The Future of Retail with QVC, Livestreaming’s O.G.

Speaker 1:
Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas, shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Oliver Chen:
Thanks so much everybody. So hi, my name is Oliver Chen. I'm Cowen's retail and luxury analyst. Today we'll discuss the future of retail in live streaming. I'm pleased to be joined by Mike George, president and CEO of Qurate Retail, as well as Jeff Davis, the CFO of Qurate Retail. Qurate Retail Inc.'s principles, businesses include, QVC, Zulily and the Home Shopping Network and it operates in North America, Europe, and Asia. We view Qurate as a pioneer in live streaming and virtual shopping, which have been key communication method during COVID-19. Mike is also chairman of the National Retail Federation, board of directors. He serves on the board of directors of Qurate Retail, Ralph Lauren, and the National Constitution Center. Thank you Mike, for your time. It's great to have you here with us. So Mike, there's a new golden age, Qurate is really at the nexus of retail media and ecommerce, what is Qurate and how have you been reinventing curation?
Mike George:
That's great to be with you Oliver. And it's a really unique and exciting time for us because all the things we've been trying to build towards over the last several years are now starting to come together in ways that we think are really exciting, not just for the current results, but for the longterm outlook on our business. The reason we named our company Qurate is that we've always been a company that is about curation, in a world of a commoditized offerings, broad ecommerce catalogs, what we always stood for is this highly curated selection of unique products that would encourage discovery, insight, passionate and energy from our viewers and visitors, products that had unique stories to tell, that's still true. But today we combine that with this really curated set of platforms we operate from the traditional, linear, live TV model that we pioneered a few decades ago. They're all forms of digital distribution.
So our company today is about highly curated and compelling products distributed over a digital network with curated content based on what's most relevant to that network, whether that network is YouTube or live TV or Facebook, or pick your example of ways in which folks consume video content today. So we're about curation, curation of product, content, distribution, and communities. And around that, we build these really exciting and engaged consumers who come back every day to check out what's going on in the network.
Oliver Chen:
Mike, in many ways, QVC is the original of many different things. Could you talk about that? What does it mean to you today and what are you really excited about, some of the foundations of your business relate to influencers?
Mike George:
Yes, it's a really fun topic for us because when we think about what we've tried to build and invent over the years, it's fascinating how they're all coming around in new and interesting ways in today's environment. So obviously we were the first meaningful player to really do live shopping. Obviously we did it over television platforms because what was new when we started 40 years ago was cable. Cable was the new thing and we were able to take advantage of cable distribution to build out these live TV networks of shopping. We've remained the leader in live shopping, but now that live shopping is manifested as I was mentioning over all these other digital platforms, but we really started live stream shopping and are excited to champion it into this new era we're in. But you also mentioned influencers. We like to think about ourselves as the first influencer model because in the original QVC model, our hosts, the amazing guests and personalities that would come on air from celebrities to entrepreneurs, to inventors, these were influencers.
These were folks who helped guide you and give you advice and perspective and understanding to make informed purchase decisions. Today, we compliment that by partnering with YouTube influencers and others that have built big social following so we can tell their stories as well. But that influencer model that everyone talks about today is kind of in our DNA. Another area where we were the innovator is buy now, pay later. We started that buy now, pay later model a few decades ago, in our platform it's called easy pay. And as you know, one of the hottest retail trends out there right now is all these folks offering these buy now, pay later models. We have deep expertise, good systems, and we do it in a much more efficient manner than most of the players out there. But, I think all of those attributes of our business are more relevant than ever. And again, it's what gets us so excited about the future of this business.
Oliver Chen:
Mike, also what happened with respect to the pandemic, and how did your business fare and what strategies did you change or solidify?
