3-2-1nsight: Misunderstanding Potential
How the market momentum screwed so many businesses and people and what should you do next
Welcome to 3-2-1nsight from Marketing Sciences.
We have had 8 new subscribers join since the last newsletter. Welcome, and thank you for subscribing. If you like what you’re reading, please continue sharing it with your friends or colleagues, as that’s the only way to grow this newsletter.
Now that we’re into November, and we’re about the close out the year, there seems to be more uncertainty than ever. There’s also a strong appetite for narratives pushing along the momentum that’s been driving so much of 2021, after a pandemic-filled 2020. We’re seeing now though, how that momentum and the changes caused by the pandemic have impacted everything from individual behaviors to overall business strategy. As the world continues to get back to normal, and the outcomes of short-sighted business strategy start to reel its head, businesses now more than ever need to understand whats signal, whats noise, and whats driving the momentum.
And as well, I feature a couple of great things I’ve read or started reading this week. And as always, download my 130 slide consumer research deck looking at the future consumer in 2021, It’s a ton of primary research, and you can download it for free.
3 Stories
How Zillow's Grand Home-Buying Ambitions Imploded - Bloomberg
Rich Barton, a respected tech entrepreneur, returned to the company he founded in 2019 to help transition away from its traditional ad business to embrace the “disruptive” competition from iBuying platforms like Open Door. Barton made a bet that because Zillow had become such a habit for so many future, potential, and actual home buyers, they could become the one-stop-shop for the entire real estate value chain by entering the iBuying space with Zillow Offers. It was a risky bet but had paid off for a substantial period until the momentum swings caused by the pandemic caused it to change its forecasting model and mistake the market. That single mistake will haunt Rich for the rest of his tenure, as Zillow officially shut down their iBuying offering a few weeks after they reported they had stopped the program due to lack of labor to fix and flip the homes.
Hertz says Tesla's already started delivering cars even though Musk says there's no signed deal yet - CNBC
Last week Hertz said they placed a 100K order of Tesla’s being the number one car rental company for customers to rent and drive a Tesla. That announcement caused Tesla to become worth more than the entire auto industry and one of the few companies to hit the 1 Trillion dollar market cap. Critics called out Hertz’s leadership and lauded their strategic move of crowding out potential competitive rental car companies from the car flow, and Hertz could get some of the Tesla brand halo effects that improved its stock by 35%. That got shut down on Monday when Elon Musk tweeted out that there was no agreement with Hertz and that whatever Tesla’s Hertz was getting was at the exact cost and output as any regular customer. But by the time that tweet came out, Tesla had already hit 1 trillion and forced funds to change their positions over the weekend.
Oh, the Places Parents Will Go! (Once the Kids Are Vaccinated) - WSJ
Now that children 5-11 can get the Pfizer vaccine, many parents are finally ready to embrace the “back to normal” we’ve all craved. Kids going back to school, vacations getting taken, relatives getting visits, trips to the movie theater, dining out again, and the ability to go back to the office are a few of the things parents everywhere are thinking about with certainty. These changes will affect every economic sector, from increased public transit usage, travel, dining, consumption, and experiences. Get ready for the real recovery act.
2 Takeaways
The bounce back from the pandemic has created a momentum-driven environment that makes it easier to overreact to noise that appeared to be a signal.
Bill Gates had an adage that said:
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”
Looking at market dynamics, consumer confidence, investor expectations, analyst’s conservative estimates, whatever factor you want to consider...since the pandemic, there’s been so much momentum from everyone (business owners, customers, investors, and markets) to want things to get back to normal or to change permanently. That momentum and energy caused many businesses to overestimate specific signals and be over-aggressive in some of their plans. Examples of overestimating the short term while underestimating the long term were best exemplified this week as news about Zillow and the market’s reaction to the report from Hertz and Tesla. Most clearly in Rich Barton’s (Zillow’s CEO) statement regarding how the execution of their Zillow Offer’s rollout suffered by misunderstanding Q1 performance.
As we came into the first half of the year and then into the second half and we made the decision to go ahead and grow, given our Q1 performance, we made a decision that we needed to increase our acquisition pace, and our forecasting process at that time was not keeping up with that rapid rate of HPA increase that was occurring.
Rich learned the hard way the consequences of overreacting to noise that fit the desired momentum narrative.
It echoed again on Monday when news came out last week that Hertz had ordered 100,000 Tesla electric vehicles so that by the end of 2022, they’d be the premier car rental of choice for anyone who wanted to drive an electric vehicle. The news from Hertz did two extraordinary things, Hertz’s shares improved 35% and reached a new 52-week high of $46 a share, and Tesla hit a $1 trillion market cap for the first time after the announcement.
That same momentum dropped immediately after Elon Musk on Twitter said he’d like to “emphasize that no contract has been signed yet.” But that reality no longer matters as everyone involved won, except the investors who bought Tesla immediately after hitting that market cap.
It's hard to understand the scale of the actual recovery, which will create another artificial improvement across all sectors and impact momentum.
That same momentum wove its narrative during the beginning of the pandemic as businesses kept on discussing an unpredictable future. Bracing customers, and tempering expectations, companies that had any good news shared stories that appeared as though any success was because of strategic decisions made by their executives. Internally, leaders took credit for any success as though it was a byproduct of their efforts rather than a landscape reflection. At the same time, some businesses like Nike, Amazon, Home Depot, Target, and others sped up critical investments that strengthened their positions and built for a new world. As the world slowly reopened, the market narrative became highly focused on this narrative surrounding strategic investment and execution. But as we see, kids can now get vaccinated, and past behaviors will happen and most likely accelerate. Again, this momentum will create a landscape that’ll supercharge the entire economy as things get back to normal. Some companies that invested later than their competitors will capitalize on this second wave of consumer spending but will again make a lot of noise appear to be a signal. Families that were still cautious due to fear for their children will spend at their prior levels. Parents will fully reengage in the workforce again, giving companies a boost in productivity. With low-interest rates for the foreseeable future, this will only continue to provide momentum to the landscape and make it hard to distinguish between signal and noise.
1nsight
As things get back to normal, it is crucial to contextualize the potential for your business rather than get swayed by the momentum of competitors or the landscape.
Keep this momentum in mind and the bigger picture for the rest of Q4, especially during the holiday season and BFCM. Supply chain fears have created a narrative that shopping needs to happen early, and retailers are more than happy to start their holiday sales early to take advantage of the behavior. Large chains, especially the companies that made the suitable investments, are in more significant positions than ever before and will spend the needed dollars on advertising and getting every consumer dollar they can during this time.
Less prepared companies with deep enough pockets will try to compete by matching the spend so that their stronger competitors widen their gap. The less affluent companies and small businesses are now in a race to the bottom, spending money on marketing, shipping, and supply chain issues that they truly can’t afford due to fear that the big players will conquer all their customers.
Instead, I propose that any business owner right now should truly contextualize their business and understand what the genuine opportunities are for sustained growth, and stay disciplined with those opportunities to understand better the risks you should take and the tradeoffs that you should discuss. As the world opens up for a second time because of the new wave of vaccinations for children and a true “back to normal” grows near, don’t overreact to the present exuberance and narrative. Instead, be picky and selective and don’t get swayed by the momentum from all sides. Be intentional, understand your business, ignore the noise so that you might identify a real signal.
My Readlist: Things I’m Consuming Across the Web
Rebecca Traister, from the Cut, profiles Katie Couric as she recently released her memoir.
Gerry Smith, from Bloomberg, profiles Scott St. John, the creator of “Deal or No Deal” who plans to help Trump take on Netflix.