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 (49.3% of their total
shipments), followed by merchant wholesalers (24.3% of their total
sales). These two segments make up the business-to-business
Retailers and service providers generated just 4.7% and 3.0%,
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 89% of total
ecommerce sales, with the balance coming from the
business-to-consumer category. The latest numbers from the Bureau
suggest that the fastest-growing segments were retail and
[All the above data from the U.S. Census Bureau relate to 2011,
as published in May 2013]
Total retail e-Commerce was 5.5% of total retail sales in the first
quarter of 2013, up slightly from 5.4% in the fourth quarter,
according to the quarterly retail trade survey by the Census
Bureau. Forrester Research estimates that this share will go up to
10% by 2017.
comScore data (as compiled in the table below) indicates that this
segment recovered very quickly from the economic downturn and
continued to grow at an accelerated rate over the last few years.
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
smartphones, tablets and other mobile Internet
. 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,
with mobile as a percentage of total e-Commerce sales (excluding
travel) going from 11% in 2012 to 15% by the end of this year.
eMarketer expects m-Commerce to increase gradually as a percentage
of total e-Commerce, going from 15% in 2013 ($38.8 billion) to 25%
in 2017 ($108.6 billion).
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. eMarketer estimates that tablets will generate 65% of
m-Commerce sales this year, with smartphones accounting for the
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 better
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 "on-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. At any rate, the inherent cost
savings and convenience of "showrooming" ensures that the trend
advancements in technology
are improving navigation and customer experience on e-Commerce
sites, which is improving reviews and thus drawing more traffic to
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
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.
remains a major lure.
A July 2012 study by Forrester Research is indicative of 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.
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
) see 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
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
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 present. 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.
[Bowker Market Research survey and wsj.com]
U.S. players continue to see strength in international markets.
) are the primary channels facilitating international expansion,
Barnes & Noble
), other smaller players and local companies in international
markets are also playing a part.
Nearly 85% of the Internet-using audience in the U.S. watched
videos in May.
) sites remained the forerunner facilitating online
consumption, with significantly higher unique viewers (UVs) than
any of the others.
) has moved up the ranks pretty fast, taking the second position.
AOL Media Network and VEVO (in which Google's YouTube recently
acquired a stake) took the next two positions, with
) sites at number six, Yahoo sites at number eight and Amazon sites
at number nine.
Hulu, which did not feature among the top 10 video content
providers, served ads at the highest frequency. Google served the
second highest number of ads and AOL the tenth highest.
[comScore estimates, June 2013]
The Cisco VNI initiative has forecast global consumer Internet
video traffic to increase from 57% of total consumer Internet
traffic in 2012 to 69% in 2017, with Internet TV increasing 5X by
then and VoD tripling. This represents tremendous opportunity in
terms of video content sales and ad revenues.
The digital consumption of
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
A recent IFPI report shows that digital music could finally
bring a turnaround in the music business, which has been in the
doldrums for many years. While piracy remains a major concern,
licensed and ad supported music services are increasingly available
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
Since video, games and music are often social activities, they are
increasingly being marketed on social platforms such as
Facebook 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.
An E-tailing Group study 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
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,
) and Others. However, Pinterest and Instagram are growing in
popularity, going by the strong growth in unique visitors.
is also helping retail.
) is the leader here, which along with its closest rival
LivingSocial offers 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
Since e-Commerce entails the buying and selling of goods or
services over electronic systems, it includes companies that are
totally dependent on these sales, those that are gradually moving
to it, as well as those that want to use it partially.
Therefore, the biggest sellers or the ones growing the strongest
are not necessarily those that are solely dependent on the
Internet. The following diagrams seek to explain the position of
companies primarily dependent on the Internet for the distribution
of their goods and services in the context of the
Zacks Industry Rank
Two (Retail/Wholesale and Computer & Technology) of the 16
broad Zacks sectors are related to the e-Commerce industry as
We rank the 264 industries across the 16 Zacks sectors based on the
earnings outlook and fundamental strength of the constituent
companies in each industry. To learn more visit:
About Zacks Industry Rank
The outlook for industries positioned at #88 or lower is
'Positive,' between #89 and #176 is 'Neutral' and #177 and higher
Therefore, Internet Commerce being in the 114th position is in
Neutral territory, with Internet Services (185th position) being
negative and Internet Services - Delivery (58th position) being
So it is not surprising that the average rank of stocks in the
Internet Commerce industry is 3.00, for Internet Services it is
3.15, while for Internet Services - Delivery, it is 2.76. [Note:
Zacks Rank #1 denotes Strong Buy, #2 is Buy, #3 means Hold, #4 Sell
and #5 Strong Sell].
The broader Retail/Wholesale sector, of which Internet Commerce is
a part, appears to be turning the corner. While the revenue beat
ratio is on the low side (34.1%), the earnings beat ratio is pretty
robust at 61.4%.
Total earnings for the sector were up 5.7%, but not nearly as good
as the 7.4% growth in the fourth quarter of 2012. Total revenues
were up 1.5% from last year compared to a 4.9% increase in the
The other companies we'll discuss in the e-Commerce outlook
(Part 2) fall under the broader Technology sector. Here too, we see
a fairly strong earnings beat ratio of 63.1%, partially supported
by a revenue beat ratio of 45.6%.
However, total earnings in the sector were down 4.4% compared to a
1.7% increase in the fourth quarter. Total revenues did slightly
better, increasing 2.9% from last year, down from 5.3% in the
Initial earnings estimates for 2013 and 2014 indicate double-digit
growth in both years for Retail/Wholesale. Technology on the other
hand is expected to be flat this year and up double-digits in the
comScore estimates that Amazon remains the leading Internet
retailer based on unique visitors (UVs), followed by
), in that order. The top 3 have a much higher penetration on both
Android and iOS platforms.
Because of the gradual receding of boundaries between online and
physical store retailers, traditional retailers are increasingly
entering the space.
Nearly all the Internet retailers have issues at present. That's
because Internet retailing requires proper fulfillment and a solid
technology platform to be successful and both these factors become
more difficult as the companies grow.
Moreover, the pursuit of growth in international markets is an
absolute necessity, because stealing business from traditional
retailers can only take them so far. Besides, traditional retailers
have become wiser and many have developed their own e-tailing
) has pulled ahead of the pack with its international efforts. The
company spent a good part of 2011 as well as most of 2012 setting
up its international fulfillment centers and is now poised to
benefit from them. It has also been launching its Kindle platform
in some of these markets to spur digital sales.
We also like
), although it is still playing catch-up. eBay's recent push to
grow its international business means the company is moving in the
right direction. It has already strengthened its position in India,
tied up with weaker players in China and set up a think tank in
The sector's notable weakness is
), which is seeing trouble on every front. The business has low
barriers to entry, so there's a flood of smaller players looking to
get in. Groupon is required to constantly innovate and excite its
suppliers, but it is not being able to capitalize on the market
Following a legal decision last year, the coupons it distributes
can be redeemed for actual value even after their expiration dates,
which is just making the business more complicated. This, along
with the limited innovation, is leading to fallout with businesses
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