e-Commerce Stock Update - July 2013 (pt. 1) - Industry Outlook
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 category.
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]
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 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, 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 rest.
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 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 "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 will continue.
Continued advancements in technology are improving navigation and customer experience on e-Commerce 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.
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.
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 ) 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 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 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. 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.
Nearly 85% of the Internet-using audience in the U.S. watched videos in May. Google ( GOOG ) sites remained the forerunner facilitating online video consumption, with significantly higher unique viewers (UVs) than any of the others. Facebook ( FB ) 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 Microsoft ( MSFT ) 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 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.
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
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 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 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 ( LNKD ) and Others. However, Pinterest and Instagram are growing in popularity, going by the strong growth in unique visitors.
Selling discount coupons is also helping retail. Groupon ( GRPN ) 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 term.
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 depicted below.
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 is 'Negative.'
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 positive.
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 fourth quarter.
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 fourth quarter.
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 next.
comScore estimates that Amazon remains the leading Internet retailer based on 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.
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
That said, Amazon ( AMZN ) 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 Groupon ( GRPN ), 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 potential.
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 partnerships.
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