April 15, 2019 Consensus

The Weekly Consensus – April 15, 2019 (Volume 11, Number 15)

The Big Story
Instagram and Snapchat Battle for Consumers
Michael A. O’Hara

On April 4, Snap Inc., operator of Snapchat, launched the Snap Audience Network.  This new service will allow developers of any app looking for advertising revenue to host the same ads displayed on Snapchat.  Snapchat will take a commission on the revenue earned, with the rest going to the app owner.

According to Recode, however, the new Snapchat service comes nearly five years after Facebook launched a similar service.  And while this late entry to app advertising could still be potentially meaningful to Snap – Lifewire estimates that Apple currently offers approximately 2.2 million apps for download and Statista puts the number of apps available in the Google Play Store at approximately 3.0 million – Facebook’s lead over Snap is growing rapidly, thanks to its ownership of Snapchat’s archrival: Instagram.

eMarketer estimates that Instagram had 713.9 million monthly active users in 2018, and projects this number will grow to 989.1 million (over three times the U.S. population) by 2022.  Snapchat’s active monthly users in 2018 counted 301.0 million, less than half of that of Instagram.  Given its massive user base, eMarketer estimates that Instagram drew ad revenue of approximately $9 billion in 2018.  Snap Inc.’s 2018 revenue was $1.2 billion.

Snapchat recently posted a modest increase in users after two quarters of seeing its base erode slightly.  In contrast, eMarketer reported that “Instagram is growing close to 5 percent per quarter.”  (The publication also notes that Instagram is meaningfully outpacing the growth rate of its parent company’s namesake social network.)

Some critics of Instagram gripe that it pilfered many of the innovative features Snapchat originated.  Despite this, users and advertisers alike increasingly prefer the Facebook property.  In March 2018, Gizmodo author David Nield penned an article called “5 Reasons to Ditch Snapchat for Instagram, if You Haven’t Already” in which he essentially declared Instagram’s simplicity of use and larger network the key reasons to choose Instagram.  From the perspective of businesses, marketing software and services giant Hubspot opined: “Instagram will be a better option for most businesses. It offers cheaper advertising options, free analytics, and a public profile, making it easy for anyone to access your business’s information and content at any time”.

Consumer businesses have enthusiastically embraced Instagram’s relatively new “product tagging” feature, which allows the user to double-tap a photo, video or story to see product labels, turning a post into an opportunity to shop. The company claims that 130 million users each month tap product pictures to reveal product tags in shopping posts.  On March 19, Facebook announced that users will soon be able to add in-app checkout to the Instagram shopping experience.  Nike, Revolve and Outdoor Voices are among those said to be launching in-app checkout with Instagram.

Snapchat has also dabbled with in-app checkout through its “Sponsored Lense” feature, and has announced a test with ecommerce super-power Amazon where users scan an image or barcode and snap a photo and, if the product is available an Amazon, click through to Amazon to buy it.  But while Snapchat lags behind Facebook and Instagram in terms of shopability and user count, the app’s most compelling asset may well be the makeup of its user base: 78% of Snapchatters are between 18 and 24 years old, the largest percentage of young users of all of the social networks.   If Snapchat can remain the preferred network of this demographic, there may be a day ahead when the Snap Inc.-Facebook rivalry is more even.

 

Headlines of the Week

Corona maker Constellation to sell about 30 brands in a $1.7 billion deal

Constellation Brands said on Wednesday it would sell about 30 of its low-end wine and spirits brands to E. & J. Gallo Winery for $1.7 billion, as the Corona beer maker focuses on more profitable brands. The deal primarily includes Constellation’s brands priced at or below $11 a bottle such as Clos du Bois, Ravenswood and Mark West and the related facilities.

 

Macy’s is taking 36 of its stores and putting a new kind of store inside them

One year ago, Macy’s bought Story, a New York retail store founded by Rachel Shechtman that curates merchandise around a theme or set of ideas. Inside the quirky, colorful space in the Chelsea neighborhood, experience matters more than the products. It was an interesting pairing — when Macy’s bought Story — and industry watchers have been curious ever since. Now, Macy’s plans are starting to unfold. The department store chain announced on Wednesday it’s adding 1,500-square-foot Story shops to 36 Macy’s stores across the country, including at its Herald Square flagship, as part of its grander scheme to divvy up some of its real estate and look for new uses to fill what’s now excess space, with more shopping moving online. Macy’s hopes the new spaces, which will rotate inventory every two months and bring in different local brands through the course of the year, will encourage shoppers to keep coming back to stores.

