Ibotta: Cash-Back Coupons Reincarnate $ibta
Thanks to all who are reading this week - criticism is welcome.
Being a CPG brand is not an enviable position to be in. Selling on Amazon today means more than creating the best product; it also involves spending a lot on ads. You can refuse to sell on Amazon and instead sell only through your own website, but that involves creating your own demand, which is arguably even harder. Selling in-store isn’t much better, involving not only paying up for optimal shelf space placement but worrying that, if your product is in the enviable position of selling well, your distribution channel will create its own private-label competitor. The upshot of these dynamics is that CPGs en masse spend an inordinate amount of money on advertising, to the tune of 200B per year.1 Ibotta, which filed to go public last month, seeks to capitalize on this. The business is straightforward: Ibotta works with CPG brands to offer cash-back deals to consumers. These deals are funneled into the Ibotta Performance Network, and then offered to customers through either Ibotta’s own D2C app/website or through integrated ‘third-party publishers’, such as Walmart or Family Dollar. These cash-back deals apply both online and in-person, a key part of the company’s pitch to investors. Put differently, Ibotta offers the modern version of coupons in newspapers. That’s an analogy worth making: cutting coupons out of newspapers was a pretty annoying task, but provided enough value to readers that they did so, and enough ROI to brands that they continued to pay for placement. Taking a picture of a receipt and uploading it to Ibotta’s app is a process involving friction, but historical evidence suggests people will encounter friction if it means saving money on groceries. The company also has a smaller ads business, similar to Instacart’s, but it currently accounts for a smaller portion of revenue.
The S1 reads as both a validation of Instacart’s advertising business and an argument for why Ibotta is in a better position to serve those brands. Management is keen to emphasize that in-store sales still constitute 87% of overall grocery spend. Instacart has to convince shoppers to both use its app and pay for delivery; Ibotta only has to convince shoppers to use its app, and is agnostic as to whether shoppers purchase online or in-person. This has two consequences:
1. The lack of delivery cost, in concert with the business’ reason d’etre, means Ibotta is more counter-cyclical than Instacart.2
2. All else equal, Ibotta has access to more data than Instacart does. This is, at least in theory, an advantage for the both the company’s advertising business and for showing consumers products they’re more likely to buy.
Revenue is split into redemption revenue and ads revenue, with redemption revenue making up 75% of the total. Overall revenue grew 52% YoY, a number that becomes less exciting once it gets more granular.3 Ads revenue grew 6%, D2C redemption revenue grew 27%, and third-party redemption revenue grew a whopping 711%. This third-party number was driven by Ibotta’s partnership with Walmart, which was rolled out to all customers with a Walmart.com account in Q323 (Something worth keeping in mind when thinking about FY24 results!) Notably, this revenue increase came with a COGS decrease on not just a percentage basis but on an absolute dollar one, with gross margins increasing 800 bps. Partnering with the Arkansas retailer was also favorable at the operating income level: negotiating the deal is an upfront sales expense, but once rolled out Ibotta doesn’t have to spend on S&M to reach that publisher’s customers. Walmart accounting for a quarter of overall revenue is certainly a risk, and not just to the third-party business. Understandably, the partnership meant Ibotta became a more attractive proposition to CPG brands, leading to more becoming clients, leading to more cash-back offers not just on Walmart’s site but on Ibotta’s own site. Walmart ending the partnership might not mean a dramatic increase in brand churn, but at the very least it gives Ibotta a weaker negotiating position when it comes to pricing. It’s difficult to tell how worried investors should be about the partnership. The more sales lift Ibotta provides, the more likely Walmart is to bring cash-back promotions in house. That said, Walmart’s busy replicating Amazon’s ad business, a high-margin opportunity that’s a relatively easy pitch to investors given its competitor’s success. Management announcing on the next earnings call that they’re diverting talent towards pursuing cash-back opportunities is unlikely to be met with the same enthusiasm. The best-case scenario for Ibotta, other than Walmart staying forever, is using such a landmark customer as a sales pitch to other retailers. If the third-party segment can scale quickly enough, it’ll provide CPG brands with sufficient excess value that Walmart churning off is less of a torpedo to the company’s network effect. This growth is happening already. The company’s recently announced an agreement with Family Dollar, which has yet to be rolled out, and AppCard, which powers loyalty programs for small and medium-sized retailers. The AppCard announcement is easy to get excited about in one sense and more challenging in another. On the one hand, it’s a step towards Ibotta having a much more diverse third-party publisher base, and likely plays some role in keeping smaller retailers in business. On the other hand, the grocery industry’s structure is such that the largest players account for a significant percentage of overall spend, so Ibotta will always face a third-party dependence problem even without Walmart in the picture. There’s a reason Toast built a business serving SMB restaurants rather than SMB grocers! The good news for Ibotta is that, at least for now, both Republicans and Democrats are pretty anti large corporation. A world where Kroger and Albertsons remain separate is a better one for the company’s bargaining position.
There are growth drivers for Ibotta beyond expanding to additional third party publishers: getting into other CPG verticals and increasing spend from existing CPG clients. On the latter point, management distinguishes between ‘clients’ and ‘brands’. The company serves ~850 clients, but ~2400 CPG brands that these clients own. They estimate that they serve ‘approximately 50% or less of the brands within some of our largest clients,’ which theoretically presents a real upsell opportunity. The hope would be that a dynamic takes hold similar to what’s happening at Global-e, where clients continue to add more of their brands to the Ibotta platform. I’m skeptical that this has happened yet: the company disclosed that it retained 96% of its top 100 customers from 2022 to 2023, but importantly didn’t reveal any sort of NRR metric for that same cohort. The move into non-grocery, general merchandize, verticals is an interesting one, and reminiscent of what was the Diapers.com strategy: begin with non-discretionary, recurring purchases to engender habit formation and then move into other goods from there.
Beyond assessing these vectors, the larger challenge for investors will be sufficiently understanding Ibotta’s customer base. As was the case with Netflix, those who spend their days allocating capital are less likely to be watching TV for many hours a day or using coupons at the grocery store.4
Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence.
This assumes the CPG brands you serve don’t experience supply chain disruptions at the same time the economy is rocky, forcing those brands to cut back promotions on frequently purchased products. This is exactly what happened in the first half of 2022.
On an earnings call back in 2011 Reed Hasting was asked why industry executives failed to anticipate how much Netflix subscribers enjoyed the platform’s content. He responded: “The average American household watches 8 hrs of TV a day. And the average investor does not watch 8 hrs of TV a day.......when one looks at one's own personal behavior, there's a big disconnect, I would say, relative to median or typical Americans."