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Special situation at Water Tower Research. Today, I'm joined by Kevin Vassily, CFO of iPower. iPower is an e-commerce company using data analytics to design, source, and market products primarily on online channels in the U.S. and internationally. iPower sells a wide range of products, including hydroponics, home goods, such as `` fans and shaving system, wellness products, and pet products. iPower has achieved robust growth, thanks to its ability to design, procure, and market various products responding to unmet customer needs, and to do effectively in various e-commerce settings. I should mention that, iPower's safe harbor statement can be found on their website in their latest corporate presentation. Kevin, welcome, and thank you for joining us.
Thierry, hi. Thanks for having us.
Great. Kevin, today, we'd like to discuss your business on TikTok Shop, but before we do that, I know you participated in the beta version of the TikTok Shop. Can you tell us how you got selected for that, how TikTok got to know you and how you connected?
Yeah, sure. So, we approached TikTok in a couple of ways. Maybe the first most obvious way was we just approached them through their public channel, and they made that available to, you know, suppliers. We also worked on developing some relationships with some key people inside of TikTok. We got introductions to them through connections that we've had, you know, just through the supply chain. And the relationships we targeted were, you know, managers in key verticals that aligned with our product portfolio. We think we were able to get onboarded fairly quickly because, you know, we feel this way, but we think we have the right infrastructure to be successful on a platform like this.
You know, we've got a really large software development and production team, a really sophisticated ERP system for a company of our size, and it's optimized for e-commerce. We operate, you know, our own fulfillment center. You know, if a consumer wants to place an order for a product, you know, featured in a short video on TikTok, the experience on the back end will be pretty seamless to them. You know, TikTok absolutely wants a good consumer experience, particularly as they, you know, come out of the gate live here. I think we, you know, have what it takes to do that. Then finally, you know, I think we've got pretty good alignment from a product perspective.
You know, I think I would add, and it's pretty easy for TikTok to see how well our products sell on places like Amazon. So they were, I think, right out of the gate, pretty interested in having us just come aboard.
How long was the beta stage of the TikTok Shop?
So I think one thing I should kind of be clear on, they, they never really officially called it,
Mm.
a beta, but, you know, maybe the best way to think of it is a soft launch, where they were inviting people onto the platform that they felt had a decent shot at being successful out of the gate. So it took about six months from the time we were introduced until it was live, which happened like the third week of September. And we were up on the platform for that entire period. So let's call it about six months. And not a lot, you know, on that changed, you know, we didn't have to do much in the way of adjusting our approach.
But I think what TikTok was trying to do was use that period to kind of fine-tune the algorithm on what content was working best, you know, how much product content to weave through kind of a traditional feed for users, et cetera. And kind of once that six-month period ended, and we got some heads-up that the more public launch would be sometime in September. But, you know, they seemingly accomplished a lot in the six months, you know, that we were on the platform, because they felt pretty confident going live in September.
Right. So do you create TikToks yourself, or do you get in touch with influencers and ask them to create TikToks? Is it organic, or do you reach out to influencers? How does that work?
Right. So it can be, it can be both of the things that you've highlighted. You know, our primary way of getting visibility is to develop relationships with the influencers. And, you know, we do that proactively. TikTok has a decent amount of data on these influencers, including traffic, what they like to post about, you know, categories that, you know, tend to be associated with them. And, you know, we can see that data. TikTok also gives us recommendations based on, you know, their evaluation of our product portfolio on who to reach out to, and then we can proactively choose and connect, you know, with those influencers. You know, buyers can also be influenced organically.
You know, so as an example, someone, you know, goes to an influencer's page, sees one of our products, decides to buy it. They like it, decide that they wanna make, you know, a short video. You know, TikTok is giving them tools to also, you know, create and kind of monetize, you know, their videos. That's gonna be a little bit of a slower ramp, you know, an individual person's reach is gonna be a bit more limited than a well-known influencer. But, you know, that's an example of how, you know, you could create some organic content from, you know, an actual buyer of the product.
