Episode 182 - Scale Scale Scale - Exponent Recap

Podcast: Exponent

Published: 2020-02-28

Duration: 1 hr 5 min

Summary

The episode delves into the complexities of the consumer packaged goods (CPG) industry and the impact of internet assumptions on business models. The hosts critique the FTC's decision to block mergers and acquisitions in the DTC market, arguing that the real issue lies in the integration of demand-side control by companies like Facebook.

What Happened

The episode begins with a discussion on the early days of the coronavirus pandemic and its potential impact on global supply chains, likening it to the 2008 financial crisis. The hosts then pivot to the FTC's decision to block Edgewell's acquisition of Harry's, a direct-to-consumer (DTC) razor company, highlighting the implications for competition and pricing in the CPG industry.

They explore how the internet has disrupted traditional CPG business models, making it easier for new entrants to bypass retail markups by selling directly to consumers. However, they argue that many DTC companies fail because they don't fully integrate internet assumptions into their cost structures and business models.

The conversation shifts to the role of Facebook and Google in the advertising landscape, emphasizing how these platforms have become dominant players by integrating audience reach and R&D to offer targeted advertising. This integration allows them to extract significant value from the market, at the expense of smaller companies that struggle to compete.

The hosts critique the FTC's focus on market structure and competition, arguing that it misses the real issue of demand-side control. They suggest that the real problem is not the lack of competition but the concentration of power in demand aggregation by companies like Facebook.

A key point is made about the incorrect assumption by many DTC companies that they can avoid retailer markups without understanding the full implications of a shifting value chain. The hosts argue that these companies are not prepared for the competitive pressures and cost structures that come with selling directly to consumers.

The episode concludes with a call for a new legislative approach to address the challenges posed by dominant tech companies. The hosts argue that traditional antitrust laws are ill-suited to address the dynamics of internet-based markets and that new laws are needed to deal with the power of large tech companies.

Key Insights

• The FTC blocked Edgewell's acquisition of Harry's, a direct-to-consumer razor company, due to concerns about competition and pricing in the consumer packaged goods industry.
• Many direct-to-consumer companies struggle because they fail to integrate internet-based cost structures into their business models, mistakenly assuming they can avoid retailer markups without facing new competitive pressures.
• Facebook and Google dominate the advertising landscape by combining extensive audience reach with advanced R&D, allowing them to offer highly targeted advertising and extract significant market value.
• Traditional antitrust laws are considered inadequate for addressing the challenges posed by dominant tech companies, prompting calls for new legislation tailored to the dynamics of internet-based markets.