#Tesco #Sainsburys Q1 A good covid response but underlying challenges persist #Hankinshottake #retailweek

So; this is the first of what i hope will be many “analyst style” notes that i will produce. I’ve tended to publish under the #HankinsHotTake label. Its a bit corny, i know that, but its an attempt to cut through some of the “fluff” out there and provide a little insight into what can be quite dry, sometimes vapid content. The last week has been particularly busy and the ambition is to get these notes out a bit quicker and contemporaneous, couldn’t be helped but; to that end I’ve bundled Tesco and Sainsburys together. I don’t do every update and whilst i skew Retail, Tech and Media i do sometimes look at other businesses that interest me. There is also a UK focus typically although I will mention International implications if relevant

I like to follow a simple format

Headlines – These are the topline performance figures taken from various reports. Its easy to find this stuff so i don’t dwell too much

Statement – This is a digest of the various accompanying news excerpts of validating information

Implications (the HOT take) – This is my view on the strategic implications and context of the headlines and the statements.

Tesco Logo transparent PNG - StickPNG

First up is Tesco

Headlines = +9.2% up as a group. +9.1% (UK and Ireland) +6.1% Booker. Like for likes were up 8.7% in the UK whilst Booker was up 0.6%

Statement = A positive update, bursting with can-do attitude and CSR nods in line with the prevailing cultural winds. Big outtakes include positive switching from ALDI for the first time in a decade, a significant shift away from promotions (28% to 14%) and a clear split between Food (+12%) and GM (-20%). Worth noting that incremental costs are expected to contribute some additional -£300m (when business rates relief of c£500m is taken into account)

The Hankins Hot Take = It all looks rosy for Tesco at the moment in the final months of Dave Lewis’ reign. The near 50% increase in delivery is certainly impressive and this was done without the help of the urban distribution centres that are currently under development. The positive shifts against ALDI are also to be welcomed although this is probably as much a function of ALDIs weakness in e-commerce and a store set-up ill suited to social distancing than anything fundamental by Tesco. In fact when looking at Kantar Worldpanel data its clear that Tesco actually lost share during the period going below 27% for only the second time as far as this data goes back with this slipping to the smaller players.

The shift to “everyday low prices” is an interesting strategic choice although it fits the simplification approach that Dave Lewis has applied to the whole business so is to be expected. It will certainly help in the next few months if the economy slips further rather than V-bounce in line with the BOE estimates. There should also be concerns about the Booker business. The majority of its growth was driven by acquisition and whilst its wholesale business was up, supplying as it does the local store network of brands (Budgens etc) that witnessed positive share growth in lockdown. The catering business, perhaps unsurprisingly was down significantly.

With all this in mind Ken Murphy is likely to come in with a few jobs on his hands. Accelerating the ongoing distribution capex is the big one, whilst the other the shorter term impact of the flight to local which was the biggest impact on share. The discounters aren’t going away and have a significant slate of openings planned and with no such expansion for Tesco there needs to be a concerted effort to drive demand and maintain the net movement switching from them into the mid term.

Media tool kit – Sainsbury's

Headlines – 8.5% up and 8.2% LfL. Grocery sales up 10.5%, Online sales up 87% and Argos up 11%

Statement = Another positive update (like Tesco) with some remarkably similar figures. Doubled e-commerce (this aligns with a category doubling), a large cost implication of £0.5bn broadly covered by business rates relief and some positive shifts in price perception. This being Simon Roberts first real chance to communicate there is an argument that it couldn’t have gone much better.

The Hankins Hot Take – The immediate thing to notice is the negative trajectory that has been reversed for Sainsburys. Last year was a bit of a shocker for the business with profit and sales down along with significant declines in share. This was reversed at Christmas and the Covid effect on the category has benefited all. The jewel in the Sainsburys crown so far has been the significant growth of ARGOS. Its telling that whilst Tescos saw a decline here, even with stores closed, ARGOS performed well. Its renown “hub & spoke” distribution network eminently suitable for lockdown.

