Global Marketing Monitor: Weekly Market Trends (September 12, 2021)

Apple App Store Ruling ReadThrough For MarketersOne of the past week39s biggest news items relevant to media industries relates to a US court ruling on Friday relates to the Epic Games amp8211 Apple lawsuit As a consequence of this ruling Apple will effectively no longer be allowed to prohibit developers from using thirdparty payment mechanisms which in turn should allow companies who sell digital products such as game developers and other media companies to either establish their own payment systems or use payment systems from other companies which would charge less than Apple39s 30 commission rateOn its face the news certainly has favorable financial consequences for companies that sell virtual products today Perhaps more interestingly we can contemplate a world where manufacturers of physical goods choose to invest more heavily in virtual products or digital services knowing that they won39t have to share as much as they would have to presently Consumer experiences will also likely change if developers who today route consumers to websites to make payments can now do so within their apps instead Overall a lower transaction cost environment for digital products within apps should lead to more development of appbased activities for all kinds of marketersDTC Companies Securities Filings From Allbirds and Warby Parker Provide Extra Insights Into Important Business TrendOne of the better illustrations of quotcreative destructionquot in the economy has been the emergence of directtoconsumer brands over the past decade While the specific definition of a DTC brand can be somewhat subjective we think of them as including a wide array of companies primarily in highly consumerfocused categories such as apparel food and packaged goods Historically they featured digital storefronts along with some elements of customer service and fulfillment aided by advertising strategies that relied on high degrees of targeting on social media platforms While many of these companies sold goods on an individual product basis they also commonly featured subscriptionbased business models Perhaps most notably many of them outsourced the bulk of their operations including manufacturing Putting all of these features together many companies quickly established themselves as important challengers in their categories or new sectors adjacent to older onesThe perceived successes of these companies amp8211 or at least the highprofile highvalue venture capital fundraisings which were completed paired with the occasional eyebrowraising sale to a strategic buyer at a time when global packaged goods companies were experiencing low growth amp8211 led to a significant amount of attention on the space However as early growthhacking strategies reached their limits many DTC brand owners adapted and began to embrace traditional strategies such as selling products through traditional retail environments whether via owned stores or through third partiesThe newsworthy update to this sector relates to recent IPO filings by two of the bestknown entities within the DTC space Allbirds and Warby Parker Last month both companies filed documents with the SEC as part of the process of becoming public companies They followed on IPOs earlier this year for Honest Company and BarkBox as well as prior public offerings from BlueApron Casper Hello Fresh Peloton and Purple among others For students of economic change the broader number of companies with public data is helpful as we have increasingly meaningful data through which we can better understand DTC business modelsAmong the most interesting takeaways from our read on filings from these companiesAdvertising expenses as a percentage of revenue remains remarkably if unsurprisingly high with figures ranging from 1030 on an annual basis These percentages appear to be declining in general at the individual company level although all companies making disclosures did show growth in absolute spending during 2020 over 2019DTC companies are relatively small despite the positive size bias associated with companies that tend to become publicly listed Among this group of companies Hello Fresh and Peloton generate revenues that are measured in the billions However all of the others and presumably almost every other company we might describe as a DTC business generates revenues at a smaller scale Most of the companies listed here generate hundreds of millions of dollars annually amp8211 roughly the size of a midlevel brand at a large packaged goods or apparel company For a point of reference if there were even 100 DTC companies with 500 million in revenue and there almost certainly are not those companies would collectively generate only 50 billion a figure which would be exceeded by three individual CPG companies While certainly successful as startups go few of them can be considered to be worldbeating at this point in timeRecent revenue growth trends are arguably more a function of industry product exposure and low market penetration levels rather than because these are DTC businesses per se For example pet ownership food delivery and athome exercise all grew rapidly through the pandemic and companies focused on those opportunities are growing quickly By contrast the need for personal care bedding eyewear and footwear was strong but much less robust over the past yearAlthough there is only a limited history to point to at each company39s current scale most of the group is not cash flow positive This point is important because arguably most incumbent companies in these sectors with brands generating hundreds of millions of dollars in revenue would probably be cashflow positive Of course investment in future growth is important and losing money in support of that growth can be positive but it39s far from certain that DTC business models can ever achieve the kind of profit or cashgenerating levels that incumbents in the sector are used to seeingIt39s important to keep in mind that many DTC businesses will surely prove their durability and become substantially larger in the future than they are today Even at a small scale their high intensity of advertising as a percentage of revenue is important because they remain outsized contributors to the growth of media especially including digital platformsamp160 However the bigger impact of the emergence of the DTC concept relates to the new approaches they have pioneered as they provide incumbents in related sectors with new business models to consider for their legacy brands or those in which they will invest in the future Given the scale advantages incumbents possess in manufacturing and distribution they may be able to manage such businesses more profitably tooPackaged Goods Companies Are Growing Rapidly Vs PrePandemic Levels Despite Limited Role For DTC Brands In Their Portfolios At