 

 

Apparel & Footwear

Crew Weighs Madewell IPO in Potentially Crowded Jeans Market

Blue jeans are having a moment. At least that’s what J. Crew Group Inc. is hoping as it considers bringing its Madewell business to the public markets in the wake of rival Levi Strauss & Co.’s own $623 million offering. Madewell, the denim focused starlet of the J. Crew family, could go public as soon as the second half of this year, the company announced Thursday. Struggling parent company J. Crew also named Michael Nicholson as interim chief executive officer after months with no one in the post.

How David’s Bridal reinvented its digital marketing strategy for prom season

Following a troublesome 2018, David’s Bridal is looking for new growth opportunities. At the start of 2019, David’s Bridal emerged from bankruptcy and kicked off a new strategy to grow the company — not through bridal gowns but through prom dresses. In late 2018, it tapped digital marketing agency January Digital to refocus the brand’s retargeting strategy across Instagram, Google, YouTube, search and Facebook, in order to convert more customers both online and in stores. Additionally, David’s Bridal came to the conclusion that 16-year-old girls aren’t usually the ones purchasing these dresses. It’s the mom, grandmother or another adult in that teen’s life who does the buying. That meant widening David’ Bridal target audience to include adults (mostly women) between the ages of 35 and 65.

Ascena debuts cross-brand loyalty program

Ann Taylor, LOFT, Lou & Grey, Ann Taylor Factory and LOFT Outlet — which together make up Ascena’s premium apparel group — Tuesday launched ALL Rewards, a loyalty program without a membership fee that for the first time enables clients to earn and redeem perks across all five brands. The program includes customers without the retailers’ credit cards. All loyalty members get $5 for every 500 points they earn, which they can use at any Ann Taylor, LOFT, Lou & Grey, Ann Taylor Factory or LOFT Outlet store or website in the U.S. and Puerto Rico.

 

Athletic & Sporting Goods

Planet Fitness Franchisee Acquires 13 Clubs in Georgia, South Carolina

Sunshine Fitness Growth Holdings, a U.S. operator of Planet Fitness clubs in the Southeast, recently acquired 13 franchise clubs in South Carolina and Georgia from Anchor Fitness LLC. This brings Sunshine Fitness’ total facility count to 80.  Sunshine Fitness is owned by private equity firm TSG Consumer Partners, San Francisco, the prior majority owner of Planet Fitness. TSG acquired a majority stake in Sunshine Fitness in December 2017.  This acquisition marks Sunshine Fitness’ third acquisition in the last calendar year. In May 2018, Sunshine Fitness acquired two franchise groups representing 31 clubs across Florida, North Carolina and South Carolina.

REI expands gear rental to 115 stores

As promised, REI announced another expansion of its gear rental program in 2019, which will include, among other things, snowshoes, skis, snowboards, and camping and backpacking kits. The products will be available for rent in 115 stores, according to a company press release. The outdoor retailer also announced Tuesday that it would be investing in used gear and gear trade-in options both in physical stores and online. The moves come off of a record $2.78 billion in net sales for fiscal 2018, as well as the addition of one million new co-op members.

Premier Lacrosse League nets Adidas sponsorship

Adidas will provide apparel for players, coaches and staff in the six-team PLL and will buy commercial time during PLL broadcasts on NBC Sports. Adidas will also work with the PLL to deliver original programming and plan fan events at its flagships stores in the US.

The new lacrosse venture will launch in June 2019 and already has some big investors involved, such as billionaire co-founder of Alibaba Joe Tsai and Raine Group – who are involved with companies such as Soundcloud and VY esports.

