Apple, Google Change the Rules of the E-Commerce Game

If the post-pandemic wane on stocks like online retailers wasn’t enough, Apple and Google are also changing the rules of online commerce.

It’s well known by now that Apple’s changes to the way advertising on iPhone works hurt the effectiveness of Facebook ads. The Facebook Audience Network was previously a cheap, measurable source for customer acquisition across Facebook, Instagram and major customer-facing properties that added the Facebook Pixel, which tracked users.

But last week Google announced it would start a two-year process to follow Apple on its Android smartphone platform. Google’s process appears to be more collaborative as it was actually praised by Meta, Snapchat and others, in a back-hand to Apple, but also slower to implement. The process will take two years, with no changes until at least 2024.

Over on the iPhone, Apple didn’t even wage a war on its outright adversary, Facebook, to make its devices more private. It just made the change: Apple forced every app on its App Store, and every company, to ask if it could track users and their data across other apps and websites. Apple’s perfectly-crafted prompts guided a reported 96 per cent of users to not allow tracking on iPhones and iPads.

Steve Sammartino covered why this looks like a peak moment for Meta.

But the issue for ASX-investors now is how their local companies are affected.

Apple’s changes reduced the ability for advertisers on ad networks like Facebook to minutely target consumers, track clicks, and calculate costs and revenues to determine overall customer acquisition costs (CAC), as well as long-term value. With one change to iOS as well as on iPads, it became both harder and more expensive for ad networks to target customers, especially frustrating small businesses.

One company, quoted by the FT, explained that advertisers are getting less bang for their buck on iPhones. Mike Woosley, Lotame’s chief operating officer, gave as an example a men’s underwear brand. Once, it would have “gained one customer for a $5 ad targeted at 1,000 men”. Now?

Well, now to get 1,000 men you have to show it to 2,000 people, because all of a sudden you don’t know who is a man and who is a woman. Woosley said. “And you still only have $5 for those 2,000 impressions. So your acquisition costs doubled and the lost yield is 50 per cent.”

Money responded by flowing towards Google’s platforms and apps on Android grew their share of mobile ad spend. However, with Google eventually joining in as more of a gatekeeper of advertising versus a gateway, this is still the foothills of significant changes.

Canadian company Shopify, particular for its focus on independent brands that build direct-to-consumer operations (DTC or D2C brands), saw its market cap tumble after it warned of a slowdown in digital commerce. That largely related to the pandemic wane and lack of stimulus driving commerce.

But, as pointed out by Ben Thompson in Stratechery, a blog on the business of technology, the inability for Shopify’s small and medium sized online businesses to cheaply target those who may be interested in their wares or services may be another factor. Apple’s own ad tech hasn’t come close to supplanting what was taken away. One possibility is for Shopify to create a new ad-network: but it would remain beyond the barriers of Apple and Google.

Who’s Affected?

Investors should be aware that DTC brands that don’t benefit from supermarket placements and offline targeting may struggle. That may be especially the case for those on thin margins with a limited user base where loyalty and long-term value isn’t as clear.

Many DTC brands rely on a combination of paying to acquire (discounts and bonuses for joining), paying to retain via long-term discounts, and paying to get you to refer a friend. Once you churn from the service, they’ll pay to keep you or pay to get you back by offering discounts on return. This hurts margins: customer acquisition and re-targeting of customers as they move through the web was particularly reliant on cross-app tracking, and advertising on social media. That is now especially limited

And there’s plenty of ASX-listed DTC brands: many that have made their way by successfully navigating digital commerce through attractive brands, clever marketing, interesting products, and great pricing. But some are just spending for growth, which may come unstuck.

ASX-listed companies that feature DTC brands include:

• Adore Beauty, a pureplay online beauty retailer, which talked about its owned marketing channels in its H1 FY22 update.
• Aumake, which advertises to Chinese consumers and may face less restrictions
• BMX, with its Sukin skincare brand, though it has a foundation of physical retail partnerships with Woolworths and Chemist Warehouse.
• Crowd Media, with DTC brands including London Labs, KINN-Living, I am Kamu, Vital Innovations.
• DesignMilk, a company focused on digital commerce and design inspiration.
• Digital Wine Ventures, which sells wine online.
• Harris Technology Group, an online-only electronics retailer.
• Kogan, online-only electronics retailer.
• Live Verdue, which operates DTC food, nutrition supplements and skin care products
• Marley Spoon, an online-only meal kit home delivery service.
• My Food Bag, listed in Australia, a New Zealand-based online meal kit home delivery service.
• RedBubble, a dropshipping company.
• Step One Clothing: A DTC underwear brand.
• Temple & Webster: Online furniture sales via the Temple & Webster brand and the Milan Direct brand.
• Wellfully, which has DTC brands including Reduit skincare and Swisswell products.

Many other companies have DTC offerings as part of their business or have announced acquisitions or plans to get into the space. And some of these listed companies are better insulated from the whims of Apple and Google, with multiple revenue streams, larger communities and significant brand-awareness.

Businesses already facing negative cash flow each half or quarter may now have more difficulties.

Of the above, those include:

• Adore Beauty (half year report: lost $344K, spent $15.9M on marketing)
• Aumake (lost $1M, spent $180K on marketing)
• DesignMilk (lost $180K, spent $80K on marketing)
• Digital Wine Venture (lost $5.6M, spent $435K on marketing)
• Harris Technology Group (lost $2.3M, spent $1K on marketing. It spent $62K across FY2021)
• Live Verdue (lost $738K, spent $736K on marketing)
• Marley Spoon (lost $5.8M, spent $23.3M on marketing)
• RedBubble (half year report: lost $1M, spent $1.8M on marketing)
• Step One (lost $5M, spent $14.9M on marketing)
• Wellfully (lost $2.9M, spent $537K on marketing)

Each has their own challenges — and each may argue that without that marketing spend, profitability would be worse. But each now faces a common challenge. Without knowing who’s seeing or clicking their ads, online brands that rely on DTC need to keep finding new customers.