Amazon Shelves Private Label Products in Favor of Ad Revenue + Thoughts on Airbnb Investing
What We’re Reading
2 articles + RockWater analysis to make you a better investor and operator. Today we discuss Amazon’s doubling down on its ad revenue at the expense of private label product lines, and the changing market for Airbnb rental investments
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Amazon Chooses Ad Revenue… What’s Next?
The RockWater Take by Chris Erwin
The old DTC playbook doesn’t work. Is an Amazon storefront strategy where more execs should be leaning in?
Let’s first break down the Amazon biz model, which hits ecommerce co P&Ls 3 different ways…
⚙ COGS – % of sales via marketplace fees. Of note, the % varies by product line based on its margin profile e.g. the % on a cookware set is different VS a mattress VS a beauty product.
🚛 CONTRIBUTION MARGIN – fees for Amazon 3PL services. From bulk freight shipping and warehousing to pick & pack and customer shipment
🔎 SG&A – Amazon advertising to improve product discovery. Its offerings are broad and include PPC-based sponsored products / brands / display inventory, video, audio, custom stores, and their DSP (demand-side platform). Their DSP allows clients to programmatically buy ads to reach new and existing audiences on AND off Amazon.
Clearly, the DSP is having incredible success, driving Amazon’s US digital market share to 11.4%, taking share away from Google and Meta. In fact, Amazon grew global ad sales 25% YoY for Q3 2022, a period of slowdown for most other industry players.
Now some key exec insights 🤯 …
I’m hearing the tune of many brands and DTC businesses change about building on Amazon.
An oft-heard quip for the past few years was to be wary of Amazon, in that they didn’t share customer data, and also that that were was the risk of Amazon deploying its own private label product.
So, an Amazon retail strategy was penny wise, pound foolish.
But that tune seems to be changing 👊
Amazon has recognized that its fast-growing and high-margin ad business is much more compelling than growing its private label products, which is lower margin and more resource-intensive, and more importantly, turns off potential Amazon biz customers and generates bad PR for the co.
So, Amazon instructed its private-label team to slash its nearly 250,000 SKU count in 2022.
And is instead doubling down on what’s working best.
Like focusing on more ways to support its ecom clients in driving revenue. Which means that while they’re not sharing buyer and audience data, they’re helping package up that data to provide better advertising tools in an environment when customer targeting just got a lot harder with iOS 14.
And Amazon has a broad network of premium audience targeting environments. Beyond its behemoth marketplace, I think of Amazon Prime, Twitch, MGM, billion-dollar streaming rights for Thu Night football, Audible, Wondery, and so much more.
For most ecommerce sellers, who today have very limited access to growth capital, juggle numerous ops tasks, seek broad distribution, and better ad products, optimizing the Amazon playbook is starting to sound like a very compelling proposition.
Do you agree?
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What Everyone is Getting Wrong About Investing in Airbnb Rentals?
The RockWater Take by Chris Erwin
“Hope for the best, plan for the worst”. Aka for every new STR real estate deal I do, there’s a “backup exit plan”…
The short term / Airbnb rental mkt is entering a new paradigm. 10+ yrs of high YoY growth is being replaced by a new normal of macro headwinds, incl a very stretched consumer and reduced discretionary spending.
Therefore, I don’t believe that trends in historical revenue and occupancy data, from companies like AirDNA and Rabbu, Inc., should be solely relied on to gauge 2023 performance.
At best, 2023 rental revenue will grow less quickly YoY or maybe even decline (this is on average, as certain regions could face even higher growth).
At worst, long term revenue growth trends will have a meaningfully different trajectory VS years prior, and market size potential could be smaller).
So, this is where risk mitigation comes into play…
My STR investments have a “backup exit plan” in case rental income doesn’t hit my ROI targets. This could be ensuring my STR properties will be attractive targets for (1) buyers who are owner-occupiers or (2) medium term aka exec rentals. And maybe there’s a 3rd backup strategy, but I don’t know it yet!
So, what does this look like when evaluating properties? I seek out…
👍 1 or even better 2-bay garages and doesn’t count if converted to another bedroom. Families need storage!
👍 Similar to above point, good closet space
👍 Logical floor plans VS gimmicky or unrealistic lay outs
👍 2 full bathrooms. 3/1s don’t sell nearly as well
👍 Decent size lot sizes (> 0.15 acres) to ensure privacy from neighbors and setbacks
👍 Good schools
👍 Nice, safe neighborhoods (see Barbarian?!…)
I may not be able to get all these things, and I just saw a well-priced 4/2 with a converted garage I’m going to diligence…but important to have this top of mind.
…btw in the bottom photo, that’s me with my bros and our significant others at a minor league hockey game. We’re at the new Enmarket Arena in Savannah’s west side, watching the Savannah Ghost Pirates play the South Carolina Stingrays. Was so fun, and the growth of new development and city infrastructure is really exciting to see!
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If these insights are relevant to projects you’re working on, ping us here. We love talking all things media / tech / commerce!
