Global Marketing Monitor: Weekly Market Trends (September 25, 2021)

WHAT YOU’LL READ ABOUT THIS WEEK:

We look at the consequences of billions of dollars of investment directed into apps focused on grocery and food delivery services, assess Facebook’s news of the week related to Apple’s data limitations and review an important media merger in India between Sony and Zee with the context of Disney’s efforts to sustain their global growth from that market.

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Capital markets remain keen to support massively scaled early-stage ventures.  Low-interest rates and a commensurately low cost of capital is a key factor supporting a substantial volume of activity in the general economy, as we and others have written before.   A noteworthy consequence is the presence of scores app-based companies dependent on a massive scale which have raised large volumes of that capital.  Many of them need to demonstrate rapid revenue growth regardless of the near-term costs to justify the capital raised, and then additional capital can be put to work in a manner that produces even greater losses in pursuit of further revenue growth and further capital raises.  All of this may occur with an eye towards an undefined future point in time where scale leads to profitability and, eventually, a return of capital from the companies which ultimately succeed.

As is true in most emerging venture capital-fueled sectors, most new companies will likely go away, either sold to more established companies or wound down at some future point in time.   This is not to mean that the changes which follow from these activities are not consequential: instead, the volumes of capital involved make it highly likely that whole sectors of industries will be meaningfully disrupted.  Along the way, many newly durable and massive advertisers may be formed, and other incumbents will find that their advertising strategies will change as their industry changes concurrently.

Grocery and food delivery services businesses are benefitting at a global level.  One sector where this phenomenon is playing out is in grocery and restaurant delivery, a sector which in the past week saw news of two significant fundraises of hundreds of millions of dollars each with both directed to separate German companies in this sector, according to Bloomberg.   Flink is positioned to raise capital at a $2.1 billion valuation while Gorillas is set to do the same at a $3 billion valuation.   These transactions would follow on other recent fund-raises in this sector including US-based Gopuff, which raised $1 billion in June at a $15 billion valuation and Turkey-based Getir, which raised $550 million at around the same time with a $7.5 billion valuation.  In July even more, capital was raised, with India-based Swiggy raising $1.25 billion at a $5.5 billion valuation and Colombia-based Rappi raising more than $500 million at a $5.25 billion valuation.  Most of these early-stage companies – whose actual GAAP revenues likely run in high eight or low nine figures on an annual basis with gross merchandising volumes (GMVs) likely measured in the high millions or low billions – can point to much larger companies in support of their ambitions.

For an example of the scale of what’s possible, many established players in the most comparable sectors are worth tens of billions of dollars each, building on similarly scaled order volumes. To start, there is Instacart, easily the biggest venture-funded company focused on grocery delivery in the US, and which last raised capital at a $39 billion valuation way back in March, supported by $1.5 billion in revenue generation last year, according to The Information.  Then there are several newly public companies such as India-based Zomato, US-based Doordash – which is primarily involved in restaurant-based food delivery and itself is reportedly leading the Flink fund-raising – Germany’s Delivery Hero (with a legacy similar to Doordash’s and leading the Gorillas round), UK-based Deliveroo, SE Asia-based Grab (which recently filed to go public), Uber (owner of Uber Eats and Postmates), and China’s Meituan.  China-based Ele.me, part of Alibaba, is another massive player in this sector as well.

An important question is how big the ultimate opportunity is that all of these companies are pursuing.  Although food and grocery delivery grew rapidly during the pandemic, and while there is clearly a significant amount of upside potential, the total share of economy-wide sales to be captured by apps will always face some limits, especially in more mature markets.   For a sense of scale within groceries specifically, in the UK e-commerce associated with predominantly food stores doubled in share from just under 6% of related sales to a peak of 13% in January and 10% in August, tracking towards £20 billion this year, while in the US e-commerce associated with food and beverage stores is on track towards a similar amount, or $25 billion.   This would represent 3% of the approximately $900 billion annual retail revenues associated with the sales channel.  The actual figure is undoubtedly higher, given the volumes of spending on food and beverage through other kinds of retailers.   Whatever the right number in the US, markets like China and other emerging markets will likely find these services to be even bigger: Meituan alone has food transaction volumes that are already approaching one hundred billion dollars, with the portion they keep set to exceed ten billion dollars this year.

