May 22nd, 2023: Google’s AI and retail announcements, Klaviyo’s IPO filing, Target Q1 2023 earnings, and Shein’s marketplace expansion
Today’s episode of the Watson Weekly podcast is sponsored by Commercetools.
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It’s May 22, 2023, and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Google’s AI and Retail Announcements
Klaviyo’s IPO Filing
Target Q1 2023 Earnings
Shein’s Marketplace Expansion
- and finally, The Investor Minute, which contains 7 items this week from the world of venture capital, acquisitions, and IPOs.
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To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
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BUT FIRST in our shopping cart full of news….
Google's I/O Announcements Show It Will Continue to Innovate in AI and Retail.
The narrative in advertising and retail in the last 20 years has been a battle between Google owning search share, and Amazon slowly taking "first search" share of eCommerce.
While Microsoft has recently seized the initiative with ChatGPT, Google's quick response most likely means the next 10 years could be the same as it ever was.
* Google is likely not going to lose share of consumer searches to Microsoft’s Bing search engine. The reason is that ChatGPT can only seize the advantage over Google if Google’s Bard is inferior for a long time.
* Microsoft seems more likely to push its advantage in the business world. The average consumer may not use ChatGPT unless it is embedded in other apps, but the average business will, regardless of the size. The technology will be a labor-saver and productivity enhancer.
A few new things I saw from Google's push of AI into the front of consumer search:
- We have potentially seen the beginning of the end of the Google search results "Answer Box" to be replaced by AI responses.
- Google users will benefit from not having to filter as much, and the ability for the engine to understand multiple dimensions of user intent at the same time, and translate that to "meaning" better than ever.
At the end of the day, though, Google is reliant on the data you give it. And so the dynamic of brands needing to give high-quality data to Google Shopping to feed the engine will remain unchanged, and people aren't going to start giving that data to Microsoft unless there is some existential reason to -- and there simply isn’t one.
Who loses in an AI-driven search world?
Ultimately, I think the biggest losers in the content publisher market are those that were in the middle to bottom of the first and second pages of results. A lot of this content is sources trying to tell you how to make a decision or solve a particular problem.
Instead, the AI will tell you straightaway how to evaluate your query -- including the things you used to rely on Consumer Reports or Wirecutter for -- and what evaluation criteria are even important to begin with.
But none of this cuts out Amazon. Everyone needs solid logistics. That said, it is possible that Amazon could lose some "first search share" back to Google if it does not have a great response in the next 3-6 months.
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Our Second Story
Klaviyo Files a Confidential IPO Listing
The eCommerce world and my network are buzzing about the news that Klaviyo has confidentially filed for IPO later this year. There are a few points that have me curious:
1 - Economic signs are mixed at best.
Inflation is still slightly double the Federal Reserve's target of 2%, but it's down from 6-8%.
This sounds like progress, right?
Well, not so fast.
None other than Warren Buffett reminded the world that 2023 is going to look rougher than last year and was quoted saying "The majority of our businesses will actually report lower earnings this year than last year."
Employment numbers still look pretty great, historically speaking, and nowhere near what we were looking at during the 2008 timeframe.
Meanwhile, Q1 2023 was a bloodbath made up of not much M&A, few IPOs, and cautious capital expenditure forecasts.
So, I guess the economy looks mixed?
2 - eCommerce valuations get another test.
I asked industry friend Victor Castro what the last comparable to Klaviyo was; he went all the way to the end of 2021 with SaaS marketing company Braze to find a comparable. Make no mistake, Klaviyo at the end of 2023 will provide a solid test of the eCommerce SaaS IPO market.
Right now I am seeing even relatively solid SaaS companies being given 2-3x Annual Recurring Revenue (or ARR) multiples in whisper M&A talks. This is a far cry from the seemingly normal days of 10x ARR as the standard.
There are 3 reasons a public SaaS comparable is important right now.
One, acquirers have no idea how much their previous purchases are worth. Mergers and Acquisitions in the past few years valuations of mergers were inflated, but no one knows by how much. That Shopify just took a 75% write-down on its Deliverr purchase price gives some idea what the market thinks right now.
Two, new M&A could use a new baseline. Is it as bad as we think, or are we being too conservative? Right now, smart money says insiders in a 60-day Klaviyo lockup post-IPO may not fare well, but if there is an upside surprise, 2024 could be brighter than we think.
