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PODCAST - Unpacking the digital shelf

Roundtable: The Wile E. Coyote Effect

An outstanding Benedict Evans blog post inspires a conversation between Rob and Peter about whether retail will follow the print, camera, and RIM off a cliff. (https://www.ben-evans.com/benedictevans/2020/5/4/covid-and-cascading-collapses)

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TRANSCRIPT

Peter:

Welcome to unpacking the digital shelf where we explore brand manufacturing in the digital age.Hey everyone. Peter Crosby coming to you from the digital shelf institutes Cape Cod office and Rob is on from the Berkshires. Hey Rob, thanks for thanks for the rantifesto last week. I really, you covering for me while I yeah, hung out, but it was it was a wonderful rant. I really appreciate it.

 

Rob:

Thank you. I love it. I love a good rant. I was aware of that.

 

Peter:

So we, so it's earning season and so we've been paying attention to a lot of, of what's going on out there. It's kind of the first signs of, you know, I have to report to the markets how things are going. One that stood out last week was Shopify guys, cause I think it really points to the shift that's happening right now. Their revenue jumped 47% to 470 million. The total value of goods sold on its platform increased 46% to 17.4 billion from, from the year ago period.

Rob:

Like that's massive. Yeah, it's huge. I mean Shopify Ben Thompson calls them that the anti Amazon, the cause, their strategy is one of 'em integration with the rest of the ecosystem, right? Rather than integration vertically within their own company. So Shopify partners with three PLS rather than developing their own three PL strategy, they empower brands to go direct to consumer rather than through an integrated aggregated shopping experience. And it's, it's like you can almost look at Amazon's retail strategy flipping on its head and that's, that's how you get Shopify [inaudible] they're killing it. I think the CEO on the earnings call said that the future 10 years from now in retail has come early. So I know it on this podcast, we've been talking about five years of retail change in five months. He's saying essentially 10 years of retail change in one month. And I think an interesting part of that growth I think right now is w this is my conjecture that manufacturers in particular, you know, our audience are taking advantage of this moment where maybe some budgets have been redistributed to digital and wanting to just, this is the time to experiment.

Peter:

On having control over your own destiny, like what does it mean to go to the direct consumer? Shopify allows you to 10 that to shell set up something super quick and just run experiments and test and learn and like you said, they give you the, the whole ecosystem to be able to pull it off. Any brand that has not in DTC prior to Kobe is now investing in DTC and the self service eCommerce platform, Shopify, big commerce, Magento, which is now Adobe are seeing massive, massive list lift of it because in a panic you're not necessarily going out there and doing an RFP in a six months sales process and buying an enterprise enterprise stack for a direct to consumer business. You try to stand something up fast. And so Shopify seeing a lot of that, a lot of new signups which is, which is where they are.

Peter:

There were recurring revenues going up. So good moment. I mean I think that the interesting thing will be to watch how consumer behavior continues to shift. How much of that stickiness is durable. If you're going to the brand.com site, which is powered by Shopify to transact, is it because Amazon or Walmart are out of stock and so you're out of desperation going to the brand or is it a new type of behavior where people are going to brand first? I think this, there's a lot to unpack in terms of what the future might bring here, but the, I mean, man, that's, those numbers are impressive. It's, yeah, even even if a third of it sticks, it's impressive. So just a quick note to listeners. On June 10th, Rob and I are going to be doing a live the first ever virtually live podcast of the digital shelf Institute with the CEO of big commerce.

Peter:

And so I'm super looking forward to that conversation. You can come on the, the zoom podcast recording and you can ask questions of Brampton. So we'll have that link up soon and you can get signed up for coming on that. But that's going to be a great conversation precisely on this topic. Just sort of cool. And so Rob, I think, you know, whenever w what we've been doing a lot of on this podcast and just in our own sort of work conversations is figuring out what of this will sustain what does it, what, what will survive these changes in, in in numbers. And I saw a tweet recently from Sasha PI who's at bloom ventures and he said, good posts by app Benedict Evans on inevitability debt piling up in declining industries and how coven and crises like these forces, it's reckoning overnight.

