October 31st, 2022: Amazon’s New Ad Capabilities, Google’s New Shopping Experience for Search, Instacart Pushing Off IPO, and UPS Q2 Earnings
It’s October 31, 2022 and this is the Watson Weekly - your essential eCommerce Digest!
Happy Halloween to all the spooky Watsonians in the world!
Today on our show:
Amazon Announces New Ads Capabilities at Unboxed
Google Launches New Shopping Experience for Search
Instacart Pushing Off IPO as Valuation Continues to Drop
UPS Q2 Earnings Show Continued Great Execution
- and finally, The Investor Minute, which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.
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BUT FIRST in our shopping cart full of news….
Amazon Announces New Ads Capabilities At Unboxed
Last week, Amazon held its popular advertising event here in New York City.
Some of the capabilities released are more for technologists and agencies than for brands directly. Jeffrey Cohen, an Amazon tech evangelist, posted on LinkedIn about the updates and highlighted the following:
Certifications were also added for advertising agencies that use Amazon’s Marketing Cloud, which is a cloud-based database to expose all of Amazon’s advertising network analytics data.
A new beta for Amazon Rewards credits is now available in Sponsored Display ad units, which can advertise promotional incentives for clickthrough.
A new video tool, which will allow advertisers the ability to create new video-based advertisements. Amazon has also rolled out video ads to the Amazon Sponsored Display advertising network.
Overall I took a few things away from this announcement.
First, Amazon’s team on this platform is extremely experienced and is laser focused on not just the direct needs of brands, but also on the needs of agencies and the technology providers used by agencies.
Second, advertising still represents a tremendous opportunity for margin growth at Amazon, with direct share gains from Google and Facebook, the largest players in the market today.
Given this backdrop, I continue to see Amazon Advertising along with Amazon Web Services leading the profitability push for overall Amazon.
Finally, in the last year it has become largely impossible for any single brand to fully understand the depth of Amazon Advertising’s offerings, and the scary part is that we are still in early innings.
This will push more Amazon Ads work into technology companies and technology-powered agencies. I also predict that even relatively sophisticated advertising agencies will not be able to keep up, leading to a great fragmentation and specialization among even dedicated Amazon advertising agencies.
[References:]
https://www.linkedin.com/pulse/unboxed-keynote-product-announcements-live-from-nyc-jeffrey-cohen/
https://advertising.amazon.com/resources/whats-new/amc-instructional-query-library
Our Second Story
Google Launches New Shopping Experience for Search
Well, I am worried about Google’s eCommerce efforts again as its latest shopping tools were finally released to the market. Remember a few weeks back I talked about Google using the shop keyword to design a landing page focused entirely on eCommerce.
Seemed like a good idea. The execution is what I’m worried about. At the time of recording, you can search for a product like “shop iced coffee machine.”
For this term, Google puts pictures of coffee machines all over the page. On the right side or the top, there are ads that take you off the site. More integrated with the search results are extremely similar but different pictures of iced coffee machines that keep you on the site but put you in kind of a modal product detail page experience, which can be best described as some kind of psychotic version of Wirecutter.
And herein lies the problem with the Google approach. Retail is a huge part of Google’s advertising business, so it can’t kill ads altogether. But it also seems like Google can’t decide if it wants to get you off the page where it can monetize you, or if the company actually wants to keep you on the page to help you make a better decision.
Who knows where this will end up Watsonians, but my Magic 8 Ball says Google will end up shutting down yet another eCommerce experiment after yet another confusing A/B test fails.
What is needed for real progress at Google? Real willingness for the commerce and ad teams to work together and even sacrifice some of that ad revenue in the face of actual consumer goals.
[References:]
Our Third Story
Instacart Pushing Off IPO as Valuation Continues to Drop
In March the CEO of Instacart Fidji Simo mentioned that she wanted to “build a company, not IPO." I guess be careful what you wish for?
Bloomberg reported last week that Instacart has already shelved its plans for a 2022 IPO. You almost feel a little bad for Instacart. The company announced an IPO in May and even then, it didn't seem likely to happen.
But the company must have have been planning this for quite a while. What's happened since then?
Oh, just that …..
- More and more retailers want control over their customers.
- Not to mention that Instacart has been acquiring companies rapidly to build service revenues and change its positioning in the market.
- And many investor valuation metrics have switched to EBIT rather than revenue. 3x EBIT seemed common earlier this year.
- Industry watchers know that Instacart has _already_ reduced its valuation several times in the past year. From a valuation of $39 billion down to $13 billion. Ouch!
Let’s pretend you are going to use that valuation to predict EBIT at a 3X EBIT; do you think that Instacart has $4.3B in EBIT? I can barely even keep a straight face talking about it now.
Let’s go back to basics then.
Reports I have seen have revenue at $1.8 billion in 2021. Let's say it's growing 25% year over year – which, to me, is incredibly generous in this environment. Even by the old-school metrics of 3x revenue valuation, it would be worth something like $7 billion.