Mike George:
Our business results were very strong through the pandemic. We saw enormous growth in new customers, new customers up probably over the last 12 months with the pandemic, new customers were up by 35% across the company, a huge growth in our home businesses, electronics. So we're really strong response from consumers, good top-line growth. And I think all of that reflected a couple of things. It certainly reflected the reality of a stay at home environment, right? People were spending more time at home. They weren't comfortable going to the store. And so we saw this huge surge in online shopping across the industry. And we also saw this huge surge in folks doing video streaming of all flavors. They try to keep themselves entertained at home. So we were the beneficiaries of those trends. We could be there for her present on TV, but also present on all these digital platforms, traditional ecommerce offerings in addition to video commerce offerings and this wide range of products that we could flex fairly quickly to what was most important to her in the moment.
And in those first few months of the pandemic, she cared about food. She cared about making our environment more productive, more safe. We're able to pivot our offerings to those kinds of products, tell those curated stories in a meaningful way and all that enabled us to get this kind of outsized growth. But the point, I guess, I'd make though, is it took many years of effort to get to that point. So while we benefited from some of these state home dynamics, we benefited only because we built out the digital platform. We built out the agility in the business model. We built out the marketing capabilities to really take advantage of the moment and all credit to our team for being able to respond and adjust to what was happening in that environment and deliver some pretty compelling stories for our customers and results for the company.
Oliver Chen:
So Jeff, what have you noticed in terms of your customers and the cohort behavior of a lot of the new customers you've acquired?
Speaker 4:
Yeah, a lot of the new customers we have been acquiring not only through the pandemic period, but now post pandemic very much resemble the customers from a pre pandemic period. With respect to age demographic, they are coming in to us, let's say still through our digital platforms. And, that is something that Mike has mentioned earlier that we've been developing not only the opportunity to continue attracting customers through our video linear platforms, but through our digital platforms, that customer is coming to us. We have a blend of marketing programs, so we're still gaining that customer about 60% organically and about 40% through performance marketing. So that is something that while we've been leaning into marketing a little more over the last periods while we've been ratcheting that up, but it has not substantially shifted. We're still driving, the vast majority of that new customer growth organically.
Oliver Chen:
Thanks for that Jeff. Mike, what are your thoughts on different brands that you work with and why do brands like to partner with QVC and HSN?
Mike George:
No, we work with this really interesting and broad range of brands. And Jeff mentioned this briefly, but in some categories, apparel would be a good example. We largely work with proprietary offerings. We'll partner with leading stylist, leading designers, leading influencers from Isaac Mizrahi to LOGO by Lori Goldstein, to influencer like Hunter McGrady and really build a product line and build a story around those personalities. But it's exclusive to us. It's only available on QVC and we got a similar set of proprietary offerings on HSN as well. But in a category like beauty, we would take a different approach. And beauty what we love to do is find the next great indie brand and tell the story that cool brand, Live Matters how to use it and tell that story.
And over a long period of time, we've helped build some of the largest beauty, prestige beauty brands out there, but they started small, came onto our network and told their story in a special way. In home, it can be anything from proprietor offerings in gardening to leading national brand kitchen electrics, where we'll have exclusive offers, exclusive colors, exclusive new launches to provide, so the common thread is product that has compelling stories to tell, there's some degree of exclusivity to us that creates a reason to come to QVC or HSN. But beyond that, it's really wide range of types of brands we partner with.
Oliver Chen:
What would you say experiential retail means to you and Qurate and what will that mean next and how do you form trust and long-term relationships with your customers?
Mike George:
Yeah. I think we're in this really interesting period where technology enables us to do so much. So it enables us to create these virtual experiences to match the physical experience. The way we think about it is we've always been about creating this really multi-dimensional experience. It used to be kind of a lean back experience. You'd be flipping the channels and you would discover us on TV. Now it's a lean-in experience where you can [inaudible 00:12:10] your favorite experiences through our interactive apps. You can transact through interactive app. You can engage in a social conversation about the product with the inventor, with the designer, with your fellow shoppers in your community. So for us, it's all about creating this dynamic virtual experience that really replicates all the best parts of what we typically would view as great shopping in the physical world, which is to say, you come into a cool boutique, you discover stuff you'd never heard about before.
