e-Commerce Industry Outlook - Part 1
The Electronic Commerce, or e-commerce, industry is one of the most progressive sectors of the economy. The industry is evolving very rapidly, so data collection and evaluation are particularly difficult. Consequently, one has to rely largely on surveys by both government and private agencies.
According to the U.S. Census Bureau, the manufacturing sector is the largest contributor to e-commerce sales (46.4% of their total shipments), followed by merchant wholesalers (24.6% of their total sales). These two segments make up the business-to-business category.
Retailers and service providers generated just 4.4% and 2.3%, respectively of their revenues online, a slightly higher percentage than they were in the prior year. The Bureau categorizes these two segments as business-to-consumer.
This places the business-to-business category at 90% of total e-commerce sales, with the balance coming from the business-to-consumer category. The latest numbers from the Bureau suggest that the fastest-growing segments were manufacturing and retail. [All the above data from the U.S. Census Bureau relate to 2010, as published in May 2012]
Retail
Total retail e-commerce was 5.4% of total retail sales in the fourth quarter of 2012, up slightly from 5.2% in the third quarter, according to the quarterly retail trade survey by the Census Bureau. Forrester Research estimates that this share will go up to 11% by 2015.
Recent data from comScore (as compiled in the table below) indicates that this segment recovered much faster from the economic downturn and continued to grow at an accelerated rate over the last few years.
Key Drivers
Since the industry is in evolution, the drivers are changing. For instance, the initial push came from the time savings and convenience of online transactions. To this were added the benefits of comparison shopping and personal recommendations. As technology required for personalized recommendations developed, became more available and its benefits more evident, most "e-tailers" started adding the feature until it is now considered a must-have.
Today, the biggest driver of growth in the industry is the adoption of smartphones, tablets and other mobile Internet devices. In fact, trends indicate that consumers prefer mobile browsers when shopping, searching and entertaining themselves, while preferring apps for navigation and acquiring information.
comScore sees global mobile Internet users increasing very rapidly and surpassing desktop Internet users by 2014. A June 2012 study by comScore on behalf of Paypal revealed that mobile e-commerce tripled from 3% in the fourth quarter of 2010 to 9% in the fourth quarter of 2011. Forrester Research estimates that retail sales made on smartphones touched $8 billion in 2012, with sales expected to grow at a single-digit clip over the next five years, touching $31 billion in 2017 (Jan 2013).
A Sep 2012 study by comScore supports this view. According to this study, 4 out of 5 smartphone owners had already used the devices for shopping and related activities in July last year. Men and women in the 25-to-44-year age group were doing most of the shopping on both Android and iOS devices.
While smartphones are extremely convenient when on the move, tablets have several advantages of their own. In fact they are a boon to the e-commerce industry, since the larger screens offer better visibility of online stores and merchandise, thus facilitating purchases.
This is the reason that tablets remain the device of choice for making online purchases while smartphones are the preferred devices for store location, coupon redemption and such other “ön-the-go” activities. Given the unique advantages of smartphones and tablets, it appears that they are working in conjunction to boost total online retail sales.
Overall retail trade through smartphones and tablets grew 81% in 2012 and is expected to grow over 55% in 2013 (eMarketer Jan 2013). While growth rates will come down thereafter, they will remain in the strong double-digits range. Moreover, the percentage of m-commerce sales to total retail ecommerce sales will grow from 11% in 2012 to 24% in 2016.
Around 37% of customers in the third quarter were comparison shopping on their mobile devices while in retail stores, something the industry now calls “showrooming.” Because of the resultant cost savings and convenience, this trend is likely to continue (comScore, November 2012).
Continued advancements in technology are improving navigation and customer experience on ecommerce sites, which is improving reviews and thus drawing more traffic to the sites.
The digital consumption of books, music, video and games all over the world is extending the reach of these goods and thereby boosting sales. Therefore, previously unconnected electronic goods, such as TVs and game consoles are now being modified to enable connectivity. On the other side of the fence, online versions of books, music, video and games that can be downloaded and consumed on a traditional computer or any other connected device are becoming available.
Since the shift in consumption patterns is resulting in multi-functional electronic gadgets that are no longer optimized for a particular activity, there is a great drive to develop technologies that could improve the quality of each experience.
Free shipping remains a major lure, as seen from the recent e-tailing group survey, where 85% of surveyed consumers said they intended to make use of it this holiday season.
Top-Selling Items
A July 2012 study by Forrester Research points to the most popular products being sold online. The 10 hottest individual product categories are women’s apparel, books, computer hardware, computer software, apparel, toys/video games, video DVDs, health and beauty, consumer electronics and music.
Apparel is a huge market and although online sales are currently under 10% of total apparel sales, the category already generates the most dollars. Selling tools, such as zoom, color swatching and configurators are helping the process. Even primarily brick-and-mortar outfits like Macy’s (M) sees that consumers purchasing through multiple channels (online and offline stores) tend to spend more.