I suppose the BIG insight is that nobody seemed to fcuk up in grocery over the covid period. All have pulled out the operation stops and delivered meaning that no-one has really outperformed the market. Even the estimated costs are proportional to size meaning they’ll all have the same “asterisks” attached come full year. What this means is that the same challenges persist. Sainsburys has a clear strategy to utilise its square footage but how to guarantee growth? Mike Coupes gambit with ASDA failed and hes now gone. There are no attractive other mergers on the horizon and with L4L’s under pressure last year I’m sure we’ll see that return. Sainsburys typically do well at Christmas as a function of the “scale-up” phenomenon, they are a seen as a step up from Tesco and the discounters but they need to create a clearer proposition in consumers minds to stand a chance of growing.

Mapping a macro economic path via the impact of Covid-19 using simple Demand and Supply curves

A few weeks back i wrote a blog about the “high wire” shape that i predicted we would see as a function of pent-up demand and the unique set of circumstances covid-19 has created. There was much debate on twitter ( https://twitter.com/JCPHankins/status/1252953834797912065) and references to a thread i’d started a few weeks on March the 31st (https://twitter.com/JCPHankins/status/1244922813489844230) prior to that , about why the use of “spend during a recession” advice by many in the marketing fraternity was inappropriate.

As lockdowns have progressed a ripple has swept through the industry with many now agreeing. Mark Ritson, JP Castlin and very recently even Les Binet have set out the same thinking. To take things on i now think its time to begin contextualising what is actually happening/happened using the wonders of Demand and Supply curves. We’re a pretty poor bunch at using techniques such as these to map out categories and positions but hopefully this could also be a simple tutorial to get people thinking about expanding their repertoire of critical thinking tools and mapping capabilities.

Obviously these are simplistic tools but they are useful in providing a theoretical base for a narrative and enable critical thinking and planning to begin. Without a model of the potential future how can you begin to create a strategy to take advantage?

Step 1 is the simple Demand and Supply curve pre covid-19 lockdown (in the UK)

We see the market in equilibrium (ceteris paribus) with price and quantities at P1 and Q2. Now lets see what happens next when Covid-19 begins to have its first impact on Supply chains globally as China gets affected first.

Supply is reduced pulling the model out of equilibrium, moving down the supply curve from a to b. In real terms the price is unlikely to have gone down as movements with D & S happen very quickly (however as we will see there is negative pressure on inflation in the real world) but you can immediately see the problem we have because Demand is still stuck at a. Too much demand vs.supply and shortages of goods.

What happens next is interesting because usually the demand curve would just shift into equilibrium as follows

Demand shifts with reduced quantities (D1 to D2) and as suggested earlier further negative pressure on prices (this is why inflation has been so low). However; because of lock-down we then had an external impact on demand and further negative impact on supply D1 – D3 via D2, essentially two demand curve shifts.

This shift in demand to D3 leads to new price and quantity positions Q2 and P2 . Supply has also seen a further negative shift due to the impact on availability (sliding down that S1 curve). Physical and digital availability are constrained not just by supply chain issues but the simple fact that people cannot actually buy the goods from various platforms. It’s a point worth reiterating though, supply problems are physical availability problems (in the Ehrenberg-Bass way) .

At this point demand is down, supply is down and the economy is shuddering to a halt. This was probably April/early May in the UK, when we saw the economy shrink by 20%+

To me, this is the bottoming out of the economy, the worst it gets and the reason for this is that at this point there is a glimmer of hope in the rise of e-commerce and ingenuity of business owners. Answering the question how to get products to people if they are stuck at home/pivot exactly what their offering is…

The Ehrenberg-bass institute will tell you about physical and mental availability and how its “how Brands grow”. I’ve evolved the physical availability element a bit (apologies EB) to include “Digital availability“. This is because, whilst the EB definition is perfect, human beings aren’t and if you say “Physical” they think bricks not clicks. Digital availability as a sub-section of physical means maximising digital channels such as PPC, affiliates and e-commerce channels and establishing fulfilment (getting products out and delivered) services to support these channels.

In all the chat about advertising during a recession most people forgot one thing. Its a weak force. Yes, if you can afford it great but; for many short term activation creates instant cash. We know that brand building delivers only 50% of its cash benefit in year 1 which is great if you’re going to be around in year 4 to collect the other half but no good if you’re going to go bust before then! That’s why necessity is the mother of invention. This affects the model as we see a shift in the supply curve (s1 to S2), an increase in physical and digital availability!

