November 6th, 2023: UPS reports bad Q3 2023 earnings, Amazon smashes their Q3 2023 earnings, what everyone gets wrong about platform decisions, and Omnicom Group acquires Flywheel Digital
Today’s episode of the Watson Weekly podcast is sponsored by Commercetools.
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It’s November 6, 2023 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
UPS Reports Bad Q3 2023 Earnings
Amazon Smashes their Q3 2023 Earnings
What Everyone Gets Wrong About Platform Decisions
Omnicom Group Acquires Flywheel Digital
- and finally, The Investor Minute which contains 5 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….
UPS Q3 2023 Revenue & Profit Declines
You know that cartoon when the train goes off the tracks and starts picking up more steam headed downhill? That is a good visual for the accelerating decline of UPS at the moment.
UPS thought their third quarter was going to be bad and it definitely was. At the same time, the company lowered its Full Year 2023 Guidance. I’m going to put my commentary on this UPS earnings call into three buckets: good, bad, and WTF.
On the good side:
* UPS claims 46% of Teamsters contract costs are in first year. On a 5 year agreement, this means after the first year they may be ahead of their competition on costs.
* Happy Returns should be a great acquisition. It costs merchants $33/unit to process a return - 20-30% of eCom packages returned - and now consumers can drop off with no label/no box, improving UPS delivery density. Will be available at 12k locations in the US, including 5,200 UPS stores.
* UPS has opened 7 dedicated healthcare facilities this year, which should be a growing, high-margin market.
On the bad side:
* UPS revealed that package diversion was not 1M as they previously reported, but was 1.5M, but that winback has been 600k on that number already, and accelerating week/week. 50% of that winback has been from FedEx.
* UPS is definitely seeing demand softness from their shipping customers who did not divert volume. This is not a great sign.
* UPS lowered their Full Year 2023 Guidance lowered to a midpoint of $91.7B.
Recall, at the beginning of 2023 the company had guided between $97 billion and $99.4 billion. Last quarter, the company lowered guidance to $93 billion. So, trends are not great. By the end of the year, could this end up being almost a $10 billion miss on the top line?
Finally, my favorite, the WTF category:
* UPS clearly has no idea what the consumer will do, producing a holiday volume growth range between 4% to 12%. This is despite the fact that UPS says they have good visibility into their top customers?
* UPS’s Top 20 customers seeing retail same store decline, and eCommerce sales decline more as spend shifts from good to services.
On top of that, they say volumes are recovering? The message is off. Where are we seeing ecom volume declining faster than retail? Nowhere this year I have seen.
To finish off the segment, revenues decline almost 13% year over year in the quarter to $21 billion, compared to $24 billion last year. These are accelerating revenue declines quarter over quarter, on a yearly comparable basis.
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Our Second Story
Amazon Q3 2023 Earnings Results
Last week, Amazon reported their earnings and it’s clear what is going right, and that is logistics.
The runaway success for Amazon in the past year has been the rollout of their regionalized fulfillment network. At Amazon scale, you cannot underestimate the difficulty of this transition. Sounds like the results have exceeded even their most optimistic expectations on costs to serve, speed, and customer satisfaction.
I believe this has been a very underappreciated "bet the company" type gamble. For Amazon, the formula has been the same for many years now and it’s something that Jeff Bezos used to talk about all the time: Faster shipping increases purchase frequency and range of merchandise purchased. Andy Jassy reported that the fulfillment performance was the fastest ever seen in the company’s history.
Here are my five biggest takeaways from Amazon’s earnings report:
*First, overall sales were up 13% y/y to $143 B, up from $127B last year, with operating income up 5x year over year on a quarterly basis.
*Second, the company reported that consumers are still cautious about price and trading down. Lower discretionary spending.
* Third, let’s go to Amazon Web Services. The division grew 12% y/y, which is solid growth on what is now a $92B run-rate business. At 30% operating margin. That is ridiculous.
* Fourth, the advertising division grew 25% y/y, very solid, accelerating from 22% y/y last quarter.
* Advertising is now a $50B run-rate business. Which itself is unbelievable, growing faster than AWS and at much higher operating margins.
Finally and perhaps you’re not surprised by this, but there was not a single mention of Amazon’s physical stores or grocery business. No questions about it at all!
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Our Third Story
What Everyone Gets Wrong About Platform Decisions
I’ve been thinking about this topic a lot lately, and it strikes me that the industry tends to focus a lot on what software platform to pick, but not very much about how to align your organization, make a proper decision, and then implement it!
