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
wholesale. [All the above data from the U.S. Census Bureau relate
to 2011, as published in May 2013].
The U.S. Commerce Department estimates that ecommerce sales in the
country grew 16.9% in 2013 to reach $263.3 billion.
Total retail e-commerce grew 3.4% sequentially and 16.0% year over
year to 6% of total retail sales in the fourth quarter of 2013,
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 of 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 ecommerce sales (excluding
travel) going from 11% in 2012 to 15% by the end of 2013. This
share is expected to go up to 26% in 2017.
Smartphones and tablets accounted for 6.0% and 3.5% of total
ecommerce sales in the first half of the year, according to
comScore, with event tickets and apparel and accessories being the
most popular items on mobile devices. eMarketer estimates that
tablets generated 65% of m-commerce sales in 2013, with smartphones
accounting for the rest.
While both tablets and smartphones are extremely convenient when on
the move, tablets have several additional advantages. In fact they
are a boon to the ecommerce industry, since the larger screens
offer better visibility of online stores and merchandise, thus
Average spending per user on tablets is therefore 20% higher
than on smartphones but since more people have smartphones, their
overall share of ecommerce spending is lower. Given the unique
advantages of smartphones and tablets, it appears that they are
working in conjunction to boost total online retail sales.
Additionally, the inherent cost savings and convenience of
"showrooming" ensures that the trend will continue.
advancements in technology
are improving navigation and customer experience on ecommerce
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.
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
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
) 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 ecommerce 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. Growth trends in 2013 according to
last-available reports indicate tough comps for the children's
category that are offsetting increases in adult and religious
categories. With a penetration rate in the mid-teens percentage
range, 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 (a Bowker Market Research survey and
wsj.com). U.S. players continue to see strength in international
) are the primary channels facilitating international expansion,
although other smaller players and local companies in international
markets are also playing a part.
Nearly 87% of the Internet-using audience in the U.S. watched
) sites remained the forerunner facilitating online video
consumption, with significantly higher unique viewers (UVs) than
any of the others.
), which has moved up the ranks pretty fast (helped by 6-second
Vine videos and auto-load videos), maintained the second position.
AOL Media Network, Yahoo sites, NDN sites and Amazon sites took the
next few positions, with VEVO (in which Google's YouTube recently
acquired a stake) coming in at number seven. AOL topped the list as
far as ads viewed were concerned (helped by the Adap.tv
acquisition) with Liverail and Google coming in second and third.
[comScore estimates, Jan 2014]
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 seen huge growth since Apple announced its first iPod. Amazon
and others are also seeing their business grow. In 2013 however,
digital track sales declined around 6% while digital album sales
stayed flat (Nielsen). The decline is attributable to streaming
services, such as YouTube and Spotify, which saw volumes increase
32%. 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 growing in popularity.
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. The release of the new Play
Station 4 from Sony and Xbox One from Microsoft are also helping
sales right now.
Since video, games and music are often social activities, they are
increasingly being marketed on social platforms such as Facebook
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
Facebook remains the leader by far in the social networking space,
with monthly average users that are significantly higher than other
networks such as Tumblr, Pinterest, Twitter, LinkedIn and Others.
Its recent acquisition of WhatsApp ensures that user growth will
remain very strong, despite the strength at peers. Engagement on
Facebook also compares favorably with its peers.
is also helping retail.
) 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
Forecast for 2013
A recent report from Forrester indicates that online spending
(excluding travel) will increase at a 10% CAGR to reach $370
billion by 2017. Western Europe is expected to grow at a CAGR of
11% to 2017. The Asia/Pacific region will emerge as the largest
ecommerce market this year, pushing ahead of North America for the
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 Services - Delivery and Internet Commerce being
in the 212th and 233rd positions, respectively are in negative
territory, with Internet Services (102nd position) being neutral.
So it is not surprising that the average rank of stocks in the
Internet Services - Delivery industry is 3.29, for Internet
Commerce, it is 3.37, while for Internet Services it is 3.00.
[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, should have a moderate quarter. With roughly half the
companies having reported thus far, the earnings beat ratio is
56.5% although the revenue beat ratio is much lower at 30.1%.
Total earnings for the sector have increased 0.3% in the fourth
quarter on revenue growth of 3.9%. This contrasts with an earnings
growth of 10.3% based on revenue growth of 3.8% in the preceding
quarter. This seems to indicate heavy discounts typical of the
The other companies we are discussing in the e-commerce outlook
(Part 2) fall under the broader Technology sector. Here we see a
fairly strong earnings beat ratio of 86.7%, supported by a revenue
beat ratio of 73.3%.
Total earnings in the sector were up 5.3% year over year similar to
the 5.6% increase in the third quarter. Total revenues increased
5.2% from last year, up from 3.2% in the third quarter. The trend
Earnings estimates for 2013 and 2014 indicate better growth
prospects in both years for Retail/Wholesale and Technology.
comScore estimates that Amazon remains the leading Internet
retailer based on unique visitors (UVs) in Dec 2013, followed by
), Apple and
), in that order. The top 3 have a much higher penetration on both
Android and iOS platforms.
Opportunities are hard to come by considering the way the sector is
doing now. There are huge growth prospects, so companies are mostly
in the investment mode. Naturally, at this stage there are
execution risks, or at least some uncertainty regarding the time by
which investments will bear fruit.
In this environment,
) is one of the few stocks with some momentum. The company reported
solid results and looks set to ride the growth wave.
We also see estimates for
) going up, attributable to a refocusing of its business and a
demonstrated ability to deliver a solid lead generation business.
The company has not done too well in the last few years due to its
dependence on macro factors particularly with respect to the
automotive industry. It also needed to trim its operating
structure. With this out of the way, Autobytel should be able to
generate steadier returns.
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
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
Generally, estimates have been coming down for a large number of
companies, mostly because of execution uncertainties related to
their investments. Some of these that we would like to caution
against include Amazon.com, eBay,
) and Autobytel.
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