There are bits of positive news and surprising patterns among the economic carnage inflicted by COIVD-19. For one, consumers have dramatically shifted behaviors. A senior citizen in my family, just recently set up with the internet over the holidays of 2019, is now regularly ordering Walmart curbside pickup on her mobile phone. COVID-19 has forced almost everyone to change their habits.

The following articles highlight businesses that have seen an unexpected windfall or have had to significantly pivot due to COVID-19.

WSJ - How Etsy Became America's Unlikeliest Breadbasket

  • Etsy now sells food - namely baked goods 0 thanks to “cottage food laws” enacted over the past seven years

  • Etsy is becoming to go-to for everyday staples

  • Backdrop of new CEO who streamlined and experimented to get Etsy on a path towards growth/profitability

  • The baked goods category is exploding, “reported increases in orders of between 200% and 450% in the past two months, compared with a year ago

  • Etsy was well positioned to buffet COVID-19 as creators are usually based at home. Interestingly, the article notes how Etsy customers are loyal and prefer to shop with Etsy versus other lower priced competitors like Amazon and eBay. Etsy is a platform that fosters goodwill between both sides of the market. For example, buyers and sellers are encouraged to message each other.

Meal Kit Trends

WSJ - Can Meal Kits Remain the Flavor of the Month

WSJ - Meal Kits Thrive During Lockdown

  • Meal kit makers are busy. Direct to consumer meal kits have thrived during the lockdown imposed by COVID-19 in early 2020.

  • HelloFresh is one of the more popular services

  • While Instacart staffed up and restaurants shuttered, meal kits helped fill the void.

  • “HelloFresh grew first-quarter revenue by 37% compared with the final three months of 2019 and made its first quarterly net profit. Blue Apron, which has struggled to execute on its promises for several years, made more muted gains of 8% quarter-on-quarter and remains in the red.” (Flavor of the Month)

  • But meal kit services are beset by high churn rates.

  • Unsurprisingly, BlueApron is still financially struggling, but they are aware that they need to adjust to retain customers: “To keep customers for the long run, the company said it is boosting marketing and offering more flexible menu choices.” (Thrive During Lockdown)

  • Once the economy opens up, will meal kits see a precipitous decline is usage?

WSJ - The New Recipe for Restaurant Survival? Become the Next Dominos

  • The non-delivery software that support restaurant operations like Toast and ChowNow - are what interest me. Restauranting is operationally intensive and could benefit from streamlined processes enabled by software. However, the margins are often razor-thin. What are the products that truly grow the pie as opposed to just taking a cut?

New York Times - Your Kitchen Can Be as Well Stocked as Restaurants Now

  • Restaurant suppliers quickly pivoted to the retail market.

  • Once they figured out consumer distribution strategies, suppliers experienced faster payments and presumably lower nonpayment rates. Normally restaurant suppliers and farmers extend credit to the restaurant clients.

  • Consumers are benefitting from the high quality meats and produce and experimenting with new ways of cooking.

Will this trend stick? Will restaurant suppliers permanently nurture enthusiastic retail customers who want quality food and have a desire to support small businesses?

It's not just food. All categories have been impacted in surprising ways

New York Times - Americans Keep Clicking to Buy, Minting New Online Shopping Winners

  • Of course, on aggregate, there has been a major economic contraction. However, not all categories of spending have declined, especially when it comes to e-commerce. According to the article, e-commerce electronic sales have experience a 200%+ growth in sales.

  • Shows us that Instacart and Amazon are the only major players in grocery delivery. Grocers need to be on Instacart to compete with Amazon. Due to the network effect, it generally doesn’t make sense for a grocery store like Vons or Pavillions to be on a smaller outfit like PeaPod. Thanks to COVID-19, Instacart is back to a going concern.

  • Walmart and Target’s online business has grown.

  • DoorDash is to food delivery as Instacart is to grocery delivery.

  • No one is interested in wearing anything but rayon-spandex blends. LuLuLemon’s online sales are up by 200%+, while major players like StichFix & Rent the Runway are flat or declining. Even MeUndies is flagging.