Cosmetics & Pharmacy

Rite Aid posts Q4, full-year loss amid immunization, script growth

Despite delivering a record number of immunizations, continued same-store pharmacy sales and script count increases and solid growth within its EnvisionRxOptions segment, Rite Aid swung to a loss for its fourth quarter and fiscal year 2019. For the quarter, net loss was $255.6 million, with net loss for the full-year period totaling $667 million. “In the fourth quarter, we continued generating critical momentum in key areas of our business while taking important steps to position Rite Aid for future growth” said Rite Aid CEO John Standley.

Michelle Pfeiffer is paving a new route in the celebrity fragrance world

Michelle Pfeiffer is paving a new route in the celebrity fragrance world. The actress has been quietly working for the past seven years on a line of fine fragrances that complies with the Environmental Working Group’s strictest health and safety standards. The line, Henry Rose, debuts with a five-scent range, making it the first fine fragrance collection to be EWG Verified. “I utilized [EWG’s Skin Deep database] for many years and one of the things it kept pinging was fragrance,” said Pfeiffer. “I took that to mean that fragrance was really toxic, so I started looking for fragrance-free products and I stopped wearing perfume. Cut to many years later, I decided I would see if it were possible to develop a fragrance.

 

Discounters & Department Stores

Kohl’s lands exclusive deal with Elizabeth and James

Elizabeth and James, a lifestyle brand founded by Ashley and Mary-Kate Olsen in 2007, will exclusively be available in most Kohl’s stores and on Kohls.com beginning this holiday season, the retailer said on Wednesday. The collection, which will be available in stores nationwide, will include apparel, handbags, accessories and beauty offerings, according to a Kohl’s press release. The retailer said Elizabeth and James will continue to operate as an independent business, and the Olsen twins will both continue to serve as creative directors for the brand. Forming a partnership with Mary-Kate and Ashley Olsen further adds to Kohl’s growing portfolio of partnerships in a bid to stay relevant among younger consumers. The brand joins the likes of LC Lauren Conrad, Simply Vera Vera Wang and Adidas, among others.

Walmart adds nearly 4K robots to stores

Walmart on April 9 announced it would be adding more robots to its stores: 1,500 additional “Auto-C” robots, which are autonomous floor cleaners; 300 “Auto-S” robots, which scan shelves to ensure availability, accurate location and correct pricing; 1,200 “FAST Unloaders,” which automatically scan and sort items from trucks; and 900 “Pickup Towers,” where consumers can pick up purchases ordered online. The expansion of Walmart’s robotic fleet is in an effort to give associates more time to serve customers face-to-face, according to a company press release.

Walmart bolsters growing ad business with Polymorph Labs acquisition

Walmart Inc. said April 10 that it will acquire the technology and assets of Silicon Valley-based Polymorph Labs, adding to its expanding ad business, Walmart Media Group. Details of the deal, including the value of the transaction, were not disclosed. The deal is expected to close later in the spring. Walmart has been “quietly” building its advertising division, which is based on online and in-store sales data, according to a blog post from Stefanie Jay, vice president and general manager of Walmart Media Group.

 

 

Emerging Consumer Companies

Rent the Runway launches kids’ clothes

Rent the Runway will launch Rent the Runway Kids, a service that is expected to launch on April 16thwith girls’ items for children three to twelve years old. It will include apparel made by designers like Stella McCartney, Little Marc Jacobs, and Fendi. The service starts at $30 for a four or eight-day rental.

Candid raises $63.4 million

Candid, the teeth-straightening startup that keeps consumers away from the orthodontist’s office, has raised $63.4m in a Series B round. The investment was led by Greycroft, Bessemer, and e.ventures, and brings Candid’s total funding to $90 million. Candid will use the capital to open additional retail locations (called Candid Studios), growing from thirteen locations and plans to more than sixty across the country by the end of the year.

Bump, marketplace for streetwear, raises $7.5 million

Bump, the peer-to-peer mobile marketplace for streetwear, raised $7.5 million in Series A funding. The round was led by e.ventures, with participation from Kleiner Perkins, Y Combinator, and a number of angel investors. Bump enables consumer to buy and sell jackets, T-shirts, sneakers by brands such as Supreme and Palace.