This, i think, is where we are now. Point D (there or thereabouts). Demand has increased from the depths (but in real terms only marginally), supply has increased due to improved availability but we’ve seen a significant drop in price (the sales are going to be something to behold and inflation should stay low for a while) whilst quantity has shifted up a notch to Q3 from Q2 lows.

Its worth pointing out that due to the shift in the supply curve its likely that post recession the potential for the economy will be greater as demand shifts back through D2 to D1 along the S2 line you can see a greater potential equilibrium position driven by this shift in physical availabilty.

Now what’s great at creating demand? Marketing. 🙂 However maybe thats a blog for another day.

So; what to do at this stage? Obviously this is a simplistic method of analysing the situation at a macro economy level. It will be different for different categories and using this simple methodology to understand your specific positioning would be very useful. Like many things this is just one model and you’ll need to diagnose specific problems and benefits but hopefully it shows that we have more tools than we think at our disposal and simple high school economics models can still paint a picture that can add to the discussions around the table.

Anyhow, this is a theoretical exercise but one worth going through i think. It help paints a picture and its not something that we (in the industry) tend to do. Mental models help and when they correspond and support real world examples then they can only be a good thing. Like Mark Pollard is always saying “strategy is your words” well for me “strategy is my models (and sometimes my words”

#Pent-up demand and the “High wire”

As a “seemingly early voice against the whole “advertise during a recession” debate (see my twitter @jcphankins ) it does now look as though the dialogue has flipped, which is good. However in keeping with trying to stay ahead its now worth detailing what i think will happen as restrictions are relaxed. I flagged it on twitter a few weeks ago but now i’m going to extend it with a little tutorial. Admitedly i’m reusing something i produced over a year ago as part of my quarterly economic update that i do for my business and also media owners (tap me up if interested in seeing 1hr 30 mins of economic goodness) but its worth it. In addition and new to this debate is my predicted shape of the short term recovery (for most categories) as a concept. Obviously different categories will respond slightly different but i believe the universal shape will be defined by the “High Wire”, a peak followed by a dip and a return to peak. I’ll explain….

Here is a chart that looks at the last recession and the bounce back as a result of pent-up demand. Pent-up demand is basically demand that is held back until confidence returns. This data is official Nat Stats data. Key point to make but the area under the curve is not matched until several years after (the bounce back is NOT the same size as the original dip). This works because households DO have some money and are just delaying discretionary purchases. In the case of covid-19 its not even as though they are actively reducing buying, they literally can’t. The impact on motor and home purchases is the most striking of these shifts because there are rarely fewer than 1 million houses sold per annum (people always need to move) and 3million private sales is about median for a post 2008 world. These happen no matter what (unless you live in lockdown).

So what we have is a lot of delayed demand. People who want/need to move and people who want/need to buy a car (me amongst them). But; we can’t do it now.

That brings me on to the “high wire” shape. This is how i believe the short term “pent up” demand pattern will play out

The initial rise will be due to all that immediate demand that has had nowhere to go. Households will rush in spend money and demand will spike. This will diminish over the next few time periods as the remaining “demand hungry” HH’s enter a little bit later, return to work etc. But; what about the second peak? The thing to remember is that purchase cycle has been damaged for many people. Anyone who would have normally entered the process will have stopped or deferred. That means that they have to start and this is going to take a period of time, to push people through. Initially a large number of people will start the process as we go back to normal and this will emerge as the second peak as HH’s move through that process and will be governed by that categories purchase “pathway” average time.

That’s how you can easily plot this. If it takes 1 month on average then that “high wire” line is going to be a month long if its 3 months (house buying) then ergo the line will be roughly 3 months long. The “dip and rise” is because that purchase pathway time is variable, some are quicker some are shorter. I have spoken about purchase pathways on this blog previously here https://theeqplanner.wordpress.com/2020/03/05/a-quick-history-of-the-path-to-purchase-consumer-pathway/. Its been edited to include my favourite worst innovation the “infinity curve” (but thats another story).

When putting in place plans for investment for business it would be wise to acknowledge this as acquisition costs will change rapidly and busiensses need to hold their nerve as demand drops off again after that initial bounce. It will return of course 🙂

Anyway this sets out a simple concept for brands and businesses to predict the likely flow of demand as we return to normal-ish. The pent-up demand “high wire”. A double peak with early demand and then a build up due to allow for the purchase pathway. The width of this high wire conicides with the time length to go through that process (on average). As to the initial peak, don’t be surprised for it to happen very quickly.

