On Amazon, the strong are getting stronger
Below is a really interesting chart that L’Oréal shared at a recent investor presentation. Through April and May, the largest brands selling on Amazon significantly increased their market share. There's lots of brands selling in the online world, but tough times are favouring the strongest of them.
This is not a phenomenon limited to the last couple of months. In ecommerce the largest, strongest offline brands are at an enormous competitive advantage, and our portfolio is directly benefiting from this via our investments in L’Oréal and Nike. In 2019, L’Oréal’s ecommerce sales grew by 52%, twice the rate of growth of the beauty market online. In the March quarter of this year, the mass beauty market online in the US grew by 11% while L’Oréal’s sales in this market grew by 49%. Finally, in China, online accounts for more than half of L’Oréal’s sales compared to 35% for the overall beauty market. Nike's online sales accounted for around 20% of sales last year and were growing at 30-40% pre-lockdown (and pre-The Last Dance!).
There are dozens of apparel and beauty brands available online, but who wants to look at page 15 of a Google or an Amazon search to find them. All the action is on page 1. Further, this is self-reinforcing. In an article in (VIEW LINK) titled ‘Scale and loyalty are more important online than offline’, Gavin Baker described the ad quality score that Google and Facebook assign ad bidders. Google and Facebook only get paid by an advertiser when a consumer clicks on an ad, so their ad quality score reflects the likelihood of this happening. A company with a higher quality score will win auctions with a much lower bid vs. a company with a lower quality score. The quality score generally works to the advantage of larger and well-known brands. He writes that ‘One of the most fundamental principles to understanding a world dominated by AI is that scale matters more than almost any other variable for AI quality. The cream really rises to the top on the internet, but once it is at the top it is hard to displace’. In the UK over 2016-18 2,000 new make-up brands were launched in the UK; by the end of this period only 5 of them generated annual sales of over GBP500,000. The barrier to scale and success is infinitely higher than the barrier to entry.
The acceleration in digital transformation that Satya Nadella so eloquently described ('2 years of transformation in 2 months') is benefiting leading brands like L’Oréal and Nike by accelerating the shift of retail to ecommerce where the strong are even stronger.
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Stephen founded Aoris Investment Management in 2017 and has been investing internationally for around 25 years. Prior to Aoris, Stephen was Head of International Equities at Evans & Partners where he directly managed $1bn of client assets.