Overall, we might estimate with grocery store, restaurant and convenience store sales amounting to several trillion dollars globally, related e-commerce sales are likely in the low hundreds of billions of dollars at present.   Although some markets will be more heavily weighted towards delivery than others, the global volumes will likely only represent a modest share of total grocery sales for many years to come, and actual revenues kept by the delivery companies will be well below these levels.

Important opportunities in this space relate to the creation of “super-apps” and advertising.  Consequently, for companies focused on the space, the upside opportunity goes beyond grocery, to be sure, as many of these services will aspire to become “super-apps” covering a range of services.   At a minimum, there is a clear overlap with restaurant services, but other services will also be synergistic.  Advertising will also inevitably represent a significant source of upside potential and serves as an important area of interest for marketers.  In support of that interest, Instacart itself employs a significant number of former senior ad sales executives from Facebook and Amazon, for example.

Marketers are presented with opportunities, but risks, too.  On this topic, for marketers these there is clearly a meaningful new opportunity to explore in this sector, as delivery service apps provide a new environment in which to capture targeted attention from consumers, and better yet, present tangible ways to connect that attention to immediate sales.   To illustrate this potential we can point again to Meituan, which is already one of the world’s largest sellers of advertising, with nearly $3 billion generated last year alone.  However, it’s worth noting that investment in the upside potential of delivery services should be the focus rather than investments in the long-term value of a consumer on any one particular app, unless a strong view is held about the durability of that particular business.  If a shake-out eventually occurs and some of the companies in the space refocus their efforts elsewhere or simply go away, when the time comes for companies to check out, it will be best if the venture capitalists are the ones left holding the bag.

Facebook was in the news once again this week, although on this occasion for reasons related to measurement rather than any matters of social consequence.   In a blog post published on Wednesday entitled “Navigating Change and Improving Performance and Measurement,” the company conveyed what was arguably old news, albeit with some incremental precision.  Facebook’s statement that “in aggregate we are underreporting iOS web conversions by approximately 15%” detailed an issue that has been known for as long as Apple’s changes to its operating system have been known.   The other headline driver that “we expected increased headwinds from platform changes, notably the recent iOS updates, to have a greater impact in the third quarter compared to the second quarter” was previously articulated by the company in July during Facebook’s most recent earnings call.

Growth headwinds are to be expected; they were always poised to occur for reasons other than those described by the company.  Well beyond the consequences of targeting limitations, it should be inevitable that growth will slow, if only because of the comparable growth rates from year-ago periods (3Q20 saw 21% constant currency ad revenue growth and 4Q20 saw 31% growth).  However, that doesn’t mean that they will struggle because of Apple’s data changes: we think that Facebook, like Google and Amazon, will continue to have relatively more data than other sellers of advertising, and to the extent that the availability of data on a relative basis for purposes of targeting allows Facebook to support buying goals for its customers, the company won’t be particularly impacted – at least not to a degree that could be definitively be associated with the iOS changes.  On this latter point put differently, attribution is always an issue for marketers to manage.   There are many reasons why many marketers have reassessed how they work with Facebook, but few marketers will go away and stop advertising because they are unable to precisely connect cause and effect in their media budgets.

More generally it is important to note that media companies – whether Facebook or TV network owners or others – often make attribution mistakes in their own businesses, wrongly connecting industry or economy-wide issues to their own revenue trends and vice versa.  Digital media owners, long accustomed to growth that is independent of economic conditions and who position themselves as “performance-based” may be more predisposed towards describing revenue growth trends up or down as due to their own actions rather than to macro-economic conditions or even the proverbial laws of gravity.  In an advertising context, this is to say that on average we should always expect that rapid growth will decelerate and that difficult or easy comparables need to be accounted for when considering the health of a medium or media owner.

Disney saw some disruption in its stock this week as well, largely due to investor reaction to current quarter subscriber trends in India.  Another media giant made stock-moving news this week as well, as Disney’s CEO described headwinds to Disney+ subscriber growth in the current quarter, with gains now expected in the low single-digit millions.  This figure was well below investor expectations.   However, the negative reaction was arguably unwarranted, as much of the underlying trend is somewhat temporary, due to the automatic lapsing of millions of subscribers in India.  Many of them are likely to return as IPL cricket, which airs on Disney’s Indian service Disney+ Hotstar, began its new season this past week.  However, that’s not to say that all will be easy-going for Disney in India, as a bigger issue related to that market came out subsequently, with two of the company’s biggest competitors in India announcing a merger.