Peter:

And if so, so of course I had to click through and saw, just totally called it like Benedict Evans. If you guys aren't following him, you must bend-evans.com just really good. He has great brain power on this stuff. And, and so he did this article on what he, you know, he's calling the Wiley coyote effect and was saying that, you know, Wiley coyote, when he runs off the cliff and, or the cliff has disappeared in your, so the legs would windmill, hopefully defy gravity. But and he would always hang there for that. Wonderful, tasty. And then boom. And he was sort of talking about and he quoted Lennon saying, you get a decade of inevitable in a week and he goes through, so T Rob, just walk us through a little bit of sort of how he got into this discussion of, of these moments of Wiley, coyote newness in industries.

Rob:

Well, this, this is, I mean there's the whole thing here is Mmm. It can, a crisis will accelerate underlying trends and he looks a lot back in the 2001 the recession and then the 2008 recession and looks at what those things accelerated in the underlying economy. And and, and his wildly coyote moment. I mean, the classic example that he gives and a lot of people give is rim. The maker of Blackberry, 2007 iPhone came out and people use this thing and said, poof, man, this is amazing. Blackberry is dead, but Blackberry wasn't dead the next four years. Their sales kept increasing year over year over year over year. And then all of a sudden boom off a cliff, right once, once the iPhone just had a couple of couple of revisions in it, once the Android started coming up, Blackberry had nowhere left to go.

Rob:

And so there's this moment where the change occurs [inaudible] that just kind of ha, you know, you can still hang on for a little while. Then the other, the other example he gave is print media as in terms of the, those old school recessions where in 2001, I remember the internet, Amazon was founded in 94. They went public in 97 in 2001 these big internet companies had been around for a little while. I mean, back then it wasn't Google so much as Yahoo and whatever, but yeah, there, there, there, there were folks that were out there and in 2001 print media, advertising and newspapers had a good year and it dropped a little bit in the recession, but it grew slowly from 2001 to 2008. So, even as Google is rising, as Facebook is rising, print media is still getting more dollars every year up until 2008 and then it drops off a cliff and never recovers. And

Peter:

Well, that's what he keeps talking about is that it's it. It's deceptive because actually these things are rising at times where you, so I could imagine the people inside of the industry is going, we're doing great, our heart legs are pumping and we're just, we're keeping up with it. We're actually rising.

Rob:

But then that precipitous drop, right. And there's lots of structural reasons. So if you look at right now, for example TV advertising, believe it or not, despite the fact that I think the total number of subscribers has gone down by almost 25% since peak in the United States, TV advertising is still up compared to what it was 10 years ago. So you have significantly fewer subscribers in terms of number of households in a household penetration rate and all this sort of stuff. Mmm. I think that there's kind of a nuance there where there's more households, but fewer of them subscribed. So maybe it's like 8% less than the total on gross number of subscribers, but 25% less in terms of household penetration since peak. And yet every year TV advertising dollars are still sticking around. And so he's got this great paragraph or TV viewing is now moving.

Rob:

The TV ad model has seemed to be storing up its inevitability for the future. So far the internet has failed to offer TV advertisers a substitutable product in the way that happened in print. Does that change and does it matter as an ad agency had put it to me a couple of years ago, subscriptions are down and viewing is down, but budgets are flat. So CPMs are up unquote, I am neither a TV analyst nor an advertising analyst. But observations like that tend to end the same way. So what does this chart look like in five years? How much longterm structural changes the catalyst book. And so that was, that was all from Ben Ben Evans. And I'll say that the interesting thing about this is if you think about the wildly coyote effect, a lot of the television advertising market is underpinned by cars.

Rob:

You know, car companies that are advertising by the, by the major CPGs. You always see them in the top 10, like a Proctor and gamble of Ford. You know, folks like that. And they, the way that the media that the publisher's contracts are structured is they have to commit upfront to a certain minimum payments over long periods of time. And so there's a, there's a structural contractual, habitual element to it that makes it hard to decrease meaningfully. I mean, Procter and gamble, the CMO a year ago stood up and said advertising is dead. And yet, you know, P and G still spending a ton of money on television. They, I mean, they've shifted a bunch of it over to digital, but not, you know, most of it, most of it, it's fun. And right now that's not, there's a, there's all of a sudden a way to accelerate all this sort of stuff.

