Daily Consumer #34 - All About Ads
Sharing learnings from the earnings calls of the large retail and internet players.
Author’s Note
Retail earnings suggest that consumer spending is healthy. This is corroborated by the fact that both Visa and Mastercard saw payment volume grow >10% YoY in Q4’22. But earnings from the large internet companies suggest that advertisers are turning cautious.
TikTok’s performance, retail media growth, and TV streaming ad interest may suggest the opposite. Perhaps advertisers are not cautious but are simply reallocating their budgets in search of performance.
Lastly, we may be getting a glimpse into a next era of the internet with the sudden and explosive interest in ChatGPT and other LLM-based technologies.
Unpacking the Industry
📈 Fed hikes 25bps to 5.25% in its continued battle to bring down inflation.
Core inflation was +5.6% YoY in January 2023, still well above the Fed’s +2% YoY target but down from a peak of nearly +7% YoY in June 2022. This led the Fed to raise the fed funds rate by an additional 0.25% . High inflation means more challenging times for the retail industry as discretionary spending curtails and costs rise. It remains unclear what will happen from here and to what extent further rate hikes will be needed. One thing is clear though - the Fed will continue to monitor and tighten the economy until the path to 2% is more evident.
🔍 Microsoft’s partnership with OpenAI makes it a contender in search and has provoked a reaction from Google and others.
OpenAI is a private company that has pioneered the development of large language models (LLMs) - models that are trained on a huge corpus of text data that is ultimately organized into 175B defined parameters. These models hold the potential to redefine how we search for information online as they can perform many actions for queries including translating, summarizing, expanding, and more. After seeing OpenAI amass >100M users for its ChatGPT product, Microsoft deepened its partnership with the company and plans to use their models to power its Bing search engine. Google is scrambling to demonstrate that it has similar capabilities and defend its search business. Meta and others are also scrambling to show that they can stay competitive with this technology.
☝️ LLMs will be the defining technology for ecommerce search.
LLMs have the potential to redefine how to find the products that we want online. This technology can ingest large amounts of information and can perform multi-step processes to ultimately steer a consumer to a final recommendation. What we do today by toggling criteria on the sidebar of Amazon and other stores will likely become fully automated. Vetted is a portfolio company of ours that is making huge strides around this.
📉 The big internet advertising platforms are seeing a slowdown in demand.
Meta now has 3.0B daily active users (+5% YoY) but Q4’22 revenue was -4% YoY to $31.3B. “Revenue remained under pressure from weak advertising demand, which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape.” Google doesn’t disclose user numbers (estimated >1B DAU) and Q4’22 revenue was -3.6% YoY to $59.0B. “We’re on a multiyear mission to make Google a core part of shopping journeys for consumers — and in a valuable place for merchants to connect with users. To that end, the company will seek to improve its consumer experiences with a more visual, immersive, browsable source.” Snap now has 375M DAU (+17% YoY) but Q4’22 revenue was relatively flat at +0.1% YoY to $1.3B. Pinterest now has 450M MAU (+4% YoY) and Q4’22 revenue grew +4% YoY to $877M. TikTok may be the counterpoint though - annual revenue is estimated to have grown by +172% to $12.5B in 2022.
📈 Retail media is the new growth sector in advertising.
McKinsey estimates that retail media networks could represent $100B in annual ad spending by 2026. Amazon is an emerging leader and saw Q4’22 ad revenue grow +19% YoY to $11.6B despite seeing total product sales -1.2% YoY to $70.5B. Amazon is also experimenting with new ad formats including a TikTok-style product and allowing DTC brands to buy display ads to drive traffic to their own websites. Walmart ad revenue meanwhile is estimated to be growing +31.5% YoY and is likely generating around $600-800M per quarter currently. Doordash and Uber are also pushing into this opportunity with Uber already on a $500M annual revenue run-rate which is growing 80% YoY. Target, Dick’s Sporting Goods, and others are following.
💁♀️ Influencers are driving $3.6B of social commerce via LTK.
Influencers driving commerce still feels like a relatively untapped opportunity in the US. LTK is an early leader here and their roster of 200K influencers drove $3.6B in fashion, beauty, home decor and other category sales. LTK arranges affiliate deals for its creators and provides the technology to track clicks and sales. “200 of LTK’s creators have made >$1M on the platform.” Meanwhile, at Index, we just announced our investment in Flagship, which is going even deeper on the technology front and enabling creators to stock their own digital storefronts with products from hundreds of desirable brands (let us know if you’re a brand that would like to get into their network). A key part to making creator commerce work is the element of product scarcity or providing a better price that consumers can’t get elsewhere.
🎮 Gaming and commerce are increasingly intersecting.
Prada announced that the brand saw 1,813% weekly website traffic growth after launching a mini-game called Prada Candy in Candy Crush, the popular matching mobile game with >200M users. Philips Norelco meanwhile announced that over >1M Roblox players visited their Roblox game called Shavetopia. Revolve announced its intentions to launch its own game for its large female community. Facebook, Instagram, and Snapchat dominated mindshare of previous generations of teenagers and brands followed. Are popular games the next platforms for brands to connect with consumers?
🟢 Roku is partnering with Walmart to enable commerce directly via connected TV ads.
Walmart will be the exclusive retailer enabling streamers to buy featured products fulfilled by Walmart directly on Roku. The partnership aims to enable purchasing directly at the time of inspiration. “No one has cracked the code around video shoppability. By working with Roku, we’re the first retailer to bring customers a new shoppable experience and seamless checkout on the largest screen in their homes – their TV.”
📺 TV streaming giants are launching ad-supported tiers and brands are getting in line.
Louis Vuitton, Tiffany & Co., and Bulgari are all early testers of Netflix ads. Chanel, Tiffany & Co., Old Navy, and L.L. Bean are early testers of Disney+ ads. What remains to be seen is how performant these ads are and how deep the targeting capabilities of the streaming platforms will be. Roku may be a source of inspiration.
🪞Demand for models is surging.
The demand for models is surging as brands need a constant stream of digital ads and social media content. Brands are specifically looking to create imagery that is designed to target a broader range of demographics which necessitates more models per campaign. With demand growing and budgets getting stretched, brands are increasingly turning to “street” casting where they find (usually via Instagram) and hire models that are not working with agencies and pay them $1.5-5K for a shoot versus $25K+ for agency models. It’s unclear where this is all headed. Will the end-state be centered around computer-generated models that puts an end to in-person shoots altogether?
Notable Earnings / Financings / M&A
💰 Earnings: Meta, Alphabet, Snap, Pinterest, Amazon, Costco, Uber, Procter & Gamble, L’Oreal, Coty, LVMH, Apple, Peloton, Levi's, Skechers, Tod’s, Zegna, Ralph Lauren, Deckers, H&M, Canada Goose, Estée Lauder, e.l.f., Shiseido, Adyen, Mastercard, Visa, PayPal, UPS, Prologis
🤝 Financings: Leaflink, Triple Whale, JOKR, Tabby, Cars & Bids, Chord, Oro, Zitti, Guayaki, Cudoni, Notch, Makeup by Mario, Emperia VR, SYKY, Bremont, Thirteen Lune, Wristcheck, Locad, Breef, Peggy, Replo
🤗 M&A: Skip, Keds, Winc, 3PM Shield, Expectful