The big news in India this week for Disney actually related to its competitors Zee and Sony announcing a merger.  Days after Invesco, a US-based institutional investor, sought to remove Zee Entertainment’s managing director and shake up its board of directors, and several years after Sony began pursuing consolidation options for its Indian-based TV business, on Wednesday the two companies announced a combination which would leave the business as a Sony-controlled company. Following an infusion of $1.6 billion of new capital, Sony will own 53% of the business and existing Zee shareholders will own 47%.

If the merger is eventually completed, the new entity would hold an approximate 30% share of TV viewership in India, with a complimentary content offering, too: while Zee doesn’t have a presence on sports, Sony holds the broadcast rights for Cricket boards of Pakistan, England & Wales, Sri Lanka, Australia & Ireland.  Beyond sports, Sony is strong on reality content while Zee’s forte is fiction and an extensive movie library. Sony has a higher affinity with urban audiences while Zee has a wider audience appeal. For a sense of the scale of each company’s existing businesses, Zee’s pre-pandemic (for the year ending March 2020) revenue base was 82 billion INR, or just over $1 billion USD with around 60% or $500 million in ad revenue.  Sony’s revenue base in India was slightly smaller at 58 billion INR, equivalent to approximately $800 million, with half of that figure in ad revenue.  Total TV advertising in India on our estimates was just over $5 billion in 2019 and falling to $4.3 billion in 2020 suggesting the two companies would have around 20% of the country’s total.

Cricket rights remain key to India for media companies.  Looking forward, on a combined basis the new company will be better positioned to compete for the most important sports rights in India, which all relate to cricket, as each of BCCI and IPL as well as ICC, cricket’s World Cup are coming up for renewal in 2023-24.  Currently, all three sets of rights are held by Disney.  The most recent round of IPL cricket sold in 2017 to Star prior to Disney acquiring that business via its 20^th Century Fox transaction for 163 billion INR, or more than $2 billion for a five-year period.  All other BCCI cricket similarly sold to Star in 2018 for 61 billion INR or nearly $1 billion for a separate five-year term.   ICC rights were secured by Star in 2014 for 220 billion INR, or around $3 billion for the period between 2015 and 2023.

Consolidation within markets is a global trend.  While the factors driving the Zee-Sony are in some ways unique to the companies involved, consolidation within countries outside of the US by media owners who are primarily single market operators (mostly true for Zee and for Sony, too, as their global TV network footprint is minimal outside of India) is a common thread.  We see this playing out in France and the Netherlands presently, and other markets are poised to follow suit. In those instances, the driver of transactions is that single-market incumbents typically lack the resources or the will to secure necessary investments to compete with global giants outside of their home markets.   That factor will generally keep those single-market network owners sub-scale as the global streaming platforms – most of which are owned by companies with legacy positions in US TV networks – continually invest in content around the world, primarily focusing on non-English language programming as they go.

Streaming services are also becoming more important in India as they are elsewhere.  Within India, streaming services are similarly becoming more important, and OTT content is another area where Zee and Sony would complement each other, with Zee offering a significant volume of regional content and originals with Sony bringing sports beyond cricket.   Press reports from this past summer indicated that Sony’s SonyLIV had 200 million monthly active users during its last fiscal year, with average usage of 75 minutes per user.  Zee stated during its most recent earnings event that their platform Zee5 had 80 million monthly active users globally, with approximately 190 minutes of average monthly watch time.  In terms of subscribers, Sony and Zee surpass Disney+ Hotstar, which has approximately 45 million paying subscribers across both India and Indonesia, although daily viewing, per press reports from the summer, is much higher, with consumption levels of 45 minutes per day per user.     Other services such as Amazon Prime Video and Netflix have fewer subscribers in the market, but those consumers are paying much more for their subscriptions, which has the effect of limiting their appeal.  However, we note that both are making substantial investments in Hindi language content to support their longer-term presence in the country.

Overall, the impact of India on US-based media owners is unlikely to be more than modest any time soon, at least in terms of revenues and profit.  More generally, it’s likely going to be the case that countries whose populations have less of a capacity to support subscription services will not be particularly lucrative for the world’s largest streaming services providers, at least when compared to the opportunities they have in front of them in wealthier countries.  This probably leaves more room for domestic media companies to thrive in emerging markets, at least on a relative basis when compared with the position of incumbent broadcasters elsewhere.  Still, the opportunity for long-term growth for everyone involved will remain, and those who choose to make the biggest investments in content will likely end up with commensurately large shares of viewing, revenue and profitability over time.