A quick history of the path to purchase/consumer pathway

A chance mention on Twitter led me to dump this presentation into my blog. It was designed as a discussion piece and is not exhaustive in terms of the history of pathways. The original client this was produced for was a financial brand but the techniques and applications are universal (and i’ve since applied it to other categories effectively).

My view on pathways is the presence of common stages that represent the fixed “nodes” of a model however the way an individual navigates between these nodes is up to them. The natural implication is that there will be some pathways which are very important (most pass through them) and others where fewer people wander. As with all there is a strategic decision to be made on which to concentrate on…

The classic AIDA model

The wonders of AIDA – Dis-proven in a majority of cases, its over 100 years old (not that old things are bad) but the existence of multiple evolutions suggests it doesn’t quite do what we need it to do

Lavidge et al – Hierarchy of effects = Awareness→ Knowledge→ Liking→ Preference→ Conviction→ Purchase

Modified AIDA = Awareness→ Interest→ Conviction →Desire→ Action (purchase or consumption)

AIDAS Model = Attention → Interest → Desire → Action → Satisfaction

AISDALSLove model: –Awareness→ Interest→ Search →Desire→ Action → Like/dislike → Share → Love/ Hate 

Image result for awareness marketing funnel
This bloody thing
https://www.business-to-you.com/marketing-funnel/

It’s linear. You skip from stage to stage and everyone does it. Conceptually useful to a degree but not in the least bit representative of real life. The use of “conversion” measures to detail how many move from stage to stage also brings with it huge problems as you get analysts making ridiculous statements like “you need to increase awareness by x% to increase consideration by y%”. Also do you really go from Advocacy to Awareness?

Ummm – where is the influence of communications? I don’t want to overstate the impact but comms in all its guises must have some sort of impact? no?

Surely this is just a new way to sell a product? And by product i mean Googles ad product

Another google product but missing a very important stage….

At least the passive stage (out of market) gets mentioned here. It is where most of the time is spent (unless you are a milk brand or maybe bread)

Taking advantage of low involvement processing (Heath) is key when it comes to communications.

“Passive assimilation” = The default state of consumers not in the “purchase pathway”. An out of market conversation aimed at building memory structures in order to pre-empt in-market and post-trigger moments in a brands favour (hang on, isn’t that the role of branding comms in general :))

http://www.pwc.com/us/en/financial-services/regulatory-services/publications/assets/path-to-purchase-digital.pdf

PWC attempt to wrap this all up neatly but what happens when you purchase? No “retention”/customer comms opportunity (this may not be a problem though, thats for the brand to answer)

http://http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-consumer-decision-journey

Mckinsey build a feedback loop but little in the way of that important “passive assimilation stage” (or active if your brand is strong). Also uses the word Loyalty which always sticks in my throat…

Which brings me to this one. The infinity loop

Customer Journey: Funnel or Continuous Loop? | Fridge
https://thefridgeagency.com/blog/customer-journey-continuous-loop/

Many agency groups have “developed” this one so they can plot all their services and also to suggest that the process is never ending, continuous (constant investment required, natch) but as a mental model its worth remembering that, like the debunked “funnel” ITS STILL A LINEAR PROCESS! Really winds me up this one. Conceptually incorrect and factually incorrect too.

Authors own

My initial stab including stages of commonality with some elements of natural chronology but as with western literature you read it left to right (no feedback loops) which can lead to the classic linear fallacy of pathways

Authors own

My current model = The interconnected nature of the hexagon and the various connections between allows for the complex nature of the journey to purchase to be articulated. I hesitate to call this modern as its probably always been this way! The number of “stages” or nodes can be varied by category to become representative (as can the labels) but; the concept remains the same. If developing into a tool/technique then this can also be quantified using both quantitative research (if you have the time and money) but also qualitatively in a similar way to many diagnostic strategy tools. From a representation perspective the importance of the lines (based on volume) could be thickened, bigger lines = more important. There is also the fixed and linear nature of some of the pathways e.g. purchase is always followed by post-purchase which could be enhanced by a “one-way arrow” vs the two-way nature of some of these routes. In this way prioritisation can be made on what pathways to invest in to drive the most difference. If you are able to do comparative analysis vs. a competitor or category you can then benchmark relative performance as an additional prioritisation technique.

