
📦 DoorDash launches Package Pickup nationwide to make it more convenient to return items bought online.
A recent survey suggested that 70% of US consumers are willing to pay for more convenient, premium return experiences. DoorDash is now launching such a service nationwide that allows consumers to hand their prepaid packages to DoorDash drivers who drop them off at local delivery services including UPS, FedEx, and USPS. The service costs a flat fee of $5 or $3 for DashPass subscription program members. This coincides with ecommerce merchants seeing rising return volumes. UPS estimates it will process a record 70M returns from holiday season 2022, up from 65M the year prior. PayPal is also aiming to make returns less costly for merchants with Return Shopping, a way for ecommerce merchants to convert online returns into exchanges for other items. It’s clear that the returns problem is going to be a growing challenge for ecommerce merchants, and I’ll be on the lookout for companies trying to help. ⬇️
📈 Inflation was 6.5% YoY in December, down from a 9.1% peak in June but well above the Fed’s target range of 2-3%.
Inflation continues to be elevated despite the Fed trying to stabilize prices by lowering demand via rate hikes. As a reminder, rate hikes drive up the cost of credit in an economy. About half of purchasing in an economy is on credit, so when it becomes more expensive, some purchasing slows down or disappears altogether. Given that inflation is still high, it seems likely that the Fed will continue rate increases in 2023 which will impact all economic sectors including consumer spending. Apollo, a leading investment firm, believes that “it will likely take 2 to 3 years— and more Fed hikes—to bring inflation under control.”
👖 Lululemon beat earnings but has a lot of inventory to clear.
Lululemon earned an adjusted $2.20 per share on revenue that rose 29% YoY to $1.86B. Wall Street had expected Lululemon to earn $1.86 per share on $1.77B revenue. However, inventory was up 85% YoY and analysts fear that the company’s outperformance was driven by a big increase in discounting which may continue going forward and cause margins to shrink. Tying into this, the company shared that it expects gross margin to decline 0.90-1.1% in their fourth quarter. Jefferies, an investment bank, said 41% of items at Lululemon were on sale in November 2022.
👩💻 Consumers value Amazon for its shipping speed and convenience but less so for product discovery.
A recent survey of Amazon shoppers shows that 50% of respondents would buy from Amazon over a product's own website even if the product was more expensive on Amazon. 50% say the reason is because of fast Prime delivery while 40% say it is easier than setting up a new account on another website. 35% say Amazon is how they discover new brands.
💵 Square wants to turn Cash App into an ecommerce marketplace.
Cash App became popular by enabling users to send each other payments at no cost, similar to Venmo. The app now has 80M monthly users and is becoming a hub for other capabilities including stock trading and, perhaps now, commerce. Square is in the process of rolling out a Discover tab to Cash App that will “enable users with an explorative mindset to discover new brands and merchants including those offering special deals and discounts.” Shopify meanwhile is experimenting with the same with their Shop app.
Notable Earnings / Financings / M&A
💰 Earnings: Chico’s, Macy’s, Lululemon, Aritzia, Walgreens, Uniqlo, Crocs, Costco, Fast Retailing, Albertsons, ASOS, Bed Bath & Beyond, Superdry
🤝 Financings: Loop Returns, Digital Village, Creative Fabrica
🤗 M&A: Skylar, Mielle Organics