Airbnb’s bookings were decimated by COVID-19 in the first half of 2020. I recap the highlights from the May 22nd interview with Brian Chesky by Kara Swisher in the below post. Chesky is energetically transparent as he describes the events that unfolded around him and the tough decisions that he had to make. Swisher does a good job of helping Chesky unpack the dramatic and still unfolding events. I suspect that Airbnb’s COVID-19 strategy will be a business school case study for years to come.

Initial domino falls, aftermath of laying off 25% of Airbnb staff, life/people lessons learned

  • As Chesky worked through the S1 in preparation for a mid-year IPO, the China business tanked and Europe would fall next

  • After the major round of layoffs, he allowed employees two weeks to absorb news. Despite being in literal DEFCON 5 mode (my words not his), Chesky was patient enough to know that he had to allow employees time and perspective

  • Chesky says about 90-95% of the people in his life were solid and there for him when he needed them

  • He didn’t feel like he was in a panic. He became oddly present & optimistic. Have to be optimistic because others will follow you. How do you maintain the optimism in this tough time? He relied on his co-founders and board for support. Is there a psychological term for this almost out-of-body experience?

Tidal wave of guest refund requests as COVID-19 cripples the global economy

  • As COVID-19 spread across the world like invisible wildfire, understandably, guests wanted to cancel trips and requested refunds on deposits. Chesky describes it as a very sudden wave of refunds

  • Hosts did not want to grant refunds - hosts had discretion on setting refund policies, which in normal times make sense since the properties are their assets

  • Chesky made the decision based on “principle” - minimizing moral hazard and preempted host refund policies in favor of guest interests. He understood that many guests would still travel if not granted refunds or so they claimed. He also looked at the policies of hotels and airlines as a comparison

  • However, in this fog of war, Chesky says that mistakes were made. He says he made the right decision, but he did not have a plan to help hosts offset the impact on their cash flows. But Chesky made it right after the backlash from hosts. In short, Chesky leveraged his existing balance sheet and essentially crowdsourced from other stakeholders including employees (employee driven) and investors to create a host relief fund

Shelving the IPO & Pivoting Towards Fundraising

  • Scenario planning for the raise. Cash follows revenue and Chesky would soon face a major cash crunch if he did not bridge. Chesky had to understand how much cash he needed to raise. Faced the choice to raise money now or wait to raise money during a recovery with better terms. Difficult to know when the bottom was going to hit and how low the bottom could go. His team modeled no travel for 18+ months

  • Trade off between debt and equity. Ending up going with ~ $2B debt with warrants that do not dilute existing equity very much. Debt is good if the company will grow fast

Divest/Reinvest Decisions in the time of COVID-19 - a hold, buy, sell strategy

Through an “audit” Chesky had to understand if there were any tailwind opportunities & bright spots in the business. Interesting to note that European domestic travel - as defined by in country travel - has almost completely recovered

  • Airbnb online experiences was an unexpected hit. Sounds like Airbnb experences were trudging along based on Chesky's description, but online experiences took off

  • He notes how there is strong demand for domestic stays where guests only need to travel via car in a 2 hour drive. Guests are looking to decamp for an extended period of time. Airbnb is now marketing monthlong stays on their landing page

A fun penguin oriented Airbnb experience.

Pausing initiatives - Do they add to the bottom line or are they extraneous & distracting in this time of crisis? Keep in mind that because of demand shock, Chesky has to layoff a significant share of workers, so something must go

  • Paused the new transportation products (airlines offering to combine bookings)

  • Paused content strategy - an Airbnb magazine an excellent idea in normal times

  • Paused the development nice to have “features”

  • Paused the loyalty program for guests - a must have in normal times to keep up with competitors, but not necessary

  • Paused Hotels - putting hotels onto the platform - e.g. Hotel Tonight

  • Reduce scope of existing business lines

  • Reduced the “luxe” ($1-2K a night staffed properties) - more a resource allocation than a demand issue

Final Thoughts

There is no easy way to layoff employees, but how you treat people matters. In Chesky’s open letter to laid-off employees, he mentions how he is allowing employees to keep their laptops so that they have a tool to find gainful employment. A clever, low or no cost way to build goodwill with departing employees.