 

 

Grocery & Restaurants

Chuck E. Cheese’s plans merger, IPO

CEC Entertainment Inc., parent to the Chuck E. Cheese’s and Peter Piper Pizza brands, has agreed to merge with Leo Holdings Corp., a special purpose acquisition “shell” company founded by British private-equity firm Lion Capital, with the intent of going public again later this year. The deal is expected to be completed in the second quarter, and CEC owner Apollo Capital Management LLC, which took Chuck E. Cheese’s private and bought Peter Piper Pizza in separate 2014 deals, will retain 51% ownership in Leo Holdings, which plans to change its name to Chuck E. Cheese Brands Inc. and offer shares on New York Stock Exchange. The companies said the merger of CEC parent Queso Holdings and Leo Holdings has an enterprise value of $1.4 billion.

 

FreshDirect shifts focus to expansion

Now comfortable in its new South Bronx headquarters, FreshDirect aims to deliver growth. The online grocer earlier this month extended its geographic coverage to more parts of Connecticut and metropolitan Washington, D.C., and said it plans more expansion later this year and in early 2020.

 

U.S. grocery store openings increased 30% in 2018

New grocery store openings were up 30% in 2018, with more than 17 million square feet of space added in the United States, according to JLL’s Grocery Tracker 2019 report. More than one-quarter of the new stores were in Florida, California and Texas due to expansion by their respective local market-leading grocers: Publix, Sprouts Farmers Market, Aldi, Kroger and H-E-B.

Home & Road

Bed Bath & Beyond Beats Fourth-Quarter Estimates

Bed Bath & Beyond sank Thursday despite reporting fourth-quarter earnings that topped analysts’ expectations. Adjusted earnings in the quarter were $1.20 a share on revenue of $3.31 billion. Wall Street was expecting the company to earn an adjusted $1.12 a share on revenue of $3.33 billion. For the fiscal year, the company posted a loss of $137.2 million – its first ever annual loss – as sales declined 2.6%. Comparable-store sales fell 1.4% in the quarter vs. analysts’ expectations of a decline around 1.3%. “During the fourth quarter and throughout fiscal 2018, we have been driving significant foundational change across our business,” said CEO Steven Temares. “The pace of our transformation accelerated during fiscal 2018. In fiscal 2019, we are modeling our operating profit, even including the investments in initiatives, to stabilize, and earnings per share to grow slightly, and for both to accelerate thereafter, as the impact from many of our key initiatives grows and we take advantage of the significant operating leverage of our business,” the CEO added.

Ikea in Manhattan debuts with new format

Ikea’s downsized, urban format is making its U.S. debut — and it’s like nothing the Swedish home furnishings giant has ever opened stateside. Ikea’s first U.S. city-center location is set to open on Monday, April 15, on the Upper East Side of Manhattan. The three-level, 17,350-sq.-ft. store, billed as a “planning studio,” is focused on city-living solutions and provides personalized design services. It has no need for shopping bags as everything must be ordered online, either in-store or at home. Ikea plans to open 30 similar locations in city centers during the next three years.

Mattress Firm CEO steps down

The nation’s largest mattress retailer has lost its veteran leader less than five months after the chain emerged from bankruptcy. Mattress Firm said it has accepted the resignation of executive chairman, president and CEO Steve Stagner. The company has begun the search for a new chief executive. Stagner, a 23-year Mattress Firm veteran, began his career as the owner of the largest franchisee in the Mattress Firm network prior to joining the corporate office in 2005. He was named CEO in February 2010, and went on to oversee the company’s initial public offering in 2011, and rapid expansion via acquisitions during which time it tripled its store count. Stagner resigned as CEO In March 2016 but remained chairman. He was reappointed CEO in March 2018. Mattress Firm, which is owned by Steinhoff International Holdings N.V., filed for Chapter 11 bankruptcy protection in October 2018. It emerged one month later, in November, with a plan that would leave it about 2,500 locations, down from approximately 3,500.