I read that TikTok has an affiliate plan, so you don't need to negotiate with every single individual influencer. There's like parameters as to how do you, you know, what commissions they might get or how the relationship works, right?
Right. Right, that's correct. So they do have a pretty structured approach, you know, that outlines kind of terms and conditions on, you know, how a seller would interact with a particular influencer and the deliverables associated with that, including the incentive that we get on this platform right now. The one thing that we have some control over though, is the commission. We get to choose that, and obviously get to choose who we work with. You know, typically those commissions are somewhere between 10%-20%. We're not. At least out of the gate, we're not seeing a ton of quote, negotiation, you know, on that. The, you know, on average 15% commission or take that an influencer will get, has been pretty standard for us right now.
But everything else is, you know, put in place. So once we've made that connection to an influencer, you know, all we've got to do is agree on a commission rate and we can go from there.
Do you do any direct advertising on TikTok Shop or it's strictly through influencers?
Yeah. So, you know, yeah, we're not doing advertising in the way that, you know, someone might traditionally think of the term. But, you know, we would consider that the commission that we pay to an influencer is a, you know, embedded form of advertising, 'cause they're featuring our products and bringing an audience, you know, to them. We also sell through some of, you know, some of our products are our own shop on the platform. And that's gonna be, I think, over time, you know, a little bit more useful and cost effective as our brands start to get more and more traction and build their reputation on the platform. You know, at that point we won't have to be paying, you know, a particular, you know, commission to any given influencer.
While we're certainly not gonna push them away, it'll kind of be just another avenue through which our products can get in front of potential customers.
Yeah, so you can have your brands directly on the site-
Yep.
If somebody puts brands or put the brand name, they will, they will find your products?
That's correct.
Okay. Now, it's interesting what you said earlier, that, you know, TikTok felt your products would be, would be very appropriate on the, on the TikTok Shop. And, I, I thought, you know, influencers and all that, it'd be more fashion in, you know, maybe apparel, makeup, maybe some novelties-
Mm-hmm.
Maybe games. But how do your products, you know, fit in that, in that, cultural environment, if you will, on-
Yeah.
- on the platform?
Right. Right. So you, you're absolutely correct. You know, fashion and beauty are the... so far from the data we can see, are the two largest categories on TikTok right now. But I would, I think one observation I would make is that we think the platform is pretty well suited to a more general, you know, lifestyle product portfolio. And I think in our current product portfolio, we're fairly well aligned to do that. So I would include in that description, you know, our pet products, our home and kitchen products, as well as some of our, like, outdoor home accessories, such as portable grills, portable fire pits, et cetera.
And so, you know, I think it's, you know, happy to kind of brag a little bit about, you know, what we've been able to accomplish so far, and with the small qualifier that these categories are still small for them relative to fashion and beauty, and the platform is still in, you know, really in its nascent stages. We rank number one in the kitchen category right now.
Mm.
- and number four in the pet category. And I think based on some of the at least initial data we're seeing and some of the conversations we're having with TikTok, you know, pet in particular is gonna have a fairly long runway. If there's anything that we've discovered, you know, in the pandemic period and kind of post, is that people have really started investing a lot more money and spending a lot more money on their pets. And you know, I think we're in a pretty good position there. So at least for where we are right now, we're pretty happy. Doesn't mean, you know, we can just sit around and hope that only those two categories will continue to carry us. You know, we're always looking for more.
Not clear that fashion or beauty or, you know, cosmetics or supplements or the like, are places we're headed, but we're obviously investigating that, 'cause we see the success that companies in, in that area are having.
Yeah, my, if I post a picture of myself or a picture of my dog, the dog always gets a lot more likes than I do on those things.
Yeah, funny how that works.