The rise of the smaller players #retail #kantar @kantar_uki

A few weeks old again. Must get better!

The kantar Worldpanel data landed this morning and it makes sobering reading for the BIG 4 with all 4 posting declines although in a market that was only marginally up this was perhaps expected.

  • Tesco – -1.5%
  • Sainsbury – -0.7%
  • Asda – -2.2%
  • Morrisons – -2.9%

So using this data you would call Sainsbury the winner at Christmas with a significant increase (7%) in their online sales.

The real joy comes at the bottom of the market with Lidl, Aldi, Co-Op and Ocado seeing growth. 

  • Aldi – 5.9%
  • Lidl – 10.3%
  • Co-op – 3.0%
  • Ocado – +12.5%
  • Iceland – 1.3%

The Hankins Hot take – Like the last few years the “discounters” have made inroads at Christmas however in line with the suggestion yesterday I think we are seeing the rise of specialists with distinctive propositions finally seeing the benefits.  They are never going to be the biggest but they could be highly profitable entities alongside the big 4 serving particular needs.  The rise of online shopping is another evolving picture.  Christmas is perfect for this as no-one likes to trundle round the crowded supermarkets fighting over the last Gluten Free pack of Mince pies, much better to book your slot in September and do it all online!  M&S will be looking at this with delight due to the growth at Ocado whilst Waitrose will be worrying about the financial impact next year with only 3 months to “restock” the online shopping larder.  As to Co-Op and Iceland their trajectories seem secure as they reap the benefits of their recent transformation plans.

#Greggs are my new favourite on the #highstreet #retail

Many of you will be aware of my continued evangelist role for Next but there is a growing competitor for my corporate love and that is the home of the vegan sausage roll (and slice), Greggs.

With its 4th!!  Profit upgrade of the year the business is performing exceptionally well with product innovations driving a significant uptick in penetration and combined with a broadening of physical availability, the business is currently reaping the rewards of its strategy which is underpinned by a simple ambition “to create a business able to fulfil 2000 outlets).  Their annual report isn’t out for a little while but by announcing they are to pay out a £7m bonus pot to staff they’ve signalled their rude health.

Hankins hot take – As a QSR (quick service restaurant) up against the might of McDonalds, the mid-market coffee and food shops and the supermarkets Greggs are in a hyper competitive sector but have succeeded through a focussed pursuit of a clear strategy.  At the heart of this success is an interesting “quirk” of an ambition.  I’ll explain.  Many companies will say they want to grow to a certain size or number of outlets, the difference with Greggs is that their ambition was to build the capability to fulfil first.  It sounds simple enough but in the graveyard of modern retailing its not hard to find businesses that have grown too big too quick.  The impact of Amazon on changing consumer expectations is all about quick, easy fulfilment being a pre-requisite of modern retailing.  Greggs have executed this is spades.  They are likely to reach their target of 2000 outlets in the next year or so, the next challenge will be on  finding additional environments to target (they are rolling out in petrol stations and services stations as we speak), maybe we’ll see stations and airports becoming part of the mix soon!?!

Greggs are one of the most successful modern businesses out there are the moment.  I’ve compiled a simple list of the 5 requirements of a successful high street chain / retailer taking evidence from a variety of players and will look to get some time in to present to the various teams soon.  If you or your clients are interested in hearing more then please give me a shout.

#H&M and a an interesting retail trend #ARGOS

I need to get more efficient at posting these when i actually write them. A bit late but never mind

Some of you may have missed the recent H&M results announcement but contained within evidence of an interesting trend in retail and one which provides guidance in how to compete with the Amazons of this world.

