Retail ecommerce remains a fairly small part of total retail right now, but because it is a fast-growing part, it is increasingly accounting for a larger share. Just a year ago, we were looking at a mid-single digit share, but this year, eMarketer thinks that share will be a tenth of global retail sales.
Ecommerce sales in Asia will account for 14.7% of total retail sales, with China contributing more than half, followed by Japan with slowing growth rates and then India, which will be the fastest growing. Volumes will double by 2021.
This year, ecommerce will account for only 8.8% of total retail sales in Western Europe, but grow to 11.4% by 2021. Germany is the top retail market but the UK the leading ecommerce region.
A global discussion is important for the sector because the Internet continues to melt away national barriers, making it ever easier to target overseas customers through established platforms.
So the social buying behavior of the Chinese and their increasing preference for luxury brands is relevant for U.S. players, as is Alibaba’s growing dominance in Asia. The Indian opportunity is also not to be ignored, as witnessed in Alibaba’s recent investments, Amazon’s aggressive growth plans and Walmart’s acquisition of a controlling stake in leading local player Flipkart.
A closer look at these markets shows a bigger, more mature and sophisticated Chinese market and a faster-growing Indian market offering greater scope for innovation.
According to Forrester, China will remain the biggest ecommerce market in the next few years generating 9X the size of the Japanese market and 17X the size of the South Korean market by 2020.
China made up 67.1% of mcommerce sales worldwide in 2017 (83% of Asia/Pacific sales), driven by its mobile-first internet audience. Sales are expected to nearly triple from $909.93 billion to $2.595 trillion between 2017 and 2021.
With the digital revolution in China, many Chinese have multiple devices they use to research a product or shop on. Virtual reality (VR) has started playing a bigger role, taking consumers from the “VR café” experience they enjoyed in 2016 to devices enabling the experience. Moreover, all the big ecommerce companies like Alibaba (BABA), Tencent and LeEco will continue to invest heavily in VR this year.
Cross-border trade is another driver, as Chinese youngsters are extremely brand conscious and like to buy foreign goods, especially if they’re from the U.S., South Korea or Japan and especially in categories like food, dairy, personal care and beauty. But local brands are increasingly capturing mind share, especially in electronics and mobile phones. The Chinese Ministry of Commerce says that cross-border transaction value will make up 20% of total Chinese foreign business and continue to grow at over 30% a year.
The Ministry also sees a growing number of Tier 2 and Tier 3 cities coming online with only 10.6 million of the estimated 159.9 million new users between 2015 and 2018 coming from Tier 1 cities.
According to a joint study by The Associated Chambers of Commerce & Industry of India (ASSOCHAM) and Deloitte, the digital commerce market in India will expand to over $50 billion in 2018 from $38.5 billion in 2017.
Last year was a strong one for the market, helped by mobile device adoption and 3G, 4G, Wi-Fi and high speed broadband technologies.In 2017, 82% of shopping queries were made through mobile devices compared to 76% in 2016 with one out of three customers in Tier-1 and Tier-2 cities transacting through mobiles.
The apparel segment grew the strongest at 72%, followed by food items at 65%, electronic items at 63%, beauty and personal care products at 52% and home furnishings at 49%. Moreover, 28% of regular shoppers were in the 18-25 age group with 42% in the 26-35 group, 28% in the 36-45 group and 2% in the age group of 45-60. 65% of Online Shoppers are male as against 35% female.
eMarketer reported that India’s demonetization of the rupee in late 2016 had a greater-than-expected impact on consumer spending, so retail sales grew 11.8% in 2017.
Western Europe, particularly the UK does a lot of shopping online although the rest of Europe is slower to catch up. As such, most of the opportunity is in this region. Amazon is the leading player, eBay also has a relatively strong presence and there are some strong local players as well.
FocusEconomics estimates that online sales in the region will grow 19% between 2016 and 2021 (compared to the global average of 11%) with total sales value touching $118 billion at the end of the period. However, the number of online shoppers is expected to increase substantially in the next three years, with the average revenue per user growing from $275 to $330.
Internet penetration in the region remains low, of which the number of people doing online transactions is also low (in the mid-twenties percentage range). That’s because there are significant challenges to doing business in the region, including logistics issues, traffic, inadequate infrastructure and limited banking facilities.
To top it all, there is stiff competition from a large number of local players, the foremost of which is Mercadolibre, which has operations in 18 markets and 50 million+ unique visitors. While it is still the favorite in the region, growth prospects have drawn global players like Amazon, Walmart and Alibaba.
The biggest markets are Argentina, Brazil and Mexico.
Being one of the most mature ecommerce markets, the technological assistance in shopping transactions is at an advanced stage. So online transactions take place not only on desktop and mobile devices, but also through smart speaker systems like Amazon’s Echo and Google’s Home. People are also making the most of a host of omnichannel facilities including order online and pickup at store, shop in-store and accept delivery at home, in-car delivery, lockers, smart and secure entry systems, the Amazon Go concept store and more.
Warehouse robotics are on the rise, and AR-supported mobile shopping apps are entering the market. With plenty of work remaining to be done, innovation continues in areas like payments, selection, delivery, logistics and loyalty. The use of artificial intelligence is gaining prominence, not only inside new-age chatbots for customer care and other sales operations but also as part of the algorithm driving search results.
