Mark Zuckerberg admits he overestimated e-commerce boom amid layoffs

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On Wednesday, Meta chief executive Mark Zuckerberg made a startling admission during a private Zoom call for the 11,000 workers his company had just laid off: They were losing their jobs in part because he overestimated the pandemic e-commerce boom endurance.

Like many social media platforms, Meta’s revenue skyrocketed during the pandemic when the spread of the coronavirus forced many retailers to turn to the internet to reach potential customers who were staying home to avoid the virus. Zuckerberg believed that even after vaccines allowed people to freely resume offline activities, e-commerce growth would continue to expand rapidly. He was wrong.

“It obviously didn’t go the way I expected or the way any of us hoped it would,” he admitted to employees he had just handed pink slips to, according to a recording of the call shared with the Washington Post.

Instead, the digital shopping revolution seems to have stalled.

During the pandemic, businesses of all sizes, from mom-and-pop shops to big-box retailers, have invested heavily in growing their digital footprint – including through social media advertising – to reach online customers in full expansion.

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Today, however, e-commerce sales are plateauing as shoppers return to physical stores. The share of total purchases accounted for by e-commerce fell from 11.1% in 2019 to 14.6% in 2020, where it remained, according to data from market analysis firm Insider Intelligence.

“Everyone has sort of bought into the myth that e-commerce is going to permanently accelerate,” said Andrew Lipsman, an Insider Intelligence analyst who covers retail and e-commerce. “But for that to happen, you have to have a fundamental change in behavior that’s going to be sustained into the future. And the reality is that e-commerce has been sort of constant for years and years and years… growing around 15% per year, plus or minus a few percentage points.

The slow growth of e-commerce as the pandemic subsides has been particularly painful for Meta, whose business is heavily dependent on digital ad dollars gleaned from its core Facebook and Instagram apps. Meta, which rebranded itself from Facebook last year, specializes in providing small and medium-sized businesses and digital retailers the ability to serve ads for their products to customers most likely to buy them imminently. function of the vast data mine of social media. giant collects on its users.

Businesses are more likely to spend money on social media advertising than Meta if they can see that users who see their ads are actually buying their products. If their ads become less effective, retailers are less likely to spend money on advertising with Meta, according to Lipsman.

“All advertisers track conversions that happen in some way,” Lipsman said. “More conversions equals more reasons to advertise.”

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The decline in e-commerce growth is also hitting Meta at a time when its core business model is under other serious threats. The social media giant is facing growing competition for users and ad dollars from competing apps and new privacy changes introduced by Apple that are undermining the company’s ability to collect data about its users for the purposes of targeted advertising.

Meta announced Wednesday that it was laying off 13% of its workforce, cutting discretionary spending and extending its hiring freeze through March in a bid to become “leaner and more efficient,” Zuckerberg said in a statement Wednesday. Zuckerberg said the company will prioritize its remaining employees to work on its top business priorities such as its drive to elevate content from viral creators on its social media channels, bolster its advertising offerings and create immersive digital worlds known under the name metaverse.

Meta, whose shares are down about 70% this year, is getting costs under control after years of growing employee numbers. Meta’s workforce grew from 56,653 as of September 30, 2020 to 87,314 as of September 30, 2022, according to the company’s regulatory filings. Meta shares rose more than 5% on Wednesday, showing investors were confident the downsizing would help ease some of the financial challenges the company is facing.

“It was like they were spending like drunken sailors,” said Dan Ives, financial analyst at Wedbush Securities. “I think Zuckerberg and the team recognize that they need to reduce expenses and focus on their core social media business as well.”

Zuckerberg isn’t the only tech executive who believes the rapid growth of the e-commerce market will persist even after the pandemic is over. Shopify chief executive Tobias Lütke, whose company sells payment, shipping and marketing tools to businesses, also said he expected further e-commerce growth when he announced in July that the company would lay off 10% of its workforce.

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Lütke said in a statement at the time that when the pandemic started, Shopify “threw our roadmaps and shipped whatever might be useful” to meet the growing demand. He added that the company predicted that the share of e-commerce sales in total purchase dollars would increase permanently by five or even 10 years.

“It is now clear that this bet did not pay off,” Lütke said. “What we’re seeing now is that the mix is ​​getting back to roughly where the pre-covid data would have suggested it should be at this point.”

Meanwhile, data on buying trends and demand for commercial real estate shows that in-person shopping has made a comeback. A survey by the National Retail Federation and IBM found that 45% of consumers said they preferred in-store shopping, compared to 28% who said they preferred online and 27% who said they often did both.

Retailers also have incentives to bring people back to stores. “Omni-channel shopping options” like curbside pickup save businesses money on labor and delivery costs. And buying online and then picking up in-store opens up opportunities for the “halo effect,” when shoppers pick up more items when they walk inside to pick up their order online.

“We’ve seen consumers just wanting to get out,” said Adam Davis, managing director of the retail division at Wells Fargo Capital Finance. “They want to be in stores, they want to shop, they want to touch, they want to try – all that experience. And so we’ve seen online shopping normalize and pull back from the highs it was at in 2020.”

Consumers have also adjusted their buying habits as record inflation and rising interest rates strain their budgets. Shoppers are more savvy and thoughtful when they spend their money – comparing prices, researching deals and taking advantage of sales driven by inventory builds at the nation’s largest retailers.

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In recent months, Meta executives have repeatedly warned that the company is also fending off competition for marketing dollars and users from new entrants to the social media market such as TikTok, the short-form video platform that has become popular among young users. This year, the company reported that Facebook lost daily users for the first time in its 18-year history, although user growth picked up in subsequent quarters.

In August, Meta announced it was shutting down its Facebook Live Shopping feature after underperforming. The program, which had been running for two years, allowed viewers to purchase items as influencers promoted them in live videos. TikTok recently announced that it is looking into live shopping after its success in Asia and the UK

“People have a lot of choices about how they want to spend their time, and apps like TikTok are growing very quickly,” Zuckerberg said in an earnings call this year. Meta tries to “ensure that our apps are the best services available to young adults”.

Meanwhile, Apple introduced new privacy changes last year that required app makers such as Meta to explicitly ask device owners if they could track their internet activity. Many users declined this request, which hurt Meta’s ability to collect granular details about people that would help the company better target ads. Meta estimated that Apple’s new changes will cost the company at least $10 billion by the end of this year.

Zuckerberg said Wednesday that the combination of those market pressures forced him to make the difficult decision to downsize the company.

“Not only has e-commerce returned to previous trends, but the macroeconomic downturn, increased competition and [the loss of user ad data] caused our income to be much lower than I had anticipated,” he said. “I was wrong and I take responsibility for it.”

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