This is encouraging traditional retailers to offer an online store to supplement their physical stores. Online sales also show better conversions since searches usually draw consumers with a prior intention to purchase. eMarketer estimates that apparel will be the fastest-growing category over the next few years, making up around 20% of total retail e-commerce sales by 2016.
The increase in technology purchases over the Internet is driven by not only individual consumers, but also companies and governments. The efficient and timely processing of orders, choice of payment options, subscription-selling and sales under the SaaS model are all facilitators. eMarketer estimates that online sales of consumer electronics goods will nearly double over the next four years to touch $80.2 billion by 2016.
The Association of American Publishers says that ebook sales in the U.S. grew 34% in 2012, following triple-digit growth in the four preceding years. With a penetration of just 16%, scope for market expansion is possible. However, the shift in preference from e-readers to tablets that offer other forms of entertainment, such as movies, games, songs and so on, is a deterrent. (a Bowker Market Research survey and wsj.com).
U.S. players continue to see strength in international markets (sales up 333% in 2011). Amazon (AMZN) and Apple (AAPL) are the primary channels facilitating international expansion, although Barnes & Noble (BKS), other smaller players and local companies in international markets are also playing a part.
Google’s (GOOG) YouTube remains the forerunner facilitating online video consumption, with significantly higher unique viewers (UVs) and unique streams. VEVO and AOL Media Network are in second and fourth positions, respectively in both respects. While Yahoo! (YHOO) in terms of UVs, Hulu took its place with respect to the number of streams. Highest hours of viewership however went to Netflix (NFLX), which pushed Youtube and Hulu to numbers two and three, respectively. [Nielsen estimates, September 2012]
The digital consumption of music has grown greatly since Apple announced its first iPod. Amazon and others are also seeing their business grow. Nielsen estimates that in 2012, U.S. digital album sales increased 14%, with tracks up 5% and overall music shipments at an all-time high of 1.65 billion.
The gaming segment has suffered over the last few quarters, impacted by the economic slowdown that affected consumer spending. However, while this affected total gaming spend, it did not affect the online segment, which gained from the increasing digitization of games, the desire to play across multiple platforms and the availability of free-to-play games to draw customers. As a result, sales through online channels continue to grow at the expense of traditional retail.
Since video, games and music are often social activities, they are increasingly being marketed on social platforms such as Facebook (FB) and Pinterest.
Facebook’s SocialStore, as it is called uses MarketLive's Intelligent Commerce Platform that enables marketers to display product information, promotions/discounts, shopping carts and check-out options. Both comparative shopping and comparative pricing are possible. The basic advantages of the system that are currently being touted are that it allows easy brand building, creates meaningful commercial relationships and makes use of account-holders’ social connections to attract new buyers.
A recent study by the E-tailing Group reveals that of 100 U.S. consumer product merchants with e-commerce websites surveyed, 98 had a Facebook account. Around 90% of these redirected the user to the merchant’s own page, 96% had loaded brand-building videos, 56% had product-oriented videos, 44% had store locators and 38% had promotions.
According to recent research from comScore, Facebook led the social networking space in Dec 2012, with 83% of total time spent on social networking platforms, followed by Tumblr, Pinterest, Twitter, LinkedIn and Others. However, Pinterest and Instagram are growing in popularity, going by the strong triple-digit growth they saw during the month.
Selling discount coupons is also helping retail. Groupon (GRPN) is the leader here, which along with its closest rival LivingSocial offer discount coupons with a very low shelf life from local players looking for sales. The company offers huge discounts to attract buyers and collects a percentage of the sales thus generated. This kind of business is very competitive, since it has very low barriers to entry.
As a result, not just Amazon and Google, but also a host of other much smaller parties have started doing some business in this format. Technology investments are also required in order to serve customer needs effectively. Considering the prospects, we don’t see the platform as a major contributor to e-commerce sales in the near term.
Market Position
comScore estimates that Amazon remains the leading Internet retailer based unique visitors (UVs), followed by eBay (EBAY), Apple, Wal-Mart Stores (WMT), Target Corp. (TGT) and Best Buy (BBY), in that order. The top 3 have a much higher penetration on both Android and iOS platforms.
OPPORTUNITIES
Because of the gradual receding of boundaries between online and physical store retailers, a few traditional retailers have also been considered in the table above.
Of these, Macy’s looks like a stock worth considering, given its Zacks Rank #1, positive estimate revision momentum and positive surprise history. Valuation also looks attractive. Streaming company Netflix is not far behind, given its Zacks Rank #2 and stronger earnings potential, which however comes at a higher price.
While Trulia (TRLA) has not had a good history and its valuation appears rich, the estimate revision trend indicates positive momentum. So more speculative investors could be interested in the stock. If considering a slightly longer-term investment, Amazon remains the favorite here. The company has built a lot of leverage over the past few years and we expect some of that to translate to higher profits this year. Another company worth considering is Groupon.
WEAKNESSES
The sector is facing the brunt of economic uncertainties and weak consumer spending, but we don’t really see any major weaknesses.
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