- Among the key themes impacting the consumer space over the past year: consumption returning from the digital sphere to in-person, the rapid rise in the cost of capital from zero to very high (especially for tech companies), FX rates, and pivot away from politically unpredictable regions like China and Russia. These are now commingling, concentrating, and compounding into less demand, growth, and revenue for companies that serve the digital economy. This includes everything from advertising, e-commerce, gaming, semiconductors, cloud computing, and financial services (crypto, deposit services, BNPL, investment banking, legal work, etc.). For brevity, we will call all of them "digital services."
- Reflecting the above, we are all now reading about hiring freezes and significant layoffs (be it Meta, Snap, Intel, Salesforce, or Goldman Sachs) with the objective of stabilizing their profitability, cash, and stock prices. We don’t foresee this environment changing for the better until the 2H23. As such, we expect to see very large layoffs in digital services in early 2023. In addition, capital projects, new product initiatives, older product lines, recruiting teams, sales teams, and advertising are all being cut as well.
- Meta CEO Mark Zuckerberg's layoff letter reads, "At the start of Covid, the world rapidly moved online and the surge of e-commerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected. Not only has online commerce returned to prior trends, but the macroeconomic downturn, increased competition, and ads signal loss have caused our revenue to be much lower than I’d expected. I got this wrong, and I take responsibility for that. In this new environment, we need to become more capital efficient. We’ve shifted more of our resources onto a smaller number of high priority growth areas — like our AI discovery engine, our ads and business platforms, and our long-term vision for the metaverse. We’ve cut costs across our business, including scaling back budgets, reducing perks, and shrinking our real estate footprint. We’re restructuring teams to increase our efficiency. But these measures alone won’t bring our expenses in line with our revenue growth, so I’ve also made the hard decision to let people go."
- The net net of this is that there will be less new investment and assets (people, servers, software, etc.) to drive the consumer’s attention, time, and demand/spending to the digital-world/economy from in-person consumption (i.e., there will be less digital disruption to incumbent industries, be they retail, movie theaters, theme parks, etc.). As the incumbents will no longer be fighting an unfair battle where the disruptors didn’t have to earn a profit ("growth at any cost") and didn’t have any cost-of-capital (for which their business returns needed to exceed), they will now be on a much stronger footing to acquire new customers, increase customer engagement, and "earn" a higher margin and return. Moreover, given the lessened existential threat, they will more easily be able to experiment to enhance and elevate their service. We also see this as a time, where omnichannel retailer can amplify of their physical-side to drive their digital-side, be that clienteling, returns, or shipping (see our comments on the new Target prototype above). And as we have been writing about all year, extend their physical presence into new markets.
- Above we put "earn" in quotes as we believe that margins and returns won’t automatically increase as a result of all of the above. They will increase if in-person services invest in product/service to meet an ever demanding and evolving customer. "Suprise, thrill, and delight" are what in-person service was able to win on in the past, and being in-person, that was where they had a competitive advantage. During 2023, we will certainly be writing in the Anchor about brands "pressing their advantage" and increasing their rates of customer acquisition and engagement.
