May 16, 2020

By Michael Levine - Senior Research Analyst - Internet & Media / Pivotal Research Group

BOTTOM LINE: Following the onset of Covid-19, it has not been surprising to see the strength in eCommerce, but what has caught us by greater surprise has been the boon lower priced media – particularly on FB – has been toward that acceleration. We have spoken to several agencies that are focused on the DTC-native eCommerce segment. Their advertisers indicated that beginning early/mid April, they were seeing multiple successive days of record spend at prices down 30-40% post-Covid vs pre-Covid. Beyond the benefits of lower eCPMs, this has been accompanied by higher conversion rates as well – driving record ROAS for this cohort of advertisers. We have not touched base with any gaming advertisers, but based on FB’s comments on their 1Q20 eps call, suspect this is likely driving a further boom. Notably, we have heard about pricing increases though early May on FB in the HSD/LDD range, though pacing still well below pre-Covid 19 levels. Our interpretation is this is more a reflection of firming up of the auction at FB, though it is having a slight negative impact on this cohorts’ ROAS.

Looking at a broader set of eCommerce and retail advertisers, we wanted to do a deeper dive via PAI to talk about some of the trends seen through April relative to March and to review a few interesting developments and things that stood out to us during the 1Q20 eps season.

  •     Long term changes - while there has been a clear pull forward of e-Commerce demand as a result of Covid-19, we are hard pressed to not view much of this as structurally changed consumer behavior.
  •     Table stakes is getting your online strategy right – yesterday - if you have not had a cohesive online eCommerce strategy – you better figure one out in a hurry.
  •      “Brick and mortar only retailers have lost their only channel, the street, if these businesses are going to survive, its mission critical to get online” – Harley Finkelstein, SHOP COO
  •     Some pull forward in demand likely - so be mindful of over extrapolating growth into 2H – ETSY was the most deliberate in their commentary on this front – having spoken for an extended period of time about the benefit from customers purchasing masks.
  •      “We sold over 12 million face masks in the month of April alone. In fact if face masks were a standalone category, it would have been the second biggest category on Etsy in the month of April.” Josh Silverman, ETSY CEO

    GOOG PLAs – as we mentioned in PAI and a few call outs in this note, we’ve received questions as to why this was rolled out now and some believe it is a defensive move vs. AMZN. While this may be part of it, given Covid-19 changes, GOOG’s TAM in the space has increased by 4-5x in our view. To the extent the world better categorizes their product catalogs, it can have meaningful positive impacts for other advertising players who would benefit. We lived trough this firsthand at Yahoo, and it should not be hard for them to capitalize on the opportunity.

Some of the quotes that turned our head this earnings season are as follows:

  •         “And so in many ways what the situation is doing is it's accelerating the catalyst for people to move from wholesale businesses to direct consumer businesses and move from businesses that traditionally were only brick and mortar to being more in a brick and click sort of model. So pleased to see that and we think that will continue.” – Harley Finkelstein, SHOP COO
  •         “The number of consumers making a purchase for the first time from any Shopify merchant grew 8% between March 13 and April 24 compared with the previous 6 weeks. Over that same period, the number of consumers purchasing from a Shopify merchant they've never shopped at before grew by 45% over the 6 weeks leading up.” – Amy Shapero, SHOP CFO
  •         This post COVID world is what we're building for and we have shifted accordingly. Shopify's world view has not changed. Our conviction that merchants need to be able to sell to their buyers wherever they may be remains as true today as it was a decade ago.” – Harley Finkelstein, SHOP COO
  •         I think that this is going to be an inflection point for e-commerce and I think that inflection point is going to be meaningful and lasting as much as many of us are really native to online and have been shopping online for years and shop online for many, if not most of our purchases, it's still a very large segment of the economy that shops offline and I think this is a moment when a lot of people are suddenly turning online and discovering that it's really convenient and it works really well for them and I think that that could create some very lasting behavior changes and I think that in that world people aren't going to want to remember 5,000 or 10,000 or 50,000 brands and I don't think they only want to shop in one or two places.” – Josh Silverman, ETSY CEO
  •         “We believe this period has certainly and permanently accelerated e-commerce adoption in our category. We are seeing not just robust new customer acquisition, but also strong repeat trends from both long-term loyal and recently added new customers.” – Michael Fleisher, W CFO
  •         “We're definitely seeing an increase digitization of small business, the everyday entrepreneurs who maybe weren't online, didn't have a presence or even had one and needed to get it refreshed in an environment where everyone is finding and discovering things online is absolutely a tailwind for the sector at large. And so we are leaning in with our marketing spend.” – Andre Low Ah Kee, GDDY COO

To the extent Intenet advertising have not been as tuned into earnings from these names, we thought these summarized some consistent and poignant themes. Economic dislocations have a tendency to identify new winners and new losers so we think this is a fascinating point in time.

In terms of reactions and changes we have seen from the PAI respondent set (skews heavily towards ecommerce and retail), we thought we would provide some interesting vignettes in the exhibits attached: CLICK HERE.





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