Mobile and Video Lead Internet Advertising to New Heights

The Interactive Advertising Bureau (IAB) recently released its latest Internet Advertising Revenue Report, which is conducted independently by PwC on behalf of the IAB. As expected, the report shows internet advertising continues its unrelenting growth. For nine consecutive years, U.S. internet advertising revenues have maintained a double-digit growth rate. In 2018, internet ad revenues totaled $107.5 billion, which represents growth of approximately 22% over 2017.

Fastest Growing Segments in Internet Advertising

 

 

 

 

 

 

 

 

Video was the fastest growing format.  In 2018, video revenue grew 37% to reach $16.3 billion, which represented 15% of the overall market.    The second fastest growing format was Banner ads, which grew 22% and totaled $33.5 billion or 31% of the market.   Search remained the largest format with a 45% share of the market.  Search revenue totaled approximately $48 billion, which represents an increase of 19% over 2017.

Mobile devices continued to increase their share of the internet advertising market.  Mobile ad revenues grew to 65% of the total market, up from a 57% share in 2017.  Most formats achieved strong gains on mobile devices, with video leading the way.  Mobile video grew 65% in the year and accounted for 15% of total mobile revenues.  Mobile Search and Banner also exhibited strong growth with rates of 37% and 36%, respectively.  Overall, mobile accounted for $70 billion in revenue, which represents a 40% growth rate when compared to 2017.

Desktop revenues fell to 35% of the market, down from a 43% share the previous year.  Video was the only Desktop format that demonstrated meaningful growth, registering an approximate 7% increase for the year.  Overall, Desktop revenues totaled approximately $38 billion, which was down 2% on a year-over-year basis.

 

 

 

 

 

 

 

Growth Drivers

Although the overall digital audience in the U.S. remained relatively flat with only 1% growth in 2018, consumers spent 20% more time online during the year. As a result, advertisers followed them online and directed more ad dollars to online budgets.

Digital users access the Internet through both mobile and desktop devices, and often use both.  However, mobile devices were the driver of increased time online.  Time spent on mobile devices increased 31% in 2018 while time spent online using a desktop device declined 2% in the year. Overall, approximately 75% of all time spent online is accomplished using a mobile device.

A significant reason for the sharp increase in time spent online is consumers are spending more time on Social Media.  According to the IAB, consumers spent 22% more time on Social Media in 2018 than 2017.

Another growth driver, according to the IAB, is the resurgence of eCommerce.  In the report, the IAB states “Digital ad revenue stemming from eCommerce, including the emergence of the direct brand economy, has been a key driver of recent growth. Players continue to add features, making it easier for advertisers to target audiences ready to buy and convert searches into purchases.”  Advertisers and publishers are able to utilize data and technology to deliver targeted messages in a more effective manner to consumers at various points in their consumer journey.

Implications for M&A

Internet advertising is a large, fast growing market that will continue to attract investors and acquirers.  MHT Partners, a leading business services investment banking firm, believes companies providing specialized marketing services that help connect advertisers with consumers via the Internet will be able to capitalize on the rapidly expanding internet advertising industry and, as a result, will be a highly sought-after target for acquisition or investment.

Sources:
IAB internet advertising revenue report, Interactive Advertising Bureau and PwC, May 2019
IAB: U.S. Digital Ad Revenues Surpass $100 Billion For First Time, AdAge, May 07, 2019
Full Year 2018 Internet Ad Revenue Report (webinar), Interactive advertising Bureau, May 2019

 

What’s for Dinner? Meal Kit Fatigue!

The American diner is continually searching for ways to get dinner on the table quickly, as evidenced by the meal kit phenomenon of the last several years. The plethora of meal kit choices is almost overwhelming for the consumer. Need a paleo box? Options abound. You want to eat all organic? No problem. Vegan? There’s a box for that. While the optionality for the consumer is appealing, it highlights the challenges of the meal kit market – it is a crowded space with high customer acquisition costs and significant customer churn (not to mention the difficulty of managing perishable ingredients and challenging distribution dynamics). With numerous competitors in the space competing for consumers’ attention, such as Blue Apron, Hello Fresh, Sun Basket, Gobble, Home Chef, and Plated, just to name a few, it is no wonder that many of these companies are struggling to retain customers and turn a profit. As one data point on the challenges in the meal kit market and investors’ view of the space, Blue Apron’s (NYSE: APRN) stock is currently down more than 90% from its IPO pricing of $10 a share.