Three, IPOs have to kickstart at some point, right? Bad things tend to happen when private markets create all the liquidity in the market. You get fake valuations (all over), and other consequences like tax liability buildup (Stripe).
To wrap this segment, I’m also left wondering what Shopify’s payout will be.
One of the drivers of the Shopify ecosystem is Shopify's investments in the space. Recall in 2022, in addition to lighting $2.1 billion on fire with Deliverr, Shopify invested $100 million in Klaviyo at approximately $9 billion valuation, which you can calculate somewhere on the order of magnitude of 1% of ownership.
Klaviyo raised a total of $778 million to date.
While I saw that last year that Klaivyo was said to have $140 million in revenue, a recent IPO WSJ report puts Klaviyo's ARR at $575 million. Let’s assume this last number is correct.
Based on that, you don't have to be a math wizard to know that Klaviyo's valuation is going to be challenged. If Klaviyo is valued at even 10x Annual Recurring Revenue, that would mean it’s valued closer to $6 billion than the $10+ billion I’m sure it would like to go to market. I think for now, that is probably a good range for Klaviyo given that the company is a category leader.
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Our Third Story
Target Reports Q1 2023 Earnings
Last week Target reported its Q1 2023 earnings and, while they were good from an expectations point of view, they still pointed to warning signs. I gathered a few economic insights from the call.
Overall, frequency and replenishment seems to be the key to retail at the moment. And most retailers or brands either have it or they don’t. If they have it, then consumers continue to shop those items, even as they make tradeoffs.
If retailers don’t have it, sales are off. I think this is the definition of “muddling through.”
Here are a few tidbits:
The company is maintaining 2023 full year guidance, but predicting comparable sales declines in Q2
0% comparable sales growth overall. The digital comparable sales decline of 3.4% is offset by comparable store sales growth of 0.7%.
Comparable traffic is up 0.9%. The phrase “could be worse” keeps ringing in my mind here.
Inventory levels are down by 16% year-over-year which reflects continued inventory discipline, likely contributing to an operating margin achievement of 5.2% - ahead of last year and this quarter’s guidance.
Target’s “other” revenue increased 10.2% - less than half the growth of Amazon Q1 advertising revenue growth of 23%, and significantly less than Walmart’s 41% advertising growth. Advertising is the biggest missed opportunity at Target, and second place is not close.
97% of sales were fulfilled by stores. Always an interesting datapoint to track. Target operates differently than most eCommerce operations.
Total revenue of $25.3 billion grew 0.6 percent compared with last year, reflecting total sales growth of 0.5 percent and a 10.2 percent increase in other revenue. I’m assuming other revenue is advertising related?
Back to frequency for a moment, here is how categories are breaking down across mass merchandise right now at Target: beauty reported mid-teens growth, food & beverage high-single digits, and household essentials low single-digits. Discretionary categories like home and apparel posted declines of mid-single to low double-digit declines.
Target’s investments in same-day services are paying off with greater than 5% growth in pick-up, drive-up and same-day delivery. However, pick-ups and drive-ups tended to be essentials whereas delivery items tended to be more discretionary.
Another data point I found interesting was that Target Circle members spent 3x more than non-members. Executives on the call noted several times that rather than doing broad-scale discounts, they were more targeted and personalized to specific segments instead.
Overall, I’m not too surprised by Target’s cautious earnings and guidance except for one thing. While the retailer is expecting Q2 to be worse than Q1, it is expecting much better results in the second half of the year. The reason is that Target has a high exposure to the upcoming retail calendar events like back-to-school, Halloween, Thanksgiving, and Holiday.
One last word, the funniest thing I noticed on the call was that the company all but said that due to the huge collapse of Bed Bath & Beyond there are market share gain opportunities it is poised to take advantage of. Of course, it didn’t mention Bed Bath & Beyond by name, but the implication was clear to me.
[References:]
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And Our Last Story
Shein Launches New Global Marketplace
The hyper fast-fashion retailer Shein last week launched what it is calling its global integrated marketplace in Brazil, to be followed shortly by a launch in the United States. Recall that this was rumored to be coming based on a report from Q4 of last year. Here are a few points I thought were interesting about the launch:
Shein is planning to share some amount of real-time data and insights with its sellers.
It’s not clear what categories Shein is prioritizing. Juozas at MarketplacePulse noticed that Amazon brand Anker was already listed on the US marketplace as a seller, despite Shein being a fashion and beauty-oriented website. Who is looking for electronics on Shein?