Did I mention Instacart just repriced to $13 billion?
I don't know about you, but I think it's very obvious that previous valuations were not even based on revenue. They were based on GMV and growth.
As a SaaS company, it could get higher valuation multiples, but what percentage of this revenue is SaaS? Less than 20% is highly likely.
How much is Instacart really worth? Likely a fraction of that $13 billion, and something more in the neighborhood of $2 billion or $3 billion.
Of course, people are still buying groceries. But the problem is Instacart offers premium groceries. What’s really happening is that consumers have significantly slowed down buying groceries inefficiently and are turning to discount grocers and wholesale clubs to make up the difference.
The bottom line here is that Instacart pulling its IPO was likely based on a very simple reason — no lead investor was willing to set a price on the initial public offering and potentially look stupid in the process.
[References:]
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And Our Last Story
UPS Q3 Earnings Show Continued Great Execution
Last week, Carol Tomé’ and the UPS management team reported the company’s Q3 2022 earnings and in the process gave us all a roadmap to planning in uncertain environments.
One key message?
"Control what you can control."
Preach this to your employees and management teams.
First a few highlights from UPS itself, which reaffirmed its guidance to deliver on its full-year targets.
1 - The Q4 peak is expected to be later in December compared to last year.
Does anyone even remember last year at this point? Here’s a refresher: . “There will be no inventory so better buy in October.” So of course this year’s peak will be delayed.
This also means that the early discounting and deal days you are hearing about will not be dramatically affecting spending patterns.
2 - Analyst firm IHS estimates that the United States GDP is expected to grow 1.7% this year, and global the GDP to grow 2.8%. Both of these numbers are lower than earlier predicted.
3 - It’s well known to UPS followers that Amazon is UPS’s largest customer, which over time is reducing volume. This has a big impact on UPS, which is leading to year-over-year declines in overall volume. The bad news/good news for UPS in this is that Amazon is most likely UPS’s least profitable customer!
4 - Overall, future margin improvement will come more from productivity improvements in the business, like RFID, facility automation, and driver scheduling improvements, rather than price increases going forward.
5 - UPS went on to mention that revenue, operating profit, and operating margin all up year-over-year, even with declining volume.
One new part of the news that I had not previously heard is that CommerceHub was named as a partner for UPS in upstream density improvements. This means UPS isexperimenting with order management systems and dropship providers, attempting to ship more items in the same box, thus reducing shipping cost per parcel, or to get more parcels on the same route on the same day. This is smart experimentation, but it’s unclear how fruitful it will ultimately be.
There was a short but illuminating section from Carol Tomé about how UPS plans for 2023. These principles should be shouted from the rooftops to all leaders.
1 - Stay on strategy. For UPS that is about improving customer and employee experience. Not making wild fluctuations in approach keeps employees steady.
2 - Build more agility in your plan than ever before.
To me, this means a "test and learn" approach. Rather than commit to large spending yielding possibly bigger volume discounts in the beginning of the year, build it more incrementally. Watch results, and invest as it grows.
3 - Build a conservative plan.
The consequences of overspending could be catastrophic if you build to the higher end of a plan because now you need to invest in staff and facilities to hit that plan.
Instead, project revenue more conservatively and invest/spend more conservatively at first. Chase the upside but follow it, don't lead it.
[References:]
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It’s That Time, Friends, for our Investor Minute. We have 5 items on the menu today.
First
Altana raised a $100 million Series B to dund shared global supply chain Visibility.
The company works in many industries including pharmaceuticals to ensure that global companies have visibility into all upstream supply chain procurement and downstream distribution globally, and that the information is secure and accurate.
Second
Startup Trendsi raised a Series A to help sellers dropship more efficiently.
Are we still funding pre-packaged Shopify dropship networks in 2022? About 5 years ago you could not make any money on Amazon reselling someone else’s product. You need to be a manufacturer to achieve any kind of gross margins.
I believe that day has arrived in online retail as well. Unfortunately, I’m not sure this ends well.
Third
Retail technology company Veeve raises money to turn regular shopping carts into smart ones.
Instead of trying to get supermarkets to buy all new carts, the startup is focused on upfitting existing carts.
While the cart technology itself is interesting, the retail media angle of this where I think all the money will likely come from.
Link: https://techcrunch.com/2022/10/12/veeve-6-7m-smart-cart/
Fourth
Retailer Tractor Supply bought smaller rival Orshein as a rollup was cleared by the FTC.
Tractor Supply is paying $320 million for the retailer, which has more than 150 stores in the Midwest and the South.
AND FINALLY …
Social commerce startup Elenas secured $20 million to help more Latin American women sell online.
Elenas estimates there are 11 million women in Latin America who still sell products through catalogs or door-to-door sales methods. Digitizing these sales by turning them into modern social media influencers is the idea.
The company is focusing on an under-banked population so it is looking to get into financial services as well.
I love the focus on an underserved population in a niche market.
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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 Alex Brouwer; 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.