The burden faced by professional airbnb hosts, many of whom are highly levered should not be overlooked. For more on that, read the recent WSJ piece - "A Bargain with the Devil."

We’ve all seen the hilarious thirty to sixty second videos of cats rapping or gen Z’ers pranking unsuspecting boomers playing on our phones with a “TikTok” logo in the lower right hand corner. Almost overnight, TikTok’s appeal has broadened beyond that of young adults who have a preternatural talent for viral TikTok video creation. I recently came across a TikTok posted by a gen X'er business owner who felt compelled to drive awareness with a younger audience. The post did not drive sales or even explain her product. It seemed like a true attention grab - a silly video of her dog with her business handle subtly tagged. Is this the future of content? AsTikTok emerges into the mainstream, it’s worth probing into the backstory of the mysterious brand and their addicting app.

Demystifying the origins of TikTok

TikTok is an app for short-form mobile videos. If you are unfamiliar with the form factor of TikTok, may I recommend that you start with the TikTok hit of a cat dancing along to ‘Mr. Sandman’. The app birthed an entirely new form factor of content. TikToks can combine aspects of music video, slapstick comedy, and performance art in one thirty to sixty second clip. TikTok creators have a talent for utilizing the app to leverage universally humorous or poignant content. According to G2 learning Hub, as of November 2019, the most followed TikTok account is Charli D'Amelio with 52.3 million followers.

The New Yorker’s September 2019 article, “How TikTok Holds our Attention” by Jia Tolentino, describes why and how TikTok became a viral video content house. TikTok was developed by ByteDance, founded by Zhang Yiming. Tolentino describes the two products, “The direct predecessor of TikTok is Douyin, a short-video platform that ByteDance launched in China in 2016.” It’s somewhat challenging to parse out the difference between the two platforms, but the general consensus seems to be that Douyin is the Chinese version of TikTok, which also happens to have more native ecommerce functionality. This is not the first commerce enabled consumer app in China. The China based WeChat app allows users to make purchases directly from the app.

TikTok curates content & enables a broader TikTok ecosystem of producers, creators, and managers

  • According to Tolentino, “TikTok employs an artist-relations team that contacts musicians whose songs are going viral and coaches them on how to use the platform. Some videos include links to Apple Music, which pays artists per stream, though not very much. Virality can thus pay off elsewhere, relieving the pressure for TikTok to compensate artists directly. It is, these days, a standard arrangement: you will be “paid” in exposure, giving your labor to a social platform in part because a lot of other people are doing it and in part because you might be one of the people whom the platform sends, however briefly, to the top.”

  • Tolentino writes about Jacob Pace, a twenty-one year old CEO of a content production company with a TikTok speciality, Flighthouse. "Pace has fifteen employees working under him to make TikToks, some of which serve as back-end marketing for record labels that have paid Flighthouse to promote particular songs."

The Commerce aspect of TikTok is particularly interesting. Excerpts from the Tolentino piece:

  • Though it remains broadly similar to TikTok, Douyin has become more advanced than its global counterpart, particularly with respect to e-commerce. With three taps on Douyin, you can buy a product featured in a video; you can book a stay at a hotel after watching a video shot there; you can take virtual tours of a city’s stores and restaurants, get coupons for those establishments, and later post geo-tagged video reviews. Fabian Bern, the head of a marketing company that works closely with Douyin influencers, told me that some power users can make “fifteen to twenty thousand U.S. dollars” on a shopping holiday like Singles’ Day.

  • Bern thinks that TikTok content will soon become more mature, as has already happened with Douyin, which now contains micro-vlogs, life-style content, business advice, and videos from local police.

I have no designs on downloading TikTok, but I do love the cat videos. I’m curious to see if TikTok will be a passing fad as alluded to in the New Yorker article or if it will become a successful mainstream app with an ecommerce play.