PETITION provides analysis, commentary and curated links about financial markets, distressed investing, restructuring and bankruptcy.
Our primary product is an a$$-kicking email briefing sent on Wednesdays and Sundays.
Subscription-based razors? Check. Subscription-based contact lenses? Check. Now the direct-to-consumer digitally-native-vertical-brand world is coming for your teeth. Direct to consumer teeth alignment? Check. Subscription-based dental floss? Check. Subscription-based bluetooth compatible toothbrushes. Check. No. This is not a joke.
To continue reading, you must be a PETITION Member. Become one here.
Earlier this week Fox Networks Group’s ad sales chief floated the idea of cutting commercial ad time down from 13 minutes to 2 minutes an hour in a speech he gave in Los Angeles. This is interesting on a number of levels.
First, this would pose a real challenge to advertisers who, undoubtedly, would have to fight for limited but costly supply. Yes, television advertising has flat-lined, but it is still one of the most effective means to get brand messaging out.
Second, such a maneuver could have the effect of squeezing Netflix ($NFLX). Numerous underwriters highlight that Netflix can always open the ad spigot to help it grow into its ever-growing capital structure. And they’re not talking about product placement. If ads are eliminated elsewhere, will consumers focused on the ultimate user experience tolerate ads before watching treasured content like Ozark or 13 Reasons Why? Or will that result in friction and, in turn, leakage? If this decision gains traction, this as-of-yet-untapped revenue stream for Netflix could be collateral damage.
Ultimately, minimal advertising may help draw users back to content. But it will create all sorts of issues for brands trying to sell product AND, by extension, the advertising companies trying to place those brands.
To point, earlier this week the Financial Times reported that “[h]edge funds have amassed bearish bets of more than $3bn against the world’s largest advertising companies in an attempt to profit as the industry undergoes wrenching disruption and slowing growth.” Publicis, WPP, Omnicom Group ($OMC), and Interpublic Group of Companies ($IPG) are all short targets of funds like Lone Pine and Maverick Capital. With corporates like Proctor & Gamble ($PG) cutting ad spend and Facebook ($FB) and Google ($GOOGL) monopolizing same and building custom tools that cut out the middlemen, this is an area worth continued watching.
The Walking Company. Payless Shoesource. Aerosoles. The bankruptcy court dockets have been replete with third-party sellers of footwear with bursting brick-and-mortar footprints, high leverage, scant consumer data, old stodgy reputations and, realistically speaking, limited brand value. Mere days away from a Nine West bankruptcy filing, we can’t help but to think about how quickly the retail landscape is changing and the impact of brands. Why? Presumably, Nine West will file, close the majority of - if not all of - its brick-and-mortar stores and transfer its brand IP to its creditors (or a new buyer). For whatever its brand is worth. We suppose the company’s lenders - likely to receive the company’s IP in a debt-for-equity swap, will soon find out. We suspect “not a hell of a whole lot”.
Back in December, we snarked about Proctor & Gamble’s efforts to innovate around cheaper razors in the face of competition from digitally-native vertical brands like (now Unilever-owned) Dollar Shave Club and Harry’s. The struggle is real. Per the Financial Times,
In 2016, revenues of the large consumer good companies — from beer to soft drinks, food and household products — grew at their slowest rate since 2009, when the recession took hold. The 207 results for many of those companies that have reported remain weak.
A few weeks ago the Interactive Advertising Bureau released a new study entitled, “The Rise of the 21st Century Brand Economy.” It is well-worth perusing. In fact, we’re a bit late to the game here because we wanted to give it an earnest review. The upshot? Consumption habits are rapidly shifting away from third-party wholesalers like Nine West towards direct-to-consumer relationships. With nimble, oft-outsourced supply chains, DTC e-comm brands are stealing market share from consumer products manufacturers and distributors. In the aggregate, it’s creating real shocks. Some significant themes:
Economic benefits are accruing to firms that create value by tapping into low-barrier-to-entry, capital-flexible, leased or rented supply chains. These include thousands of small firms in all major consumer-facing categories that sell their own branded goods entirely or primarily through their owned-and-operated digital channels.
First-party data relationships are important not for their marketing value independent of other functions, but because they fuel all significant functions of the enterprise, including product development, customer value analysis, and pricing.
An arms race for first-party data is influencing strategy, investment, and marketing strategies among major incumbent brands across all categories.
The significance of these themes cannot be overstated. Putting some numbers around them:
In the razor category, Gillette’s share of the U.S. men's-razors business fell to 54% in 2016, from 70% in 2010. Almost all of that share has shifted to Dollar Shave Club, Harry’s, and several other digital primary sellers.
In pet food, subscription service The Farmers Dog is averaging 40-50% revenue growth monthly, in a U.S. pet food market projected up 4.4% in 2018.
Grocery store revenue growth is projected to be about 1 percent annually through 2022. Over that same period, the market for Meal Kits is expected to grow by a factor of 10x.
Amazon ($AMZN) has meal kits. Walmart ($WMT) just launched meal kits. Albertsons purchased Plated. Meanwhile, the bankruptcy courts have a laundry list of grocers on their dockets.
Saving the most relevant to Nine West for last,
Sales at U.S. shoe stores in February 2017 fell 5.2%, the biggest year-over-year tumble since 2009. Online-only players like Allbirds, Jack Erwin, and M.Gemi have gained nearly 15 percentage points of share over five years.
Yes, the very same Allbirds that is so popular that it is apparently creating wool shortages. Query whether this factor will be featured in Nine West’s First Day Declaration with such specificity. Likely not.
Draper never would’ve made it in the age of #MeToo anyway.
This week, Proctor & Gamble ($PG) announced that it cut its digital ad spending by approximately $200mm, a shot across the bow of certain undisclosed big ad players (cough, Google) and a major blow to the middlemen ad agencies that seem to be caught in a maelstrom of disruption. Back to that in a sec. More on P&G,
P&G, however, has not cut overall media spending. Funds have been reinvested to increase media reach, including in areas such as TV, audio and ecommerce media, a company spokeswoman told Reuters.
Not yet, anyway. P&G intends to cut an additional $400mm in agency and production costs over the next 3 years. In so doing, they’re also going back to the old school after realizing that the 1.7 seconds of eyeball view time doesn’t necessarily translate into sales. Podcast producers take note.
So what about those middlemen? Judging by WPP’s 10% stock price plummet this week ($WPP), investors are bearish. WPP is a British multinational advertising and public relations company besieged by the ease with which advertisers can publish directly on Facebook ($FB) and Google ($GOOGL) and, in an instant, receive performance metrics. Ad agencies, therefore, are no longer needed as much to connect brands with end users. Per the Wall Street Journal:
For their part, big ad agency companies that have traditionally bought advertising space on behalf of marketing clients are under pressure to reinvent themselves to remain relevant as the industry changes. Advertisers are demanding that their agency partners be more transparent about media-buying, so it is clear that agencies are getting the best possible deal for the clients and aren’t receiving rebates from sellers.
Disrupting kickbacks too? Rough.