Rob:

We've been talking with executives that are saying they will not agree to a publisher direct media buy right now that's non cancelable people are not paying anything that has an upfront associated with it. So anything that's up for negotiation and late Q1 all acute to probably acute three, it's going to be okay negotiated and under a new normal where TV's just less important compared to other performance marketing in particular. And so you're going to see it might've taken another 10 years to break up this TV centric media the strategy that a lot of these companies have, but it's going to happen almost overnight. I mean, I, I know it's just to argue the opposite cause you know, the, the strength of TV and that's what's declining, but it's still the place, the one place where you can get a mass market in huge numbers at one time.

Rob:

And that may not make it the smartest guy in world, but it's, it's a, it's still been a place where where mass market retailers and brands can go to get eyeballs. The interesting things about it though is like you look at the who's cutting their courts and they tend to be the, they tend to be the college educated. Higher earners are cutting the courts first and which is, which is the most valuable segment. And then you know, your gross number of hours of viewership on cable versus Netflix or Disney plus or Amazon prime or Hulu has been, has been going down. And so how do you mean, how do you defend a high CPM or increasing CPMs indefinitely when your most valuable audience isn't there anymore and the gross number of hours aren't there anymore. It's just the math doesn't work. Right? So the thing that has to give is the prices are just way too high.

Rob:

You're right that there are still a lot of people that watch a lot of TV, but the, the, the value of those advertisements just can't possibly be what it was 10 years ago. It just can't possibly be as high and yet it's higher. That's a, that's a thing that doesn't make any sense. So when Ben Evans is saying, you know, you're running to running to a wall, like rim increasing their sales in 2010 was like increasing your sales the year before the year before the rug was pulled out completely under them and they just fell. Yeah. It's really is going to be fascinating to watch. How you guys, what, what is the, what is the replaced, what is the ad unit that replaces TV that gets the brands what they want? Or is it going to subscription where ads just stop being the thing driving the industry?

Rob:

In which case, what happens to content? Well, I mean there's a, that's another thing that he, that he calls out is that, you know, if you look over a long period of time, I'm talking close to a hundred years in, in the U S economy, advertising runs about 1.2, 1.25% of GDP and pretty consistently other than a dip during, during the war, I mean every, everything, it's, it's always about one and a quarter points. And in 2008, nine 10 it fell dramatically in the wake of the great recession to under a point and has never recovered and has never recovered. Yeah. Right. And most of that came at the, at the expense of newspapers and magazines, a little bit in radio, but then, you know, TV has been relatively resilient there. And so, I mean, I think your questions are really interesting.

Rob:

One advertising in general for the last 10 years has been at the lowest percentage of us GDP it's ever been. And will the TV advertising dollars move to another form of advertising, you know, like performance marketing online or will they be redeployed elsewhere? So you know, one of the things that I remember Bob land and the draw juvenile group did Oh years ago, and he's, he's presented on this a bunch of times is they cut TV advertising back in, I want to say 14. Mmm. And they redeployed a lot of that capital to customer service. So they beefed up their phone centers and they beefed up content on video support on how to install car seats and how to install their video monitors and stuff like that. So, you know, maybe we're seeing potentially a shift in advertising where the advertising dollars go away. They don't get redeployed to advertising. They get redeployed to something else having to do with the experience of the brand.

Peter:

Yeah, and the loyalty. Yeah. Yeah.

Rob:

I mean just think, think about Shopify, right? Like if you're to to, to the story that you started up, you're standing up your own Shopify site, how do you make that successful? But like you, you need to hire an email marketing person. You need, you need to figure out what your direct to consumer promotional strategy is. You have to figure out what your bundling strategy is. A lot of content goes into successful DTC sites and you know, companies that have limited resources suspend, you might end up redeploying writers to get more organic search or organic search traffic to your site rather than simply juicing the advertising through Facebook and Google and Twitter and snap and other other advertising mediums.

Peter:

So Bennett, Devon's did talk about retail and the, the, you know, we know, we know that the, the sort of e-commerce as a percentage of addressable retail is one of the charts that he hasn't. And in the U S it's something around like

Rob:

16%

Peter:

Of, of retail by 2019 from 6% in 2010. And we know that that that chart will, you know, the, the percentage of that's going to go way up. Some people are saying right now in this particular moment, it's like 30, 40%. It's not, if not more. And then, then he talks about the retail employees as a percentage of the labor force. I mean, obviously that chart's going to look ugly, but we're in an overstored economy, right? Where we've got, Mmm, 25 retail square feet per capita in the U S compared to something like, you know, the next biggest is the UK with 5%.