Yeah. I have to ask about trending, 'cause I heard, like, trending is a big thing. Is it? Do you have an example of one of your products that trended? And what is it exactly? Is it something that stimulates sales for a few hours, or a day or two, or is it something that has kind of like a long-term implication for one of your products?
Yeah, I think it might be a little early to say at this point, you know, what a trending product will mean for a, you know, the success or longer term, kind of, sustainable kind of sales ramp, on the platform. I think we still need more time to understand that. But yeah, trending means, you know, somebody of note, you know, did a demo of a product, and the traffic was large, and it resulted in kind of above trend, sales volume. You know, for us, I think, we've got a rule of thumb, kind of, on our other channels that, you know, a successful product will have a pretty, consistent ramp for about two months before it reaches a more steady pace.
I think the way that might transition in terms of thinking about it on an interactive, you know, shopping or social commerce platform is that that represents the transition from the consistent endorsements you might get from influencers, transitioning to more organic traffic. And that can happen in a couple ways. One, you know, the buyers of those particular products end up posting their own short videos, and that has a, you know, pretty nice virtuous kind of cycle associated with, you know, good reviews. And someone buys it, they post their own video, you know, maybe the equivalent of a, you know, a good review on an Amazon sale.
The other thing that, you know, can happen is, as our brand gets, and those products get, a building and good reputation, you know, they can start transitioning and looking for other products that we sell, and those are on our, our own branded page, on TikTok. So, you know, we're, you know, we're gonna be watching that over the next six months to see if, you know, we can take the model that we think has worked really well on other channels, you know, over here. But I, you know, I think the pieces are in place for that same type of ramp to happen, and, you know, a trending product on any given day certainly can help start that process.
Great. I also wanted to ask about live shopping. Is it something that happens in TikTok Shop in the U.S.? I heard it's a kind of a big thing in for TikTok in Asia.
Yeah. So, I mean, I think the way to think about social commerce is, there's two major forms. You know, one is short video, and that's really what we're spending most of our time with now, and the other is, is live shopping. Right, in the U.S., almost all of the, kind of sales are, happening in the short video format. But, you, you're right, it's, it's very popular in Asia already, live shopping. You know, we do have a, you know, an analog for this here in the U.S.
Do you?
Yeah, the live TV shopping networks-
Yeah.
- like QVC and Home Shopping Network. So that concept is fairly well understood. It's, you know, I think it's pretty successful. I think I saw that, you know, those two networks combined, are doing somewhere between $15 billion and $20 billion in gross merchandise value per year. And so I think it's likely to be, over time, the bigger portion of social commerce for the platform. And we're actively developing, you know, our in-house live shopping team right now, and we hope to have some products featured there by the end of year. Part of that's gonna be how quickly, if TikTok decides to roll that out in more scale.
You know, we'll be ready with, you know, a live shopping component to, you know, the products that we are currently offering on the platform.
If we, if we step back on a, on a typical online marketplace, like, like Amazon, if we think of the buying process for a, for a consumer, I, I need a product, I'm thinking, let's say, fan. I go online, I put fan in the little box, the site gives me a range of options. I look at them, I look at the price, I look at the features, if it's what I'm looking for, and then I look if it's got reviews or if it's, you know, Amazon Best or whatever. What would be the sim-- Is there a, is there a similar kind of typical process on TikTok, or is it much more spontaneous, somebody surfs and gets interested or, you know, buy or, or do actually people are like, "Oh, I need this-
Right.
I go to TikTok and see what I can find?
So, let me try to answer that in a couple ways. I think first again, I'll start by saying it's probably a little early to really know what the kind of buying process will look like over time. But, you know, I think it's a little different than kind of the Amazon process that you described at least right now, and it doesn't mean it can't evolve. But, you know, I think the central kind of driver, you know, behind how this happens is, I think, TikTok's feed algorithm. So it obviously sees all the user interaction on the platform, and based on that, can see, you know, any particular user's set of interests, right? You know, they like pets, they like cooking videos.