So why the meal kit fatigue? Some of the challenges faced by meal kit companies are the result of consumer backlash – consumers don’t necessarily find many kits “easy” enough since they still require the user to prep and cook the meal. Beyond that, the packaging and shipping of meal kits to consumers have raised concerns about the environmental impact of these services. Meal delivery services, such as Door Dash, Uber Eats, and Grubhub, have also eaten into the meal kit business (pun intended), capitalizing on consumer loyalty to and familiarity with local restaurants to generate midweek business. All that said, the U.S. market for meal kits, which is relatively nascent, has grown very rapidly over the last few years and was expected to generate an estimated $3.1 billion in sales in 2018 according to Packaged Facts. Much like the trend of meal preparation retail locations (such as Dream Dinners) that rose in popularity a decade ago, busy consumers are continually eager to find ways to streamline their dinner preparation process and still manage to eat balanced, nutritious, and delicious meals.

The grocery market clearly sees the value in trying to capitalize on the consumer demand for getting dinner on the table quickly and over the past couple of years, the major grocery players have scrambled to get a toehold in the sector. In 2017, Albertson’s bought meal-kit service Plated to make a foray into the space. In June of 2018, Kroger (NYSE: KR) acquired Home Chef, the largest private meal kit company in the U.S., for $200 million (plus potential contingent payments of up to $500 million). Beyond acquisitions, there have been a number of joint ventures / partnerships between grocery retailers and meal kit services, such as a former Costco / Blue Apron coupling and Walmart forging a partnership with Gobble in 2018 to sell meal kits online. Amazon / Whole Foods, which continues to shake up the grocery industry, also offers meal kits to customers both online and offline – given Amazon’s e-commerce dominance, vast distribution networks and now significant brick-and-mortar retail grocery presence, this represents perhaps one of the biggest potential threats to other meal kit companies.

As consumer investment bankers, we are interested in continuing to follow the evolution of the meal kit market and specifically how standalone players will fare and grocery retailers will continue to market and profit from this concept. It remains to be seen if the consumer will ultimately deem meal kits too challenging and simply opt for ready-made “heat and eat” food, or if this concept will have lasting power.

Wearable Technology

An estimated 51.9 million Americans (20.3% of the U.S. population) owned wearable technology (“wearables”) as of 2018 and that number is only expected to grow over the next several years.(1) The category spans AI-enabled glucose monitors to augmented reality glasses, but fitness trackers and smart watches are by far the most popular wearables, representing over half of the market. As wearables’ penetration continues to grow, so will the volume of data on individuals who adopt the technology—from physical activity, to sleep patterns, to heart rates. This level of data availability represents a major opportunity for technology-savvy companies who are able to effectively analyze the information and provide their customers actionable insights or valuable services.

Some of the most compelling opportunities to leverage wearables data lie in proactive and preventative care. Opportunities in these fields are two-fold. First, identifying conditions and risk factors early provides individuals the opportunity to seek care and adopt habits that mitigate risks associated with their conditions. For example, the Apple Watch Series 4 includes an EKG feature that can detect cardiac arrhythmias. This feature can both save lives and provide patients and physicians a tool to monitor the condition and track improvement. Second, firms can economically incentivize customers to adopt healthy habits. John Hancock, for example, now exclusively offers wearable-enabled life insurance policies.(2) That is, individuals with life insurance policies from John Hancock have the ability to opt-in to a program in which they are given a free FitBit (they can also purchase another approved fitness tracker of their choosing) and receive discounts according to their ability to meet certain wellness requirements. This arrangement represents a win-win for companies and their customers in that it provides individuals well-defined incentives to take ownership of their health, and it provides insurers a cohort of customers who will statistically live longer and generate fewer claims.