Rob:

Yeah. It's, I mean there's, this is, you can look, you can look at change one of two ways. You can look at it. Some types of change are like boiling the frog, which is incremental, right? Until the frog is boiled and [inaudible] e-commerce growth. You look at Amazon being founded in 1994, 1994 to present, to be pre coven e-commerce has grown about 15 16% compounded, which is really amazing growth. But it's not like any given year as a breakout year for eCommerce and that type of change where it's, it's incrementally eating away at other retail, but it's, and it's doing so quickly, but it's doing so in a, in a, in a rated way allows for traditional retailers to respond. So yes, there's, we have a lot of extra square foot compared to other countries, but we have less square footage than we did five years ago.

Rob:

And and you know, Macy's can shut down a hundred stores here and there and maybe you get a toys R us that goes bankrupt here or there. Maybe you get a Jim burry that goes bankrupt here or there, but a lot of the majors that are out there that are exclusive exclusively or primarily brick, the, you know, the Kroger's and Target's of the world, they can slowly invest in e-commerce and over a 10 year period and make progress and cash Cassius some of the gains. And there's something about the incremental gene that that's, that's addressable, right? Yeah. What we're seeing right now is not incremental. What we're seeing right now is not boiling a frog. What we're seeing right now is it's just a step function. Yeah. Where you go from the 16 points of market share that e-commerce had for retail coming into it 2020.

Rob:

And if you end the year at 30, that is just, there's no way to, there's no way for companies to respond to that reasonably. Right. It's just going to, it's going to shut some companies down. It's gonna put a lot of companies in crisis. I mean, even even Amazon can't handle that type of growth. Right. And has been actually, it's interesting, Amazon has been losing market share of e-commerce because they're unable to fulfill demand because their logistics are at capacity and, and so yeah, I think, I think that there is in retail are going to be a huge, I mean we're, we're in the middle of it long lasting change that, that we're not going to come back from in 2008 2008 killed the newspapers and 12 years later media still is kind of a mess. And I think 2020 is gonna going to change retail the same kind of way and 10 years later it'll still be kind of a mess.

Peter:

Yeah. I mean that, you know, there's sort of a core thread in humanity, which is that we, we will put off responding to critical problems until there's an absolute crisis in front of us. And I feel like part of what we're seeing here is that, you know, with e-commerce kind of rising steadily over time, it allowed sort of their traditional way of doing business for brand manufacturers as well as retailers to kind of stay siloed, stay stock. Because you know, eCommerce is only this much of revenue and now it's only this much revenue and c'mon, I'm still making, you know, 90 something percent of of our dollars. And so we should keep focused over here. I feel like this is the time where those things, those rules just,

Rob:

Yeah, out the door. Right? So, so Benedict Devin, here's a quote. Everything that the internet did to print media is happening to retail a of retailers like, like newspapers or magazines, our fixed costs, bundles that are now being unbundled and are defended by barriers to entry that are now meaningless. Hence we've been talking about the retail apocalypse for a year or two now. As the internet reached a level of penetration that made those fixed costs unsustainable and consumer behavior peeled off more and more of the bundle this. So you use red that just like the old newsreel guys from like world war two in Germany, newspapers, medical topics, bundles that are now being unbundled like that.

Rob:

I love it. We should do a whole stuff like that. Oh my God, no, sorry. What was the point? So I mean the, the, the point here is, is that similar to it, we talked about advertising having this structure of habit and budgets and contracts and all that in place and also not really a great alternative to your point from where the money we play, you're trying to reach a mass market. You have TV or you don't have TV. There's not like, it's not a separate, so retails, how does, how does similar thing in play where there's only limited shelf space? If you look at grocery for example, the pact that grocers and manufacturers made many, many decades ago is the manufacturers would take yeah. Do the advertising to consumers and drive people into the store. And yeah, the stores themselves were pretty, pretty low margin.