Mm-hmm.
And so they can start to send, you know, product related content and traffic, you know, to those users that aligns with those interests. So, you know, let's use that, you know, cooking example. A user who follows a lot of, you know, cooking accounts and, you know, and watches, you know, either home or, you know, well-known celebrities, you know, doing kind of short videos on a particular, you know, recipe, et cetera, will be shown short videos that feature, you know, kitchen prep tools. From there, I think it's probably a function of, you know, their interests, you know, does the, you know, that particular short video show a product that aligns with someone's needs at any given time? Is the content compelling? You know, is the influencer, you know, creating content that somebody's gonna sit through?
And then, you know, there's a button on a, you know, on that short video that, you know, takes you to a place to buy that product if you're interested in it. And if the price is right, then, you know, you'll, you know, hit the button and do it. So it... Right now, it feels more spontaneous.
There is a search, you know, function in TikTok, so if you have had some success with finding a product that you like, either from a particular brand or just a category, you can certainly, you know, enter that search term into the search box on the app, and it'll, you know, feed you a number of different things, some of which could be an actual short video, where there's a place to buy a particular product. I think that's gonna get more robust over time. I think it's still early in terms of its effectiveness. So, you know, right now, most of it feels like it's the spontaneous or quasi-spontaneous purchase that happens when someone you know or follow is featuring a product that, you know, you need at any given time.
Great! Now, if we switch to your relationship with TikTok or the fulfillment aspect of the-
Yeah.
of the whole process, how does it work? Is it, do you, do you just fulfill for TikTok? Is there a feature that's similar to Amazon, where it says, "Sold and shipped by TikTok," or how does... You know, do you have a third party arrangement? How does that work?
Right. So right now, it's a purely third-party arrangement. The transaction happens between the purchasing customer and us directly.
Okay.
We're using one of our wholly owned subsidiaries, you know, as kind of the sales entity or engine, so to speak, on the site. But, you know, the order will come to us, it'll run through our, you know, ERP system and our inventory management system, and we have a fulfillment center, so it'll get kind of picked and packed and boxed and, you know, loaded on, you know, a truck from FedEx or UPS or, you know, another third-party delivery company and shipped to that consumer.
Okay. That's helpful. And, and I don't know how much you can share, but I mean, you clearly, right now, have one online marketplace that's your, your, your number one place where you have the bulk of your revenues.
Right.
Where do you see the TikTok Shop in 2024, 2025? Is it gonna be one of your top three, or one of your top five, or no comments, or what are your thoughts?
Well, need to kind of state at the front, we don't give guidance around either kind of, you know, particular financials or-
Yeah
... you know, you know, or, you know, product categories for us. I mean, I think the way that we can frame it though, for the purposes of this discussion, is to talk about, you know, can this platform be successful? And, if so, you know, can it be successful for us? So, you know, I think, at least right now, there's I think there's little doubt that it can be successful in the U.S. You know, it's already doing around $20 billion in gross merchandise value globally, and, you know, we're arguably the largest market in the, in the world for, you know, the kind of products that, you know, they'll be featuring.
Yeah, I think that it's just a matter of when, not if, this is gonna be, you know, a meaningful commerce entity in the US. The numbers that we've seen, or at least they've been kind of intimated to us, is that right now they're doing about $10 billion in sales a day on the platform, so it's ramping pretty nicely. I think you could also point to... And that's just on, you know, largely on short video sales. You know, we also know that the live shopping concept, if you use the kind of legacy home shopping networks, is one that works here. I think that, you know, it has. There's no reason why TikTok can't be a meaningful player on that front.
And so I think the other thing that's interesting about TikTok, in terms of them being successful, is that the platform was designed for short video from the get-go, which I think it probably gives it a little bit of an advantage of some of the kind of non-video native, you know, social media platforms that have been trying to do some commerce. I mean, there's no guarantee that this will be successful, but I think they have the right elements for it to work. And then as it pertains to us, you know, we definitely think it has the potential to be as large as our other business segments.
