20Aug2020Cover
20Aug2020Cover
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Facebook’s E-Commerce Initiative

Instagram Shops allows small businesses to have a virtual shopfront that will eventually span across all of Facebook’s digital properties- Facebook, Instagram, Messenger and Whatsapp. This has the potential to re-shape the e-commerce space.

George Hadjia

 

E-commerce is an industry people might instinctively tie to Amazon, rather than social apps such as Facebook or Instagram. However, many social apps are working on ways to pivot towards e-commerce, with companies working on innovative approaches to tie in e-commerce with their existing platforms.

When it comes to an intentional product search, approximately half of US internet users will start their digital search on Amazon according to eMarketer, more than double the 22% of users who listed Google as their first stop. For a social app to even attempt to build out an e-commerce platform that tries to compete with Amazon on intentional product discovery would be asinine. However, social platforms do have strengths that can be leveraged for a different, and arguably more enjoyable type of shopping experience.

Connie Chan, a general partner at venture capital firm Andreessen Horowitz, highlights that social platforms have many followers, which creates built-in distribution. Furthermore, the formats of many of these social apps are highly visual (lots of pictures and videos) which lend themselves well to listing products. In contrast to the intentional discovery process of Amazon, the shopping experience on Instagram Shopping, which is being rolled out, is serendipitous. More importantly, due to the treasure trove of information Facebook and Instagram have on their users, the ads are tailored and relevant.

In contrast to this, let’s take the example of free-to-air television which follows an ad-supported model. We get to watch scheduled shows but then typically have to suffer through commercial breaks, with limited if any tailoring or relevance (TV networks at best can advertise products that they think viewers of certain content might be inclined to buy; think VB ads during the footy). This type of advertising is typically intrusive, annoying, and unwanted. The majority of people would skip these commercials if they had that option. But could we ever see a situation where ads, rather than being a jarring nuisance that interrupts the content you’re viewing, could actually be useful and beneficial to the viewer?

I believe that the answer to that is yes, and we are shifting towards new models of e-commerce and product discovery. Let’s consider Instagram Shopping. Many people on Instagram follow brands they like, curated accounts brimming with creative inspiration (e.g., fashion, makeup, interior design etc.), as well as people (e.g., “Influencers”) who might be involved with products or industries that that particular user is interested in. Users, via the accounts they follow as well as their in-app activity can give Instagram an extremely strong sense of what products they might be interested in being shown. Rather than interrupting a video that an Instagram user might be watching, the ad experience is likely to unfold in a more sophisticated manner.

Rather than just scroll through pictures in a feed where the level of interaction with that content is limited to just likes and comments, there are “shoppable posts” on Instagram where companies can tag products in their posts. Given that this is content that users would have been interacting with anyway, the presence of an ad is really just enabling them to click through and learn more about the product if they’re interested, rather than being force-fed an unwanted ad.

The exciting part about Instagram Shops is that it now allows small businesses to have a virtual shopfront that will eventually span across all of FB’s digital properties (i.e., Facebook, Instagram, Messenger and Whatsapp). Furthermore, it will involve Facebook Pay, which will securely store user payment information and make the checkout experience more seamless. The important thing to note is that this creates a closed loop of attribution, whereby FB would be able to track user behaviour from the top to bottom of the funnel and relay this data and associated ROIs to its advertisers. This could be a powerful tool in increasing the level of paying businesses on FB’s platform. On its recent Q2 2020 earnings call, it was stated that of the 180m businesses that use FB’s tools, only 9m of them are active advertisers across FB’s services (a 5% penetration rate). We think there is a potentially considerable upside from this e-commerce initiative continuing to gain traction and eventually allowing FB to monetise a greater proportion of the businesses that derive value from its platform.

 

Montaka owns shares in Facebook, Alphabet, and Amazon.

 

George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.