The Hankins Hot Take – Whilst the headlines focussed on the change in leadership, with a new chairman and CEO at the helm, the real news was hidden.  H&M have never been the most e-commerce led business on the high street.  A visit to any store will attest to that whilst their growth has been driven by a vast store opening plan in contrast to the actions of its competitors.  The outgoing Chairmans comment sets out the changes in the following comment “ can we use those stores even better as logistical hubs for deliveries, for pick-ups, for returns?”.  This essentially is the ARGOS “hub and spoke” system that uses the physical stores as part of its supply chain as well as its retail footprint. The Local Data Company already tells us that multi-usage property is on the rise and this change would enhance these figures.  It’s likely that whilst some stores would maintain their size, the proportion given over to in-store fulfilment would decrease with an increasing amount given over to the warehouse/fulfilment area.  The challenge will be whether this can work in the fast moving fashion world,  combined with a reduction in lease costs the multi-usage should actually make it easier to drive profitability IF stock control is effective.  As mentioned though, H&M stores aren’t really known for their order (although the COS’ and &Other stories are more controlled, if smaller) so a complete operational overhaul would also be required including more optimal OMNIchannel merchandising.  NEXT are rolling out this dynamic merchandising programme at the moment which is allowing them to sell more at full price (online) but this is tempered to a degree by the increased costs of online fulfilment although probably not quite as much as some of the NEXT sale deep cuts so “Net Net” its more profitable.

#Ocado paint a picture of the future #retail

Headlines – Group revenue up 9.9%, Retail Revenue up 10.2%, Losses increased YoY by nearly 400% to -£214m. Strong cash position of £751m + £600m bond issuance

Comments – It’s important to factor a number of elements to these numbers which on the face of it look pretty bad.  Firstly you had the big fire at Andover which affected not just Ocado Retail but also the services arm which supplied Morrisons (who had to take a Holiday), making the revenue growth look even more impressive and secondly the significant CapEx investments into the international services loaded cost into the business in year as ground was broken on new fulfilment depots.

Hankins Hot Take – A topline shock but an underlying success for Ocado who pointedly refuse mention of Waitrose at every opportunity focussing entirely on the JV with M&S and the expansion of their fulfilment and services business.  The business now splits itself into three, UK Retail, UK Solutions & Fulfilment and International Solutions and whilst International Solutions is nascent and costly due to heavy Capex, its intriguing to view Ocados route to profit via the ratio between revenue and Ebitda for UK Solutions vs Retail (14.5% vs.2.1%).  Perhaps unsurprisingly selling services are significantly more profitable than retail itself!!  As the international business grows and Capex declines then the clear implication is that profit is only a short step away. 

Another interesting angle on future development is taken by looking at the investments that they’ve made in Vertical Farming, Automated Meal Prep and 3D printing (in addition to ongoing investment in robotic arms for picking purposes) suggesting expansion of the Ocado group vertically into wholesale (like Tesco and Morrisons) and food delivery (they could be a big threat to Just EAT and UberEats).  The presence of 3D printing is linked to the variable sized fulfilment centre options that they are trialling, paving the way for “out of the box” solutions as a service.  The final word has to be reserved for the M&S JV.  Expectations are for 10-15% growth which feels reasonable bearing in mind the 2019 revenue depression felt by the fire was estimated as having a 10-20% negative affect (for a net 10% growth).  To support this SKUS have been increased up to 58k (Making Ocado the biggest grocer in the UK, Tesco have an estimated 40k) whilst regular users now total  795k (up 10.7%) and wastage is 1/6th of the market average which is an amazing result when you consider that often wastage management is the difference between profit and loss for many large grocery stores.  This is an aggressive set of forecasts by Ocado and suggests they do not fear the loss of Waitrose.

Its FAA time (That’s #Facebook, #Amazon and #Alphabet)

I dropped the Netflix update last week and over the last 4 days we’ve had three of the other big tech firms weigh in with their quarterly results.  here we go!

Facebook

Headlines – Revenue up 26% YoY, 98.5% driven by advertising, Costs up 51% YoY, Op Margin down 9%, Cash up 90% to $19bn and ARPU up 30%

Comments – As one of the more influential companies in the world Facebook attracts a large amount of interest, these numbers do look healthy but its worth identifying the number they barely mentioned and that is the drop in income of 16%, even as Capital expenditure increased by less than this.  It’s not a cause for concern yet but users are beginning to slow and the US/Canada is where the majority of income is driven with ARPU some 400% large than the nearest region Europe