While the procurement is focused on quadrants, waves, capabilities, and marketscapes, back in the world that IT and Digital leaders live in, it's not even just about the decision itself. It's about an organization adopting and executing its digital capabilities consistently in service of its business model and customers.
The platform is the least of the worries that a mid-market or Enterprise Digital leader has to focus on, and when it does become a worry, it is usually due to neglect.
Here are just a few concerns digital leaders face in evolving their results. For instance,
-- Some companies are more risk-averse than others. So unless a vendor is well-established with multiple references in their category, they will not even be considered regardless of the rest.
Your financials can also affect a platform decision. I find literally zero discussion about how a company’s gross margins affect their software decisionmaking.
Many companies simply don't have points of margin to give up to an unending list of SaaS vendors.
Your ability to execute is also critical. It’s very hard to succeed in a major digital platform evolution without great leadership and project management, managing up, taking one step at a time, and prioritizing. Forget what the requirements actually are for a second, if you only get to step 1 of your 200 item roadmap before you give up, what have you accomplished?
Finally, let’s talk about Agencies and Integrators for a moment. This is also another underrated aspect of making a platform decision. Few organizations can manage an entire platform in-house; almost everyone must rely on one or more third parties with specialized expertise.
Your ability to evaluate these resources is critical, and so these are some thoughts to take on your journey.
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And Our Last Story
Omnicom Group Acquires Flywheel Digital
The acquisition of Flywheel Digital by the corporate advertising and marketing firm Omnicom Group was announced last week.
From a positioning point of view, there appears to be good alignment. Omnicom works with large brands, and Flywheel is positioned to service Enterprise brands.
Flywheel Digital got it start by servicing the retail media needs of big CPG companies like Proctor & Gamble, Unilever, and Clorox, and the company services a significant amount of retail media spend.
This move highlights a few things to me.
One, large media firms are desperate to give their clients the ability to access large growing channels, in particular eCommerce and retail media.
Two, these same large media firms are desperate for talent. And make no mistake, in the agency space there is definitely a war for talent.
Third, the acquirer is notable and I think in the past you might have seen private equity making this kind of transaction, but an Omnicom strategic acquisition makes sense as well because mid-sized agencies are frequently getting gobbled up by larger agencies.
The growth of retail media is an accelerator in all this, and likely increased the urgency of the business for Omnicom. There’s just one question I have in all this, who at Omnicom is going to be making the ultimate decision where a client’s money gets spent, and what percentage will be on Amazon, and how is the attribution done?
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Hey, Watsonians, did you know that Shein has acquired UK fast fashion brand Missguided? If you were in our online community, you would! To stay on top of what’s going on in eCommerce and join the conversation, visit community.rmwcommerce.com today.
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
VisionAI Raises €5M In Seed Funding
VisionAI uses artificial intelligence to enhance search results and cross-selling for Shopify and Shopware merchants has raised €5M In Seed funding. This seems like a tenuous space to be in as Shopify has placed some big bets in the AI space.
Link: https://tech.eu/2023/10/23/visionai-raises-eur5m-to-help-e-commerce-merchants-take-on-amazon/
Second
Node Exits Stealth Raises $2.75M In Seed Funding
Node, an app-based customer-privacy and information solution, emerged from stealth with $2.75M in Seed funding. Interesting concept - their biggest challenge will be merchant adoption, as who will want to give away customer data?
Third
Popup Bagels Raises $8M Series A
Popup Bagels, a viral bagel, and schmear brand, has raised $8M in a Series A funding round for growth and leadership expansion. In the current economic climate, how does this fundraising make sense? Are the good times really still not over? How many bagels does one need to sell to repay that $8 million dollars?
Link: https://www.popupbagels.com/?tpcc=NL_Marketing
Fourth
UPS To Acquire Happy Returns
UPS has acquired Happy Returns from PayPal for an undisclosed amount. It never made sense for Happy Returns to be a PayPal company, and this will give a boost to the UPS returns experience.
AND FINALLY …
Nexus Capital Management Acquires Dollar Shave Club
Unilever plans to sell Dollar Shave Club to Nexus Capital Management for an undisclosed amount after seven years, retaining a 35% minority stake. The story of this deal is that Unilever kept a stake. It needs help to fund Dollar Shave Club’s customer acquisition needs, but isn’t ready to give up on the upside. That is at least one vote of confidence for the deal.
Today’s final word for the week of November 6th, 2023 is Growthy:
This was actually one of the funniest comments to come out of UPS CEO Carol Tome on the recent UPS 2023 Q3 Earnings Call. Growthy is how she put the returns business, which is clearly not a great trend for the industry but with the recent UPS acquisition of Happy Returns, it good mean good things for UPS.
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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.