Jewelry & Luxury

De Beers diamond sales hit highest level since mid-2018

Anglo American’s De Beers said Tuesday it saw rough diamond sales value jump about 10% in the third sales cycle of the year on the back of stable demand. The world’s top diamond producer by value, which reports on 10 sales cycles each year, sold $575 million in its third sales cycle of this year, the highest since the fifth cycle of 2018, when it recorded $581 million. Chief executive Bruce Cleaver said demand for diamonds has been stable as the company moves into the second quarter of the year. Diamond prices have been under pressure and miners are struggling across the board, especially those producing cheaper and smaller stones where there is too much supply.

Neiman Marcus isn’t dropping defamation claims against hedge fund Marble Ridge

Neiman Marcus will pursue defamation and business disparagement claims against a New York-based distressed debt investor Marble Ridge Capital. Wednesday’s decision came after Dallas County District Court Judge Tonya Parker rejected Marble Ridge’s attempt to get Neiman Marcus’ counterclaims thrown out. Marble Ridge plans to appeal Judge Parker’s ruling. Marble Ridge’s original lawsuit, filed in December, accused the luxury retail chain of fraudulently transferring European e-commerce subsidiary MyTheresa, which is valued at $1 billion, out of reach of creditors. The judge tossed part of that case in March.

US Jewelry, Watch Spending Rose 7% Last Year

Americans spent more than $80 billion on jewelry and watches last year, according to the U.S. Bureau of Economic Analysis, a 7 percent increase over 2017. Each year, the BEA, a division of the U.S. Department of Commerce, releases an index estimating how much consumers spend on various products, from jewelry and watches to items like household goods and appliances, food, or clothing and footwear. According to the bureau’s figures for 2018, spending on jewelry and watches (both fine and costume) totaled $82.53 billion, up from the $76.9 billion reported in 2017.

 

Office & Leisure

Federal judge threatens to block all Carnival Corp. cruise ships from docking in U.S.

A federal judge has threatened to temporarily block Carnival Corp. from docking cruise ships at ports in the United States as punishment for a possible probation violation. The Miami Herald reports U.S. District Judge Patricia Seitz said Wednesday that she’ll make a decision in June, and she wants company chairman Micky Arison and president Donald Arnold to attend that hearing. Miami-based Carnival has been on probation for two years as part of a $40 million settlement for illegally dumping oil into the ocean from its Princess Cruises ships and lying about the scheme, according to court filings. Despite this, prosecutors say ships have dumped grey water into Alaska’s Glacier Bay National Park, prepared ships in advance of court-ordered audits to avoid unfavorable findings, falsified records and dumped plastic garbage into the ocean. The company has acknowledged these incidents in court filings.

Delivery going to the dogs? Petco products will soon be available through Target’s Shipt

Petco shoppers who want to get Fido’s doggie toys and Kitty’s cat snacks dropped at their front door will soon be able to through Shipt, the same-day delivery service owned by Target. Starting April 18, Petco will become the first pet products seller available through Shipt, which previously focused primarily on deliveries of groceries, paper towels and other household staples. Though Target owns the online delivery company, customers still need to specifically subscribe to the Shipt service. Those who sign up prior to April 18, will get the $99 annual fee reduced to $49.

Office Depot adds more coworking spaces

Office Depot is expanding its coworking pilot as it continues to emphasize its business services offerings. The company announced the opening of two new Workonomy Hub coworking spaces, at its Lake Zurich, Illinois, and Irving, Texas, retail stores. Office Depot debuted the concept last August, at its store in Los Gatos, California. Office Depot rival Staples currently has three in-store coworking spaces, which it opened in partnership with Workbar some two years ago.

Ghost of Toys R Us still haunts toy makers

Just last year, a kid in the market for an Uncle Milton ant farm could choose from a half dozen versions, including glow-in-the dark or an ant village. Now there are only three. Last year, there were 60 kinds of K’Nex construction sets on the market. This year there are 20. A year after Toys R Us imploded, toy makers are still readjusting to the big loss of shelf space. That means slashing the number of styles they carry, re-evaluating how they sell large toys like playhouses and cars, and changing their packaging to squeeze into smaller retail spaces. It’s a jolt for toy companies.