You know, we have high hopes for our services business, and I'll talk a little bit about how we think this might tie in there. But you know, currently, our product business is our biggest business by far. And so we do look at it from a couple perspectives. You know, we think as we grow our product portfolio, we're gonna be adding another variable to consider to the multivariable equation that you know, we use to determine what our catalog looks like. And that variable is simply the product TikTok optimized? You know, is it something that makes sense for social commerce?
Part of the reason that, you know, that variable, and potentially that variable, is gonna take greater weighting, at least in the near term, is that the incentive structure that TikTok has put in place, you know, for us and other sellers on the marketplace, is pretty attractive. And so it's to our benefit to be spending time adding to the portfolio with products that make sense on TikTok. The margins will be, at least in the short to medium term, better. There's another angle here as well, and I think it plays into some of the evolving kind of business strategy that we have, which is, we think there's a services angle for us on this channel as well.
We think we can apply our service, partnership model, which is also in its nascent stages, to this platform, and be a full TikTok services provider for brands and companies who want access to this channel. You know, we've got fulfillment infrastructure. We were one of the first sellers on this platform. I think it puts us in a unique position to help accelerate other brands on this emerging channel. You know, part of the strategy behind the services channel or the services business for us in the first place was, you know, you know, really interesting companies and brands that were struggling to make, you know, make progress or break through in an e-commerce setting, and particularly on Amazon. You know, Amazon is, and their sales platform has been, you know, it's 20-ish+ years at this point.
And so companies that are, you know, struggling a bit to make progress there, and, you know, again, this might be extrapolating too much, but if they're struggling there, you know, trying to break through on almost completely new type of sales experience, social commerce, is probably even more difficult. And I think it's an opportunity for us to, you know, make a difference for, you know, a number of companies who, you know, see this as a real viable channel, but don't really know where to start. They can take advantage of our early learning and our relationships, and, you know, help accelerate kind of their success. So I think in short, yeah, we're really excited about what this can mean for us.
Okay.
The question.
Great. Maybe as we wrap up, a quick update on the business services. So you had two clients announced. Any update to that, or you'll update us on the third quarter call, or?
Yeah, nothing that we can announce right now. So I think, you know, the message is, stay tuned. You know, we're in, you know, continue to be kind of looking for partners, in negotiating, you know, with, people that we think make sense. You know, Lawrence is off to the Canton Fair, actually later this today, taking place in, I think, they're in Hong Kong or, or, Shenzhen, but he'll be there for the next, four weeks or so-
Mm.
Meeting with some manufacturers, some brands, some promising, you know, companies that we think not only could be part of the services business, but now potentially part of, you know, what we're offering with regard to TikTok. So, we hope to have something more announced by the time of the earnings call, which should be the second week of November, or will be the second week of November. But, you know, stay tuned. We don't have anything to announce just yet.
Great. Kevin, we're gonna wrap it up. I wanna thank you for your time. I also wanna thank the audience, both the live audience and the recorded audience. We'll have a transcript of the conversation in the next three business days or so. It will be on our website at watertowerresearch.com, and it's open to all investors. I read the company forward disclosure at the beginning of our conversation. I need to quickly remind you all now that the views expressed in this chat may not necessarily reflect the views of Water Tower Research, and are provided for informational purposes only. This fireside chat may not be distributed, reproduced without the written consent of Water Tower Research, and should not be considered research or recommendation. Water Tower Research provides research-driven communication and investor engagement.
It is not a licensed broker, broker-dealer, market maker, investment bank, underwriter or investment advisor. Additional disclaimers can be found at Water Tower Research. I wanna thank you, one last time, Kevin, and thank you all for your time. Have a good day, and goodbye.
Great. Thanks, Thierry.
Thank you, Kevin.