You have a wonderful customer service, a person there who can energize you, tell you stories about these products, help you understand how they fit in your life. Those are all the things we're trying to do. Just leveraging what's available with technology to do that and these highly virtual and interactive ways. It all comes down to the point you made, which is all those things have to lead to trust and relationships. Because what we want to do is not get you to buy something today, that's fine. But what we really want you to do is to say there's something interesting going on in this community.
And I want to come back and check it out. I want to see what's on tomorrow. I want to see what I can learn. And I want to know that as I do that your representatives are trustworthy. The products are good quality. The pricing is meaningfully better than what's available in the marketplace. All those cues, that signal trust and relationship. And when we think about our best customers, which represent about 70% of our sales, they visit our websites 36 times a month, they visit our TV programming 19 times a month. So that to us is about relationship, trust, coming back for this engaging virtual experience, and becoming a customer for life.
Oliver Chen:
Another key theme we're focused on at Cowen, Mike is community and what community means to retail and also how great companies formed communities. So what will you do with community as you really have passionate customers?
Mike George:
Yeah. For us, community is another one of those areas where I think we were the original I'd like to think because in the early days of our business, we've talked a lot about this philosophy we called it backyard fence and I'm now going back 30 years ago. But it was a simple idea that says, shopping on QVC should be like shopping with a friend or it should be like talking to a neighbor over our backyard fence. It's about a relationship. It's about trust. It's about casual conversation. It's about inspiring each other with your discoveries. That community has to start with that relationship and then it builds from there. So we want to start with that relationship. And then we want to connect you to a broader community of folks with similar interests and passions. And if you're a gardener, then your community is going to look different than if you're a foodie or someone who's into fashion or into beauty.
And so what's social enables us to do today is to construct these communities that are relevant to you, to your interest, to your passions, and whether it's a Facebook community or a dedicated YouTube channel or Instagram story with your favorite beauty vendor, it's all about tailor that experience, that the community of folks that you're interested in, we can share tips and ideas with you and we're piloting cool new apps. We have a cool new app we are piloting in our UK market where customers are doing their own video based reviews that they're live streaming to folks within their approved community. So again, just another way to sort of make that experience more of a 360 experience all around reinforcing the community.
Oliver Chen:
Well, Mike and Jeff, what should we think about when we do think about live streaming? What is the future of live streaming and how might this manifest in the US relative to other international markets?
Mike George:
I think it's still early days to see exactly how this industry is going to evolve. I do think it'll look different than in the east. In the east, what you've seen is a few big players that have these monstrous platforms filling a void and a gap and drawing these big audiences. They tend to be a little bit more personality based models. The economics are a little bit challenging and they're very much dependent on one or two big scale players to provide the viewers and the platform to aggregate large audiences. The challenge that I think players in the west are finding, and that we have certainly learned over the years is a very fragmented series of ways in which people consume video content, live TV still matters, but there are hundreds of channels, many different kinds of providers of live TV, and then all of these different digital and social platforms.
And so as to win in live streaming, you have to figure out how can you efficiently aggregate a very large audience because you do need a very large audience to get a fraction of them to convert to purchasers. Now we've built that out over the years. I think it remains a little bit to be seen how others will find efficient ways to build out that digital ecosystem and aggregate large audiences. Now, I think the second challenge for the industry will be that theme of relationships and trust that we were talking about, again our model works because you're coming back every day and you're building that relationship.
A lot of live streaming today is a little bit more kind of one and done. The brand may want to get out their brand story and so they might do their own live stream on their brand website or they might partner with a startup and do a live stream to promote a new product line. But none of that is building this repetitive behavior where I'm interested in getting to know you, your personalities, what you as a company are offering, and I'm going to be engaging with you over time. And so I think cracking that relationship code, that frequency code, getting people to come back and check out what you're doing, along with the distribution challenge or bigger issues that we'll just have to see how live streaming evolves.
