Online Marketing Too Expensive for FTD (FTD, GOOG, YHOO)

|
Includes: AABA, FTD-OLD, GOOG
by: The Stalwart

The Stalwart submits: Check out this deceptively normal-looking press release from florist FTD (FTD-OLD), in which they update investors on holiday sales. There's a very strange line in the opening paragraph:

"During the Christmas season, certain online search engine costs increased significantly over the prior year, and as such we made the decision not to pursue the resulting high cost order volume." stated Michael J. Soenen, President and CEO of FTD Group, Inc. "As a result, despite this slight decline in order volume for the Christmas season, we are reiterating our EBITDA and EPS targets for the year. Further, we have begun making additional investments in our marketing staff to help build a more diversified marketing portfolio. We believe these initiatives will enable us to regain our competitive position in the marketplace and continue to deliver long term bottom line results for our shareholders."

Whoa. Catch that? Advertising rates (which are set by auction) on Google (for floral services) have gotten too high, and now they're spending money to diversify their marketing away from the Internet.

What does this mean?

For starters, it's important to remember why advertising dollars are shifting to the Internet in the first place. There can be only one reason--it offers a more compelling return on the dollar. If advertisers could get the same or better results simply with billboards or FM-radio advertising they'd never bother to set up an Adwords account. The advertising migration should only stop when Internet advertising rises, and traditional advertising rates drop to the point at which they're equal (that's the theory anyway).

Now because pay-per-click search engine advertising prices are set by auction, they should rise to some level correlated with the expected profits on each visitor. The fact that FTD is not finding it worthwhile to engage in search engine marketing says one of two things. 1) FTD is less efficient than their competitors, and can't afford the same per-click rates, because their expected profit per-customer is lower than the others. This is possible, but a little hard to believe given their strength within the industry. 2) Companies have bid up advertising rates past their marginal value because they're willing to take losses in order to gain market-share.

This is worrisome for the likes of Yahoo and Google. It doesn't suggest anything fundamentally wrong with their businesses, but that the rates at which they've been selling advertising is fundamentally unsustainable (at least in some categories) and prices will need to pull back. Indeed, the partial-departure of floral heavyweights like FTD will cause this to happen.

It's interesting stuff, and certainly a trend to watch.

Related:
Full FTD press release.
FTD Misses Q4 Estimates (FTD-OLD)

About this article:

Expand
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here