PresentIncidentally whatever fears the traditional packaged goods companies might have had about DTC businesses have surely abated based on what we saw during the most recent quarter Over that time the global CPG industry grew 89 in 2Q21 led by a massive rebound in beverage sales and still grew 46 on a twoyear compounded basis on broader strength which allowed the category to perform well above pre2019 levels of under 4 Overall the pandemic caused a wide range of changes in consumption and spending patterns and so too has the recovery But above all the packaged goods industry appears to be in very rude health despite many ongoing challengesSource GroupM analysis of company reportsLooking at subcomposites of different categories of CPG Food was relatively stable and grew by 49 annually similar to levels observed throughout the pandemic as presumably consumers have eaten at home more often than may have been true in prior times and when growth for the group was typically closer to 2 NonAlcoholic Beverages expanded by a headlinegrabbing 296 in the quarter although following last year39s 189 secondquarter decline the average growth rate over this period amounted to 25 amp8211 exactly where it was in 2017 and 2018 As alluded to above Petcare units tracked here are sustaining pandemicera trends with the category up 96 organically building on last year39s 141 rate of expansion Personal Care appears to be quotback to normalquot growing 38 in the quarter despite the easy comparable with a slight decline In most years over the past five this category has grown on an annual basis in a range of 13 so this quarter39s twoyear average would fall within that range Meanwhile Home Care is exhibiting somewhat volatile trends within the category across the five companies with business units squarely in the field we can calculate 14 organic growth in the most recent quarter building on last year39s 129 baseSource GroupM analysis of company reportsChanges in China39s Technology Industry Changes For Global Marketers To Adapt ToIn what is probably one of the biggest trends for the global media industry this year in recent months the Chinese government has taken significant actions impacting their domestic technology industry with several new items emerging in the past few weeks alone Directly affected companies include many of the world39s largest sellers of advertising with capital raising antitrust law enforcement data privacy and corporate governance activities all representing affected areasBeginning with the cancelled Ant IPO in November last year and continuing with the fallout from Didi39s public offering in June of this year last month came a report from Reuters stating that Chinese regulators are considering requiring companies seeking US listings to quothand over management and supervision of their data to statebacked thirdparty firmsquot the government These actions combined with the sudden ban in July on forprofit education companies effectively limited access to foreign capital which primarily impacts tech companies Fines levied or threatened for violations of antitrust laws such as the nearly 3 billion fine applied to Alibaba in April represented another front for the government39s more active role in the sector And then in August the government also passed a new data privacy law set to come into effect in November Under this backdrop there have been many senior executive changes at companies operating across the sector as well as we saw at Bytedance and Pinduoduo earlier this year and at JDcom just this past weekWith similarly wideranging implications media content has now come into focus with a flurry of announcements made as the summer wound down First on August 25 the Cyberspace Administration of China announced a series of measures for the online world related to celebrities including the banning of celebrity rankings based on popularity or other consumerdriven assessments increased scrutiny of fan clubs restrictions on inducements to consume celebrityrelated products and prohibitions on the sharing of gossip Second on August 30 the National Press and Publication Administration announced restrictions on video game usage by individuals younger than 18 to fewer than three hours per week And finally on September 2 the National Radio and Television Administration announced its own series of measures for the Chinese television industry which included prohibitions on celebritydriving elements of the medium amp8211 such as quotIdolquotlike programs amp8211 and restrictions on the use of talent who quothave lost morality in their words and deedsquot Perhaps most notably the new rules also prohibit quotgirlyquot aesthetics for men who appear on televisionAll of these changes are attentionworthy for global marketers operating in China as they neutralize content many consumers might otherwise have been heavily engaged with Consequently strategies that marketers might apply elsewhere around the world may diminish in relevance within China and may require some global brands to take divergent approaches in different marketsFor example some categories rely heavily on celebrities in their marketing Brands operating in China will be less able to do this and may instead choose to focus more on product features or pure performancebased strategies Similarly brands that focus on exclusivity in some parts of the world may need to focus on more egalitarian elements of their products in ChinaMore generally as more restrictions are applied to content production activities brands will also need to be increasingly mindful of divergences between cultural preferences expressed in media that is widely distributed and the attitudes that consumers convey in their daytoday activities The ways in which brands quotborrowquot brand equity from professionally produced content in most of the world may become less relevant in China over time if this occursFinally while videogame ad inventory targeting under18s is not by itself particularly meaningful for global marketers gamingrelated ads targeting over18s are increasingly important To the extent that reduced video game consumption negatively impacts the development of the gaming industry in China or causes a reduction in consumption as younger audiences age the relative importance of gaming as an advertising environment may be lower in China vs the rest of the worldCopyright and Republished with permissionPhoto courtesy of GroupMClick the social buttons to share this story with colleagues and friendsThe opinions expressed here are the author39s views and do not necessarily represent the views of MediaVillagecomMyersBizNetamp160

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Global Marketing Monitor: Weekly Market Trends (September 12, 2021)

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Brian Wieser

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