Technology & Internet

Online food retailer and wholesaler GrubMarket raises $25 million

Online food seller and technology company GrubMarket last week raised $25 million from a number of investors, including a venture capital fund backed by food and beverage giant Kraft Heinz Co. Investment firms WI Harper Group and Digital Garage led the GrubMarket funding round. This round brings GrubMarket’s total funding to $89.1 million. GrubMarket, formed in 2014, buys local food directly from local farms and other producers and sells it online to restaurants, stores and consumers. In February, the company launched GWholesaler, a software-as-a-service platform for food industry suppliers and vendors. The product offers tools designed to help food businesses with financial management, inventory and price management and customer relationship management tasks.

 

Simon launches an online marketplace for its brands

Simon Property Group L.P., which owns more than 200 shopping malls in North America, launched an ecommerce shopping site for its outlet properties. The site, ShopPremiumOutlets.com, will operate similar to a marketplace. Brands and retailers manage their own product pages on the site and control what is listed on ShopPremiumOutlets.com. Shoppers can purchase products from multiple brands and check out directly on ShopPremiumOutlets.com without being redirected anywhere else. Simon will take a commission on each sale from the marketplace. Right now, the marketplace is only open to brands who have a physical location in a Simon Premium Outlet property.

 

Google unveils new retail cloud offerings

Alphabet Inc.’s Google unveiled several new retail cloud offerings on Wednesday in a new product called Google Cloud for Retail at its annual cloud event, Google Cloud Next, in San Francisco. The new retail-specific services include store inventory management, analytics and visual search tools. For retailers, cloud services, like those offered by Google, Amazon and Microsoft, offer nearly unlimited computing power for storing and processing data very quickly—power that would be far too expensive and time consuming to build out, buy and maintain in-house using their own servers.

 

Bezos boasts third-party sellers are kicking Amazon’s ‘first party butt’

Amazon.com Inc.’s online marketplace is thriving, with marketplace sellers accounting for 58% of gross merchandise sales on Amazon, a nine percentage point increase from five years earlier, notes Amazon CEO Jeff Bezos in his annual letter to shareholders. “Third-party sellers are kicking our first-party butt. Badly,” he wrote in the letter published Thursday. That growth has come at a time when Amazon’s first-party sales are growing rapidly; the retailer generated $141.92 billion in product sales in 2018, up 19.7% from $118.57 billion in 2017.

 

Finance & Economy

Signs of a global economic recovery in the second half are emerging

Worries about the global economy percolate even as equities around the world rise, but an economist at Ned Davis Research says the worst of it may be over.  Alejandra Grindal, senior international economist at the firm, said the aggregate of manufacturing purchasing managers’ indexes (PMIs) from across the globe stabilized in March after falling for 10 straight months. Meanwhile, the number of countries reporting expansion in the manufacturing sector rose for the first time in six months. She noted these indicators usually bottom about four to eight months “before the next expansion begins.”

U.S. consumer prices rise solidly, but underlying trend tame

U.S. consumer prices increased by the most in 14 months in March, but the underlying inflation trend remained benign amid slowing domestic and global economic growth. The mixed report from the Labor Department on Wednesday was broadly supportive of the Federal Reserve’s decision last month to suspend its three-year campaign to raise interest rates. The U.S. central bank dropped projections for any rate hikes this year after lifting borrowing costs four times in 2018. The Fed’s preferred inflation measure, the personal consumption expenditures price index excluding food and energy is currently at 1.8 percent.

U.S. Weekly Jobless Claims Hit 50-Year Low Drop Below 200K

The U.S. labor market remains a pillar of strength within the U.S. economy as weekly jobless claims fall to a new 50-year low, dropping below 200,000 claims. Initial weekly U.S. jobless claims fell by 8,000 to a seasonally adjusted 196,000, the Labor Department reported Thursday. “This is the lowest level for initial claims since October 4, 1969 when it was 193,000,” the report said. Consensus expectations compiled by various news organizations had called for initial claims to be around 210,000. The government revised the previous week’s report up by 2,000 claims to 204,000. Meanwhile, the four-week moving average for new claims – often viewed as a more reliable measure of the labor market since it smoothens out week-to-week volatility – dropped by 7,000 claims to 207,000.