While wearables present many opportunities, they are not without limitations. The industry has come a long way from clip-on pedometers, but the wearable devices on the market lack the accuracy of clinical devices. The data collected via an Apple Watch’s EKG, for example, is inferior to that collected by a ten-electrode clinical EKG. What many wearables lack in data precision, however, they make up for in data quantity, and where there is quantity, there are opportunities to leverage cutting-edge analysis techniques like machine learning to find signal in the noise. Vijay Pande, General Partner at Andreessen Horowitz, explains:

“Our lives are not determined by single data points. Consider your heart health today: you likely had a ton of variation from minute to minute, depending on whether you were catching the train, working out, or getting excited about some news. Sitting in the cardiologist’s office, one gets one clinical measurement (albeit a very proper one) of an anecdotal nature capturing just that one moment in time… New [data analysis] methods such as semi-supervised machine learning allows large but somewhat noisy datasets, combined with much smaller but much more accurate datasets (i.e., a few of the people also get full clinical tests). Together these allow for the simpler measurements to yield predictions comparable to the full tests. As long as one has some patients with those more accurate tests — such as in studies run by research teams — the knowledge gained from wearables can then be connected to data from more accurate measurements.”(3)

Wearables, then, represent powerful tools that have the potential to shift patient evaluations from discrete snapshots to analyses based on extensive data sets, but they remain heavily dependent on data generated by traditional clinical tools. The companies that ultimately set themselves apart in this developing field will be those that are able to access and effectively analyze the vast amount of data generated by wearables while effectively handicapping the technologies’ limitations. To date, everyone from large insurers with massive actuarial departments to lean entrepreneurial teams with biostatistics degrees have distinguished themselves, but no clear leader has emerged. The industry remains in its very early innings.

MHT Partners, a leading healthcare services investment bank, will continue to follow trends in the space with great interest as leaders emerge and change care for the better.

[1] Source: Emarketer – Wearables 2019
[2] Source: The Verge – What happens when life insurance companies track fitness data?
[3] Source: Andreessen Horowitz – Cardiogram

Public Investors are Hungry for Beyond Meat

Beyond Meat, Inc. (NASDAQGS: BYND) went public on May 2nd, raising over $240 million, and its shares received a rousing investor reception to the tune of a 163% pop by the closing bell. Should market valuations remain in the ballpark of $3-4 billion, or even half that range, the ten-year-old alternative protein company’s IPO will be seen as a smashing success for the founders and early investors.

MHT, a leading consumer growth investment bank, sees the Beyond Meat IPO as an interesting story and one that raises several questions. First off, what justifies a food company with $207 million in 2019 consensus estimated revenue and losses of $30 million last year to be valued at 19 times forward revenue? MHT (and it seems many investors) believes the valuation reflects the prospect of capturing even a small share of the $270 billion retail/foodservice meat market in the U.S. That share capture is technically two-fold, as the company grows its share of the plant-based meat category and the category continues to eat into conventional meat. Notably, plant-based food sales grew 20% to $3.3 billion in 2018, according to data from Nielsen and the Plant Based Foods Association.

Beyond Meat and competitor Impossible Foods, slated for an IPO of its own later this year, are by no means the Uber and Lyft of the category – there are many competing brands in retail, however they’ve both made significant inroads in food service (Carl’s Junior, Burger King, etc.) and have the greatest momentum in terms of revenue growth. It also seems fairly likely that Beyond Meat will see a “double exit” within five years, similar to food companies like White Wave, Annie’s, AdvancePierre Foods, and Amplify Snack Brands (Skinny Pop), all of which were acquired by larger public food companies within five years of going public.

Speaking of larger public companies, it was announced that Beyond Meat investor Tyson Foods actually exited its investment a few weeks prior to the IPO. Tyson owned 6.52%, via Tyson Ventures, after reportedly investing a total of $34 million in 2016 and 2017. While many of us view corporate food VC investments as vehicles to generate acquisition optionality down the road, this is a case where corporate VC decided to pursue liquidity instead (the rumor mill is full of other theories). Tyson, the country’s largest meat producer, has said it fully intends to become a player in the space through organic investments and by leveraging its massive distribution footprint.

As consumer growth investment bankers, we will continue to follow the plant-based food category with interest, particularly with many new entrants into this very active space.