This is part two of our e-Commerce Industry Outlook.
Click here to read part one
Although retail e-Commerce is the segment that most of us are
interested in, it is in fact just a part of the overall e-Commerce
market. In fact, retailers and service providers generate just 4.7%
and 3.0%, respectively of their revenues online, a slightly higher
percentage than they did in the prior year. The U.S. Census Bureau
categorizes these two segments as business-to-consumer.
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
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 retail and
[All the above data from the U.S. Census Bureau relate to 2011,
as published in May 2013]
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.
In this section, we will discuss segments of the e-Commerce market
than do not relate directly to the retail of goods, and discuss
instead travel, payments, security and advertising.
The U.S. Commerce Department expects international travel to the
U.S. to continue increasing over the next few years. Visitor volume
is currently expected to increase 6-8% a year from 2012 to 2016
leading to a 49% increase in the number of users during the
Visitors from the Middle East are expected to be the
slowest-growing (29%). South America, Asia and Oceania growth rates
are expected to be comparable at 83%, 82% and 82%, respectively.
The fastest growth is expected to come from China (232%), South
Korea (200%), Brazil (150%), Russian Federation (139%) and India
(94%). Travel and tourism is one of the country's strongest
industries, contributing a trade surplus in each of the last 20
The top travel booking sites are Booking.com, Expedia.com,
Hotels.com, Priceline.com, Kayak.com (acquired by Priceline),
Travelocity.com, Orbitz.com and Hotwire.com. Since Booking.com and
Kayak are part of
) and both Hotels.com and Hotwire.com part of
), this narrows down the top companies in the segment to Priceline,
) and Travelocity. However, there are several others worth
considering that include
), which was spun off from Expedia.
The global travel market grew 4% in 2012 and is expected to grow
another 2-3% this year. The Asia/Pacific region is expected to see
the strongest growth (up 6%), followed by Europe and South America
(mainly Brazil) at 2% each. North America (mainly U.S.) is expected
to be flat this year.
[World Travel Monitor 2012]
According to the April 2013 TravelClick North American Hospitality
Review (NAHR), both occupancy and average daily rates (ADRs) in
North America are seeing steady growth this year, with individual
bookings (both leisure and business) doing better than group
bookings. In the second quarter of 2013, total travel occupancy
growth was 3.6% from last year with ADR growth even better at 3.8%.
Online travel agents (OTAs) are growing the fastest this year - up
13.7% in the first quarter, according to the TravelClick North
American Distribution Review (NADR). The hotels' own websites were
up 5.0%, with direct walk-ins and calls to the hotel growing 3.7%.
The areas of weakness were the global distribution system used by
travel agents and CRS (calls to a hotel's toll-free number).
Share of individual bookings-
Global corporate travel bookings were up 8.8% in April, according
to Pegasus Solutions, which is the single largest processor of
electronic hotel transactions. This is the highest volume growth
through GDSs since August 2011.
Smartphones are playing a key role in travel purchases, especially
for last minute purchases. eMarketer expects smartphone travel
researchers in the U.S. to grow to 50 million or 40% of all digital
travel researchers this year, with total U.S. mobile travel sales
touching $13.6 billion.
The top site for travel content is TripAdvisor, visited by 60% of
Americans when choosing a hotel.
) YouTube is now growing in popularity and is the second in line,
according to MMGY Global's 2013 Portrait of American Travelers
Another report by PhocusWright mentioned that when online
penetration of the travel market reached 35% in any country, growth
rates were likely to slow down to single-digits. The research firm
mentioned that only the U.S., U.K. and Scandinavia had reached this
level of penetration and most other markets across Europe, Asia and
Latin America would continue to show good growth rates.
With practically all market research indicating solid growth in
e-Commerce sales over the next few years, online players are vying
with each other to come out with convenient and secure payment
The FIS Mobile Wallet from
Fidelity National Information Services Inc.
) is basically a bar code reader that feeds information related to
the purchase into the user's smartphone and uses it as a medium to
transfer the information to the cloud. Online purchase of
merchandise is also possible. The solution provides good security,
since the transaction is carried out entirely in the cloud through
the retailer's and banker's applications and personal information
is not shared at the time of purchase.
QR code payments have already been made by most smartphone users in
the U.S. and the technology is moving mainstream. However, the
safety of the system comes at a price, which is the time it takes
to complete a transaction. This is the reason that Google is still
hanging on to its digital wallet.
Google's digital wallet allows a customer to make a payment by
waving his mobile phone over a POS terminal. Other than the
convenience of the whole thing, the main attraction being
highlighted is the security of the payment channel, since neither
the customer nor the retailer would be recording the personal
information related to the customer. Adoption of the device,
although it is some way off, will have a remarkable effect on the
volume and value of mobile transactions, since it should increase
the percentage of higher-value sales.
However, the cost of POS terminals is a downside to the system that
could easily turn away retail partners. This is an evolving area
and much could change over the next few years.
) has also jumped on the bandwagon, claiming that its V.me is a
digital wallet with a difference. Not only can it be used to make
mobile contactless payments (bar code, QR code or NFC), but it can
also be used for online checkout (it remembers card details from
The greatest success however is currently being enjoyed by eBay's
Paypal, which has seen success at a large number of traditional
retailers such as
The Home Depot
). One drawback that remains is that although the system is itself
secure, there is always a security risk for a buyer not used to
dealing with Paypal, since it requires personal information.