In this context, the fine line between advertising and buying continues to fade with advertisers looking to close sales quicker and pushing for better measurability of their campaigns. With Amazon (AMZN) entering the advertising business, this process is likely to be precipitated.
Overall, most market watchers agree that the intent to buy on Amazon is higher than on Google Shopping and at least half of product searches now start on Amazon. That doesn’t necessarily mean that Google Shopping is a write-off.
For one thing, Amazon generally pushes sellers to lower prices, so it may not always be the best place to generate premium sales or protect the brand image. Second, Amazon doesn’t drive traffic to the seller’s site, so it may not always be satisfactory for big brands. Third, the need to sell online especially given the competition from Amazon, is increasing demand for Google Shopping and driving up prices.
Today, for instance, advertisers may be willing to pay up to 10x the amount they paid for the same placement 5 years ago. These factors in combination generally make Google Shopping more suitable for big brands and sellers because they’re the ones that can pay what is required for the visibility.
Government data indicates that retail ecommerce has outpaced total retail sales growth in recent times even in bad quarters for the sector. Some of this is on account of the continued shift from offline to online retail, as customers (baby boomers) move to online channels. But it’s also because new consumers (millennials) often start out on online channels.
These consumers spend more time in a connected, social environment and take for granted many of the online tools previous generations struggled to understand, appreciate and adopt. Therefore, ecommerce will likely continue to outpace total retail sales in the foreseeable future.
Ecommerce Industry at a Glance
Zacks also breaks down each large sector such as Retail/Wholesale and Computer & Technology into groups of companies such that there are a total of 256 such sub-sectors or industries.
These “X” industries are then grouped in two: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (industries with the worst average Zacks Rank). Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1.
Therefore the Zacks Industry Rank is a good indicator of investment opportunities within an industry at any given time. Moreover, because stocks in the same X industry have certain common positive or negative factors affecting them, it has been observed that there is some positive correlation between them.
As depicted above, the Internet-supported buying and selling process includes four Zacks categorized segments, i.e. Internet – Commerce, Internet – Services and Internet Services – Delivery and Internet – Software/Services.
Year to date, the Internet – Commerce segment (Zacks Industry Rank #81) outperformed the S&P 500 by a wide margin. The market appreciated 28.0% during the period, compared to the S&P 500’s 2.9%.
Revenue growth over the past year (ending March 2018 for which all results are available) was 9.7%, off the seasonal strength in the fourth quarter. EPS before non-recurring items was up 7.5% on a slightly higher share count. Forward earnings estimates for 2018 are up slightly from June 2016 although 2019 estimates are down significantly. They are holding steady on a sequential basis.
The Internet Services – Delivery segment (Zacks Industry Rank #73) has appreciated 25.4% year to date.
Revenue growth of 44.3% was encouraging. Opex remains high. EPS before non-recurring items was $0.00 compared to -$0.03 the previous year on a share count that increased 15.6%. The debt level has shot up although the debt-to-total capitalization ratio remains manageable at around 37%. The rising intangibles could indicate industry consolidation but increase risk. The current ratio remains above unity.
The Internet – Services segment appears to be in the doldrums, having lost 2.0% year to date.
The business has a stronger margin profile, with revenue growing 6.6% over the past year and EPS growing 3.9% on a share count that dropped 0.5%. The forward earnings estimate for 2018 is down 3.9% while that for 2019 is up 5.3%.
The Internet Software/Services segment (Zacks Industry Rank #100) is up 0.4% year to date.
Revenue grew 2.1% off a much smaller base with EPS before non-recurring items dropping 13.4% on a slightly higher share count.
The broader Retail sector, of which Internet Commerce is a part, is doing better than the S&P 500 so far this quarter. Revenue growth of 7.1% bettered the S&P 500 average of 5.8% although earnings growth of 2.5% fell short of the S&P 500 average of 6.7%. For the fourth quarter, the sector is expected to report revenue and earnings growth of 8.9% and 7.2%, respectively while the S&P 500 is expected to grow 5.8% on revenue and 14.1% on earnings.
The other companies we are discussing in the e-commerce outlook fall under the broader Computer & Technology sector. The sector has done much better than retail so far in the fourth quarter, posting revenue and earnings growth of 8.8% and 21.3%, respectively. For the fourth quarter, it’s expected that revenue and earnings growth will average at 10.6% and 22.6%, respectively.
Take Your Pick
Zacks methodology helps us find the stocks that have upside potential and a strong industry rank means an above average chance of outperforming. Zacks Rank #1 stocks within these industries are therefore good investment ideas.
So top picks in the Internet Commerce industry are Amazon (AMZN), Groupon (GRPN) and IAC Interactive (IAC), which carry a Zacks Rank #1 (Strong Buy). Other good picks are Zacks #2 (Buy) ranked BOOHOO (BHOOY), Expedia (EXPE), PetMed Express (PETS) and TripAdvisor (TRIP).
QuinStreet (QNST) is the sole option in the Internet – Delivery Services industry.
There are options galore in the Internet – Services industry, some of which are Zacks #1 ranked Baidu (BIDU) and the Trade Desk (TTD) as well as Zacks #2 ranked 21Vianet (VNET), Akamai (AKAM), Dropbox (DBX) and Etsy (ETSY).