Must-know: Why are online retailers are taking more share?

Market Realist

Key opportunity: Online retail's dramatic success (Part 2 of 4)

(Continued from Part 1)

Cyber Monday success

We discussed the Cyber Monday shopping holiday’s success in driving consumers to online purchasing in Part 1 of this series. The results may signify the beginning of a permanent shift for consumers in favor of online shopping over traditional brick-and-mortar stores. These trends are leading to accelerating growth in e-commerce, boosting many companies while weakening the prospects of others. Companies like Amazon (AMZN), eBay (EBAY), and Overstock.com (OSTK) are prime beneficiaries of this trend. Amazon and eBay are members of the First Trust Dow Jones Internet Index ETF (FDN), which corresponds to the performance of the Dow Jones Internet Composite Index.

Increased penetration

Several trends have laid the groundwork for an increase in online retail activity. Milliennals, who grew up with the Internet, are now coming of age and are consuming greater quantities of goods and services. The adoption of high-speed and mobile data access continues to increase, spreading the acceptance of online shopping. And aggressive pricing from online retailers that can offer better discounts has made it difficult for traditional brick-and-mortar stores to compete. These developments have put traditional retail on its heels and forced many companies into retrenchment.

As more dollars have shifted to online shopping, e-commerce has become a larger portion of the overall retail industry. The chart above depicts online retail as a percentage of total U.S. retail sales. The rapid increase from just 1% of the total in 2000 to over 5% in 2012 shows the success of the online retail model. In 2000, online sales were just $28 billion, compared to $226 billion in 2012—a 700% increase. Also important to note, the total retail sales number includes items such as gas, restaurants, and autos—goods that online retailers don’t typically sell. This means the actual penetration number should be higher. These forces are likely to continue to benefit online retailers like Amazon and eBay for the foreseeable future.

Continue to Part 3

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