Mobile banking is set to grow very strongly over the next few
years, according to Juniper Research. The research firm estimates
that a billion mobile devices (or 15% of the installed base) will
be used for banking transactions by 2017, up from an expected 590
million at the end of this year. Most banks already offer at least
one mobile banking offering, with some larger banks offering more
than one option. Messaging remains the most popular across the
world, but apps are likely to remain the preferred channel in most
Mobile banking has not picked up sufficiently in either the U.S. or
Canada, due to security-related concerns. However, an analysis by
Deloitte shows that mobile banking could become the most-preferred
banking method by 2020. The study estimates that 20-25 million
"Generation Y" (Gen Y) consumers will become new banking customers
A banking.com study shows that 48% of Gen Y consumers are already
using online banking services. Moreover, their preference for
online banking is so high that around 30% said they would consider
switching financial institutions if they did not provide the
service. Both online and mobile banking by Gen Y largely consists
of checking account balances and transferring funds, although they
also like to pay bills on the platform.
It is believed that high smartphone penetration, higher income
within this group and greater digital sophistication will drive
increased demand for mobile banking services. Since mobile banking
is expected to be the most cost efficient for banks, investment in
technology to improve and expand mobile banking services is likely
With online transactions expected to boom over the next few years,
the topmost concern remains security. While banks will spend
significantly on secure payment systems, hackers are expected to
have a field day, largely targeting the flood of customers going
online. Last year saw a huge increase in security breaches,
something that may be expected to continue.
Recent research from McAfee revealed certain important facts:
first, that mobile malware was primarily spreading through apps;
second, 75% of infected apps came from Google Play; third, the
chances of downloading malware or suspicious URLs was 1 in 6;
fourth, 40% of malware families disrupt the system in more than one
way, which is an indication of the increasing sophistication of
hackers; and fifth, 23% of mobile spyware can result in data
Even more alarming is that even "secure" payment platforms like
digital wallets using NFC technology can now be infected by worms
within close range of devices ("bump and infect"). An infected
device can give out personal information during the payment process
that can be used to steal from the wallet.
Mobile security offerings currently come from AirWatch,
), Avast, Check Point,
), Kaspersky, McAfee, Microsoft (
) and Trend Micro, among others.
Alternative payment systems will continue to gain popularity. While
some of these payment systems, such as
) PayPal have been around for a while, other systems, such as
Google's digital wallet, V.me and the FIS Mobile Wallet are still
in the making. Alternative payment systems never really gained
momentum in the past because of the low volume of transactions.
However, as online transactions continue to increase, many more
such systems could suddenly become more available.
We expect mobile security to become a major focus area for
technology companies, since this is the stumbling block to payments
through the mobile platform (currently just 2% of U.S. online
The U.S. digital advertising market has seen some very strong
growth in the past few years, despite the recession that impacted
the entire economy. eMarketer estimates that the market will grow
14.0% in 2013, compared to the 15.0% growth in 2012.
Growth rates are expected to continue declining: 12.4% in 2014,
10.2% in 2015, 9.0% in 2016 and 6.9% in 2017. Retail, financial
services, consumer packaged goods (CPG) and travel in that order,
are expected to drive this growth.
The current strength in online advertising is coming primarily from
the growing popularity of the display format. Of all the forms of
online advertising, display (including video, banner ads, rich
media and sponsorships) is expected to see the strongest growth
over the next few years. Also, of all the forms of display
advertising, video and banner ads are expected to grow the
strongest from 2011 to 2016.
Search will remain supreme until 2016, gradually giving way to
video and banner ads, both of which will grow rapidly. The lower
pricing of video and banner ads has made them popular with brand
advertisers, so ad inventories are solid. Another factor favoring
display ads is the proliferation of smartphones, where the smaller
screens make display ads more effective than text ads.
The underlying drivers of growth of the display format are the
continued increase in the number of users, greater propensity of
users to consume online, a growing inventory of advertisements that
serve to lower advertisement prices and the need to create brand
Search advertising is expected to remain popular, because results
are measurable, and therefore, more predictable than other media.
This also makes the market more resilient in recessionary
conditions, since advertisers are more confident about the results
of their spending.
Since ecommerce 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 ecommerce 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 are discussing 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
While many of the companies discussed are expected to do well this
year, there are a few stand-out opportunities.
) is doing extremely well right now and the company's decision to
invest in offline advertising (TV) makes sense. Traffic continues
to surge, as the company continues to add content, both in the U.S.
and important international markets.
Another good investment is Yahoo (
), which is altering course under the leadership of Marissa Meyer.
The company has been acquiring aggressively to position itself in
the mobile segment and last reports indicated growing engagement.
) is another opportunity worth looking into. The company is cozying
up with Samsung, which has taken the mobile market by storm. It is
also getting more innovative by the day, which is the only way to
We do not see a lot of weakness, although many of the companies may
not be great opportunities either.
Revenue growth prospects for online travel companies Priceline,
Expedia and Orbitz Worldwide are good. International expansion is a
key factor driving growth for these companies and collaborative
agreements with local players will be the key. Lower-value
inventories in international markets are on the rise, so margins
could be impacted.
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