Hankins Hot Take – Reading into the leadership statements its hard not to feel a bit underwhelmed by such a large and economically viable company.  There is talk about privacy but couched against a “plea” for great regulation for the industry which seems entirely disingenuous.  There is evidently a major play afoot for small businesses (the long tale) and an attempt to become THE platform for small businesses which dovetails with the platitudes around payments and the development of Whatsapp payments and the noise and subsequent silence around Libra (Facebook Crypto).  With 98% of revenue coming from advertising and huge ARPU headrooms vs the US it does feel as though FB are happy to coast along until they are forced to do something different.  Commercialising WhatsApp is an interesting avenue due to the huge levels of global penetration with over 500m daily active users and this is likely to be the biggest opportunity to drive revenue growth going forward as products like Oculus are minimal in the extreme.  This seems to be a problem affecting some of these platforms now, where to engineer step changes going forward.  That said a 26% YoY growth in revenue isn’t to be sniffed at, advertising pays!

Amazon

Headlines – Q4 YoY sales rose 21%,  FCF was up circa 25% however when we look annually revenue is up 20% YoY and income up 17%.  61% of revenue driven via the US.  AWS (Amazon Web Services) provides just 12% of income but a whopping 60% of income

Comments – Amazon continues to use its US and AWS operations to allow its International operation to run at a loss.  2018 looks like an anomaly when it comes to fulfilment growth (35% YoY) vs 2019 (17%)  which suggests the current programme of large upgrades has been effected.  This is likely to have been linked to Amazon Prime Now the rapid response delivery service.

Hankins Hot Take – There is a reason for the clamouring to break up Amazon due to the remarkable performance of the AWS cloud computing network.  It essentially allows the retail businesses to go under the radar with “international” still losing cash.  Globally there are 150m Prime users which is a huge amount of repeatable income supporting the cash generation at the levels we are seeing (c$38bn) this is likely to further support investment in programming as part of a virtuous circle to protect it against the streaming wars, Amazon are one of the potential final destinations of the Netflix business after all (although I see Apple to be the more likely to bolster its Apple TV platform).  Advertising is another glossed over area, both as an investment by Amazon and as a revenue generator.  As an investment Marketing makes up £18bn worth of cost with an estimated £11bn globally being spent, making it the biggest advertiser on the planet essentially supporting its loss making with top down revenue support.  AS regards the commercial opportunity we are only at the beginning with circa £12bn annually apportioned (but not reported) to this growing channel that was £10bn in 2018 with many territories under-tapped.  The fuss around Amazon is not misplaced.  If they get any sort of real traction with their ad product then they’ll begin to streak ahead.

Alphabet

Headlines – $161bn revenues and $38bn Net income figures are good standalone figures (18% and 24% YoY growth respectively)  with advertising making up 84% of revenues (YouTube delivering £15bn annually now).  Google cloud jumps 52% although only contributes c5% of total revenues

Comments – Scouring the news sites, its clear that the new leadership broom has led to a bit more transparency on the financial workings of Googles parent.  There are some interesting comments contained within which suggest a tightening of operations and a throttling back on the moon shots.  Advertising still makes up the majority of the business but it’s the YouTube growth that really jumps out

Hankins Hot Take – Despite the negative view of the “city” with the share price dropping nearly 10% today what’s interesting about this update and the context of these results is how well Alphabet are doing.  On the balance sheet is a sizable £100bn of Cash and Securities.  The rate of growth for the Cloud product is rapid and the accelerating YouTube numbers point to a healthy growing revenue stream especially when you consider that “direct response” on this platform is limited currently (and is Googles specialism).  The challenge is always going to be “where next” and whilst not as exposed to Advertising as Facebook there is little evidence that Google are anything other than an advertising business.  However maybe we are seeing signs of what Alphabet are really with the tightening of controls and share buybacks, essentially a VC incubator, working with external partners to develop operations and then floating them/selling them from out of the stable.  Therefore could we see a Waymo IPO  or a NEST sale to maintain influxes of liquidity to fund the rest of what they do, time will only tell.

Whats the net on #Netflix q4?

As mentioned earlier i’m releasing a load of my recent analyst notes via this blog, here is the one i wrote yesterday, here we go…

If you keep your eyes on the news you will have spotted the Netflix Q4 announcement overnight.  Whilst I appreciate that SVOD (Subscriber VOD) is primarily ad free there are obvious implications for commercial broadcasters as audiences leach out. 