Oliver Chen:
Jeff, Qurate has done a great job managing marketing spend. What do you see ahead in terms of marketing spend priorities and how you will balance that as you look at new social platforms as well to acquire customers?
Speaker 4:
Yeah. It's really important that over the years we have continued to increase our overall marketing spend. And, our marketing spend today is still less than 2.5% percent of net revenue. So still room to continue to expand marketing where we believe it continues to meet our return thresholds, but we're in a unique period where we've built a lot of new customers. It's important that we continue to engage them, re-engage them, continue to expand with them. It's important that we continue to our, what we call our avid and elite customers. So those customers are our best customers, which are purchasing more than 20 times a year with us, that we continue to re-engage her, as she starts to rebound her, her spend, if you will, as fashion for example comes back to us, we have some rotation out of home.
And as you had mentioned as we continue to look at other digital platforms, how we engage that customer on this digital platforms in ways that brings her either back into our more traditional video feed or through the apps or through other social means that we continue to engage her to make sure she is continuing to build that relationship that Mike has mentioned. And we can do that through a number of different channels. And that's what we continue to experiment with in order to be more effective. So we take all that into account, if you will, as we think about not only driving that customer engagement, driving that share of wallet, but also ensuring that it guardrails our return metrics.
Oliver Chen:
Mike, a really important topic for us at Cowen is also sustainability. What are you seeing in terms of what customers want in terms of sustainability and also what are your major priorities as you think about your supply chain more broadly?
Mike George:
We have a number of priorities in that area. Rather than try to take a cue from our customers, showing what the customer wants is important, but we really start with, what do we think we need to do to be a leader, what does our team have passion for? And we know that will ultimately align with what the customer most cares about. And so there's a few things where we have as most companies do have a very important corporate responsibility mission, which has three pillars to it, protect our environment, curate product responsibly, and champion empowerment and belonging. And if I focus on the sustainability topic around the environment, it's all the things you would expect. We've made public commitments around greenhouse gas emission reduction, public commitments around waste reduction in our own facilities. But then also how do we enable the consumer to recycle in a more convenient and easy to understand way, how to have more sustainable packaging that has a lower carbon footprint.
So for us, it's just, examining end to end everything we do within our four walls, but then also in getting the product to the customer and how the customer receives it and uses it. And I think we're in early innings. There's just so much in front of us, but a lot of passion for it. And then on that other pillar of trading products responsibly, [inaudible 00:22:47] sustainable materials, how do we continue to increase our use of sustainable materials? In addition to the other things that are important in terms of the high integrity supply chain, protecting human rights through the supply chain is as you know it is a vast distributed supply chain filled with lots of little players. And we need as an industry and as leaders in this industry to make sure we're looking from original source product and the working conditions in that factory to ultimately the consumer receiving it. And how do we do it in a way that has human integrity, social integrity, sustainability throughout that pipeline.
Oliver Chen:
Thank you. Another important topic is you really set out the nexus of retail media and ecommerce. So who are your competitors and how do you frame competition in the context of these different factors we've been discussing?
Mike George:
It's an interesting question for us, because it's so hard to peg a competitor because the business is unique. It is at this unique intersection. We find that we typically are drawing shares from lots of different kinds of competitors, from ecommerce players to traditional brick and mortar and so we tend to actually think a little bit less about competition and more about that theme you were raising of experience. What's the experience we're trying to provide? Why do our customers are passionate about it? And if we can continue to lean into that experience, we know we'll draw share from lots of different players.
Our customers are very diverse, but one thing they have in common is they're very avid shoppers, not surprisingly. And they shop lots of places. So we know that they're going to be shopping at Amazon, and we know they're going to be shopping Saks, and we know they're going to be shopping Williams-Sonoma. And so, depending on what product we're offering, what story we're telling, [inaudible 00:24:58] from different players. And because of all that, we just try to stay centered on what's our experience and let's worry a little less about what the competition is doing, and then we think we'll win over time.