Here are a few thoughts that came to my mind:
First, I’ll give Shein one thing, it has the traffic to build a good-sized marketplace. The big question will be, are shoppers looking for these items on Shein rather than going to Amazon? The answer to that question could determine if Shein becomes a serious Amazon competitor in the future.
Second, what would the average selling price on a marketplace like this be? I’m not sure what the fees are, but how does a seller make money on items that are assuredly lower than a $15 price point?
Third, while it’s not clear yet what data and insights are being shared with Shein sellers, it’s conceivable that any data shared could be useful for sellers even beyond Shein’s marketplace itself.
[References:]
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Hey, Watsonians, this is Rick. Want to get my take on a burning question and have me answer on this podcast? You can start a topic on the RMW Commerce Community and just ask!
The Community is full of eCommerce diehards just like you talking about important eCommerce issues. Just last week one of the popular topics added by Hendrik included that the eCommerce company Boxed may be preparing for bankruptcy. Ouch!
You can contribute to the conversation at community.rmwcommerce.com.
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It’s That Time, Friends, for our Investor Minute. We have 7 items on the menu today.
It’s always a good sign when so many Watsonians are raising money. I feel like I have a personal connection to a lot of today’s entries.
First
Wearable warehouse device startup Ox raised a $12.6 million Series A to drive worker productivity improvements.
Ox's leading innovation is a patented wearable device experience that features novel voice capabilities and visual-based workflows directed through artificial intelligence.
Given that labor is one of the most difficult things to scale in the supply chain, it makes sense that there are startups focused not just on robotics, but also on maximizing the productivity of human labor. CEO Charu Thomas’ Ox does just that. Congrats to my friend Charu on the fundraising!
Link: https://www.yahoo.com/lifestyle/ox-raises-12-6m-pioneer-131400584.html
Second
Shopify agency Half Helix acquired Able Sense to add more Shopify B2B eCommerce expertise.
Both companies are considered leading agencies in the Shopify world, and so the continued expansion makes sense. Congrats to Mac King and Peter Humphrey and my friends at Half Helix on the acquisition.
Link: https://www.halfhelix.com/half-helix-acquires-able-sense/
Third
Wholesale commerce platform Foundation raised a $3 million seed round.
The whole idea behind Foundation is that wholesale eCommerce is an afterthought for most direct-to-consumer eCommerce platforms.
The founder of Foundation, Shiv Agarwal, is a serial entrepreneur and was one of the original founders of Fabric before leading that company to raise money and hire its current CEO Faisal Masud. Congrats to Shiv on his new journey.
Fourth
Pietra brand studio closes a Series A extension worth $16 million.
Pietra has had a long journey from its previous business model attempting to help diamond creators sell engagement rings. Instead, the company pivoted into being kind of a brand incubation studio helping diamond creators with branding, sourcing, channel expansion, and logistics, which seems to put its brands on the Shopify platform.
Link: https://techcrunch.com/2023/05/02/pietra-creators-dtc-commerce/
Fifth
Customized nootropics brand Thesis recently closed a funding round of $8.4 million.
Is it a placebo? Is it a nobo? The investment was interestingly led by a partner at Unilever Ventures, which gives the brand a potential future exit as well. The company originally came out of New York-based accelerator XRC.
Sixth
Shopify invests in Nigerian fintech firm Nomba led by Base10 Partners
This mention is interesting because I don’t typically track eCommerce developments outside of North America too closely. The fact that Shopify participated in the funding makes it interesting.
While Shopify continues to position itself as an eCommerce platform for entrepreneurs worldwide, in emerging markets it looks to be making bets on other platforms too - recognizing that one size may not fit all. In Nigeria, Nomba offers small and medium merchants the ability to accept payments via mobile and POS terminals.
Likely this investment gives Shopify the ability to watch this market a little more closely.
AND FINALLY …
Indian-based omnichannel technology platform provider Ace Turtle raised $34 million in a Series B.
AceTurtle handles the software and retail operations capabilities for European and American licensing brands like Wrangler and Toys “R” Us operating in Indian and Southeast Asian markets.
Congrats to my friend Nitin Chhabra on the new round!
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That’s all for this week! Till next time, Watsonians.....
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Hi, I’m Rick Watson, CEO and Founder of RMW Commerce Consulting and host of the Watson Weekly podcast - your essential eCommerce Digest.
Our production partner for the series is CitizenRacecar. The show is produced by Jose Baez; Production Manager, Gabriela Montequin.
To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