The headline figures are pretty punchy with global subscribers leaping 20% to 167m (this represented an 8.8m increase which natural meant a slowing of annual growth rates ) and with revenue growth accelerating at 30% to 5.2bn in Q4 the direction of travel is good as ARPU rises.  However; further down the financials is where is gets a bit “sticky” with negative trends when it comes to cash generation (or lack of) at significant levels illustrating that the business is having to return to the markets for debt to finance growth.  This combined with a £26bn debt pile (of which £14bn is long term) and cash generation not really improving means you do wonder when operations can be financed without debt. 

In short Netflix is a heavily leveraged business that is currently structured to service debt (both long-term and shareholder) on the basis of subscriber growth only , a bit like Manchester United to paint a sports analogy.  And like Manchester United we’re beginning to see the competitors strengthen and create the potential to take over.

The Hankins hot take – The biggest threat to Netflix is obviously the rise of Disney+ and Apple TV and maybe Amazon Prime if it gets its act together.  Amongst all the Household views related to their shows they rather disingenuously report search data showing how many people have watched the new series of The Crown vs The Mandalorian and The Morning show and Jack Ryan.  Based on the stats, I’d estimate a viewing share of circa 80% across these 4 programmes.  This would suggest that a total of 35million watched these shows over a similar 4 week period (28m watched the Crown).  Bearing in mind the penetration of these platforms (excluding the oddity that is Amazon Prime) its not really a surprise, we’ll have to wait and see whether there is cannibalisation or accompaniment but it does demonstrate the current scale advantage of Netflix. 

The strength of content is clearly a factor and the generation of penetration driving content vs filler content.  I recently heard the lovely phrase “Netflix is the worlds biggest producer of TV movies” which is a bit of faint praise, however these TV movies are very well produced and cost a lot of money; you have to question whether shows like 6Underground really drove new users to the platform, as amusing as Ryan Reynolds is (although 80m+ households did try to view it which means it was broadcast to 50% of total subs = retention play). 

This is the bind Netflix find themselves in and as they pursue aggressive growth across multiple entertainment categories the risks increase, needing as they do to satisfy current users and attract new ones.  They have recently moved into animation and are producing more and more locally produced shows, utilising local talent, which puts them directly in the path of existing broadcasters/producers at a local level (its why ITV is seen as a potential purchase for Netflix).  Something of  interest here is the reference to the BBC.  The BBC are engaged in a strategic partnership of sorts with Netflix (amongst others) but there is clear admiration of the iPlayer as its referred to as a model for content referral.  The commercial opportunities for the BBC will come into greater focus now that Tony Hall is leaving but this reference is another signal that we have a jewel in this institution and its worth protecting. 

On the whole though the worry is the treadmill that Netflix are on suggests no real change in financials trajectory and with the rise of other streaming services I see ARPU declining as part of a price war.  Netflix changed the market but now the market has responded and we’ll find out whether they have the strength to maintain their position or whether one of the truly BIG boys fancies buying them out.  The content arms race is only going to increase which spells further acceleration of the flight from traditional players.  I envisage a rapid fragmentation of content followed by a swift return to aggregation with fewer players remaining as consumers fight back against the “Faff”, we’ll see more actions like those Sky has instigated (Netflix is accessible direct on platform whilst HBO is solus) as intermediaries use a “one platform for all your content needs” as a clear hook for their acquisition needs.

I added the following as a raft of questions on whether I thought Netflix would start opening their platform to advertisers like Sky do in the UK

https://www.livekindly.co/ben-jerrys-just-launched-a-vegan-netflix-and-chilld-ice-cream-flavor/  – this is more likely in the short term.  Product placement and licensing.

Advertising for Sky is free money as they make enough from other avenues.  They also have their broadband offering and mobile offering now too.

The challenge is measurement on Netflix and real scale for advertising.

Estimated subs in the UK are 11.5m but growth is slowing.  This is less than Sky.  How much are you willing to pay for a pre-roll on self-reported platform?  Knowing that 2 mins in they could drop out.  We all know the problems with Facebook and Youtube. We’ll also find out how few of their huge programming investments actually get viewed.

https://www.statista.com/statistics/529734/netflix-households-in-the-uk/

Apple and Disney are unlikely to want to put advertising on their platforms.  Can Netflix risk it in the short term?