Rob:

And so there's all these kinds of structural relationships around the way that the brands advertise. The way that the brands advertise in store, the way that they do online, the way that they line of shelves, that creates barriers to entry for new brands or emerging brands. And so if you are a massive at scale multibrand multinational conglomerate, you had an a defensible advantage, a structural advantage that enabled you to maintain high margins by blocking out competition in various ways through your scale into the stores. What you see online, is that any, any one of the categories, there's dozens and dozens of brands. How can compete now kind of on equal footing with the majors as opposed to, you know, it's like people look at coffee. The first page of Amazon for coffee has 38 different brands, but if you go into, it doesn't even matter what groceries go into your local grocery.

Rob:

There's like six on the shelf that are competing with each other, not so, so you break down that barrier to entry, you break down the captive demand, you break down the captive way. The captive audiences, structural advantages of scale and things like that, and you do it all at once and it's good. It's going to be, it's going to be tough for a lot of folks. And that's what happened with media, right? With media. You had a local newspaper that had a captive audience, even some big ones like the LA times, right. Which basically basically blew up, Mmm. Where they were dependent on about having a captive audience and a structural advantage around distribution and Benedict Evans and Ben Thompson and all these guys, they talk about manufacturers having a structural advantage around distribution through local chains due to their scale. And that's what's being unbundled. And so if you do that all at once instead of over 10 years, instead of a large multi conglomerate being able to divest a underperforming brand here or there, or create their own emerging brand strategy that's more scalable and durable and all that sort of stuff, all of a sudden they're gonna have to scramble to figure it out very, very quickly. So, yeah, it's gonna be hard. It's going to be, it's gonna be really interesting. Period of time.

Peter:

Yeah. Well I think the, the other news that I've been seeing is just there's been reports of the, for, for many industries that are shutting down factories right now, that those, for some of them it may very well be a permanent shutdown that I saw a story in the wall street journal that had, you know, Lennox that makes plates and

Rob:

Mmm.

Peter:

Glassware and things like that. Mmm. Actually they have a factory in North Carolina that they shut down. They say they now will never reopen that they're going to redistribute it out to suppliers that they have outside of North America. And there, there's just been a, a mention of, of a fair amount of that starting to happen. People just kind of re deciding and stuff. I wonder if there's, you know, is this another blow to manufacturing or is there some possibility that people will go on some industries that, that manufacturers will say we want more control and know that, you know, for essential items, there's more manufacturing capacity here so that we're less exposed during a crisis. So now I think watching these trends is going to be,

Rob:

You know, part of this, I mean, lest we forget us is still the largest manufacturer in the world. And manufacturing is still growing here. It just didn't, it just employs fewer people. And that's been a trend that's been going on for a long, long time. So I mean one of the, one of the things that this'll probably accelerate is an area both for retail and for manufacturing. Is the replacement of workers with you know, more economically efficient means of production? I, I think that they're us is seeing a rebirth of manufacturing both, no. In terms of bespoke manufacturing of high, high quality, high end goods you know, peak design as an example I use a lot because I love their products but also but, but also audit goods that are, that are produced in automation at scale. Mmm. And if you look at retail, ULA, the Amazon go stores with that, our cashier lists and all this sort of stuff, like what's going on, what's going to happen to the people. A big percentage of the country is employed in retail services and things like that. So that's, I mean, I'm a little worried, a little worried there. I think

Peter:

That us manufacturing is, we'll grow through this, but you know, crises are going to just accelerate those types of underlying patterns we'll grow to on more automated at scale larger facilities. Well it will be continued to be a fascinating story to watch, but the, you know, the dislocations that result from it are going to be as always with these events and particularly with this one, it must be painful to see and will you know, affect a lot of people. So we of course will be keeping our eye on it and, and bringing you the news as we see it in weeks to come. But I think we'll close it today and I just want to remind you particularly as we talk about brands taking control over their own destiny and Shopify. And as Rob mentioned in his random Festo episode last week, the next session of the digital shelf virtual summit comes out on May 12th.

Peter:

And we've got leaders from for easy control is there are a law and advisory firm that do a lot of work in legal and strategy challenges around channels talking about channel management and brand control in this marketplace age. So we'll be putting that recording online on May 12th. You can see it at digital shelf, summit.salsify.com Rob, thanks for this chat today. Appreciate it, Doug, to you. For our listeners, as always, if you enjoy the show, please leave a review wherever you get your podcasts. We appreciate it and thanks as always for being part of our community.