Oliver Chen:
Mike, what would you say is least well understood about Qurate and what are your core competencies/barriers to entry?
Mike George:
It is super hard to say what's least well understood because I think it's generally speaking a low understood business. I just think there's a lot that folks don't quite appreciate depending on where you sit. Things maybe I would stress as things that always surprise folks, when you talk about the range and quality of our product offerings and the level of value we provide, it's always surprising to folks, but what really surprises people is the unbelievable loyalty, stickiness of our customers. Those best customers make almost 70 purchases a year. But important than all that is the fact that we are replenishing those best customers every year at equal or better rates. So there can be a perception some folks have that this is a model of the past, but the reality is we're bringing in and long before the pandemic started so many new customers and every year those new customers act in that highly sticky, highly loyal way.
And the result of it that are these extraordinary economics that Jeff was touching on. When you have a customer that's that loyal, that sticks with you, and you can continue to bring them in at the rate, we bring them in, then the financial model takes care of itself. And so then I think the investors usually shop by a company that generates $2.4 to $2.5 billion of OEBITDA with 50% plus free cash flow conversion and does it year in year out. So depending on where you sit, you're either surprised by what we offer or you're surprised by how the consumer responds to it, or you're surprised by the financial model that underpins it.
Oliver Chen:
Jeff, how would you contrast Qurate relative to your prior experiences in retail and how Qurate thinks about return of capital and the shareholders as well?
Speaker 4:
Rather than thinking about how to contrast, I just would like to maybe focus on what we do from a standpoint of as Mike has mentioned, having such a high conversion of OEBITDA into free cash flow, that gives us a lot of optionality. So after we've already reinvested in growth in the business, having a business that is relatively low levered, we are less than two and a half times levered and it gives us an opportunity to think about returning capital back to shareholders in the form of either showing purchase, possibly special dividends. We also look at from a broader liability management perspective, in that while our leverage is relatively low, we do have some deferred tax liabilities associated with the exchangeables and being able to take a look at different opportunities to invest in some high yielding assets that be in position to defease those liabilities as they may grow and come due is another option for. So we like the idea of being able to consistently deliver the free cashflow conversion and from OEBITDA and then ultimately being able to return a large portion of that back to shareholders.
Oliver Chen:
Thank you, Mike in closing, which growth prospects are you most excited about and Mike, which part of this job do you enjoy the most?
Mike George:
In terms of growth prospects, I would just highlight this theme of trying to manifest our experience in increasingly tailored ways across this broad range of digital distribution platforms. We think that starts to open up all new possibilities for us and consumers that might have felt that our business was not for them to now discover us in new places, new ways with new kinds of content. So we're in this high experimentation mode because none of us knows exactly how this industry will evolve, but if we can be present, provide her with new kinds of experiences and then keep adjusting, we know that gives us lots of growth, so we're energized by that.
What I love about the job is really two things, passionate customers and passionate team members. I can tell you so many stories that I won't try to bore you with encountering customers and how meaningful the experiences are that they have with the brand, how it's an important part of their life, how we've helped them in some way to have special moments and running into those customers, whether it's in the context of the focus group or at a dinner party is incredibly motivating. And then we just have the most remarkable team, the passion they have for what we do for the mission and purpose of our company, that willingness to devote that extra measure of effort to whatever we need to do to serve the customer well, we saw it so beautifully on display during the pandemic where we all had to get out of the offices, work from home, keep each other safe, but still find ways to collaborate, create and deliver for the customer, hugely motivating and really extraordinary group of people that I've had the honor of working with.
Oliver Chen:
It's been great hosting you, Mike, George and Jeff Davis. Qurate is at the center of video commerce and creating a really unique ecosystem that unites customers' trust and unique brands and content. And clearly you've been innovating so thanks for joining us.
Speaker 5:
Thank you Oliver. Great to be with you.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of Cowen Insights.

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