Although retail ecommerce is the segment that most of us are interested in, it is in fact just a part of the overall ecommerce market. Retailers and service providers generate just 5.2% and 3.1%, 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 most reliant on e-commerce sales (51.9% of their total shipments), followed by merchant wholesalers (26.4% of their total sales). These two segments make up the business-to-business category.
The latest numbers from the Bureau suggest that growth rates across all segments were similar with services being just a bit slower. [All the above data from the U.S. Census Bureau relate to 2012, as published in May 2014.]
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 ecommerce market than do not relate directly to the retail of goods, and focus instead on 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 3.7-4.2% a year from 2013 to 2017 leading to a 26% increase in the number of users by 2018. Visitors from the Caribbean are expected to be the slowest-growing (1%). The Middle East, Asia and South America are expected to grow 67%, 60% and 52%, respectively.
The fastest growth is expected to come from China (229%), Saudi Arabia (191%), Russian Federation (79%), Brazil (66%), Argentina (65%) and Columbia (54%).
The Travel and Tourism industry remains one of the country’s strongest industries, although the first quarter of 2014 did not go that well. According to the BEA, the industry declined 1.0% in the quarter, better than the real GDP decline of 2.9% (in the fourth quarter of 2013 it grew 4.5% compared to GDP growth of 2.6%). The recreation and entertainment segment was the main driver of weakness, declining 11.2% in the quarter (compared to a 0.9% increase in the previous quarter).
Food services and drinking places also contributed with a 3.5% decline (compared to a 7.4% increase in the previous quarter). Accommodation prices went up 13.2% while passenger air transportation prices dropped 5.5%. They were down 8.0% and 7.0%, respectively in the previous quarter.
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 Priceline (PCLN - Analyst Report) and both Hotels.com and Hotwire.com part of Expedia (EXPE), this narrows down the top companies in the segment to Priceline, Expedia, Orbitz Worldwide (OWW - Snapshot Report) and Travelocity. However, there are several others worth considering that include Ctrip International (CTRP), MakeMyTrip (MMYT - Snapshot Report), TripAdvisor (TRIP - Snapshot Report), which was spun off from Expedia, and Qunar (QUNR - Snapshot Report), which recently had its IPO.
The top site for travel content is TripAdvisor, visited by 60% of Americans when choosing a hotel. Google’s (GOOGL) YouTube is now growing in popularity and is the second in line, according to the MMGY Global's 2013 Portrait of American Travelers study.
Global outbound trips grew 4% in the first eight months of 2013 and are expected to grow 4-5% this year. The Asia/Pacific region is expected to see the strongest growth (up 9%), with China alone growing 18%. South America will follow with 6% growth followed by Europe at 3-4% and North America thereafter at 3% [World Travel Monitor 2013].
According to the TravelClick North American Hospitality Review (NAHR), both occupancy and average daily rates (ADRs) in North America have been growing steadily through the end of 2013 and into 2014. The occupancy rate for 2013 was flattish in the Group segment and up across most categories within the Transient segment, with the only weakness attributable to government spending. The ADR increased across all categories and was helped by much stronger leisure spending. The trends going into 2014 were positive for both occupancy and ADR.
Online travel agents (OTAs) continue to grow the fastest: up 15.2% in 2013, according to TravelClick. The hotels’ own websites were up 7.6%, with direct walk-ins and calls to the hotel down 0.4% and 4.3%, respectively. The global distribution system used by travel agents was up 3.5%.
Share of room nights based on actual reservations in 2013:
According to STR Global, occupancy rates, ADRs and RevPAR saw positive growth across the world in May 2014:
A recent PhoCusWright report mentions the top seven technology trends for the travel market. Accordingly, it appears that video is essential to draw customers and content marketing, guides, travel information and ROI tracking can all benefit from it. Trend two was with respect to search engines.
The report says that Google’s algorithms are now favoring site design rather than keywords, making SEO somewhat redundant. So site design and navigability are becoming essential to capture search traffic. Social media has increased the availability of reviews, so companies are increasing focus on the overall travel experience.
Trend four is increasing mobile usage, which the report says will account for 27% of online travel revenue by 2015. The fourth trend is in wearables, with Virgin Mobile and a tourism board in Florida already using Google Glass effectively for customer interaction and advertising, respectively. Using big data analytics and social media marketing are the sixth and seventh major trends, respectively.
eMarketer is less optimistic about global digital travel sales growth. According to the research firm, this is a more mature segment, so growth rates are decelerating compared to retail ecommerce where they are growing faster. As a result, it expects travel’s 34.1% share of U.S. ecommerce sales in 2013 to drop to 26.2% by 2018.
However, mobile travel sales are expected to increase share on total mcommerce sales from 31.1% in 2014 to 32.8% in 2018. Overall, desktop travel sales will see continued declines over the forecast period with mobile travel sales decelerating but continuing to grow at double-digit rates.
Further, Mexico, India, Spain, Italy and Norway are expected to have the highest shares of digital travel sales in the next five years, with Brazil, China, India, Mexico and Italy being the fastest growers.
Trends show that younger people, many of whom have been using the Internet from a very early age are likely to spend more online. For example, consumers aged 25-33 (Gen Y) spent an average $563 million online compared to consumers aged 34-47 (Gen X), who spent $535 on average. [Forrester report May 2014]
Considering this trend, online players are vying with each other to come out with convenient and secure payment solutions. There are a host of payment systems in the market, but the greatest progress has been made on near field communication (NFC), quick response (QR) code, Soundwave and Bluetooth low energy (BLE).
The latest to enter the fray is Amazon (AMZN) with its "Amazon Payments" system. Recognizing the most-used mobile and computing platforms, the system works on any desktop or tablets/smartphones running Android or iOS operating systems. Amazon’s payment system is likely to be popular with retailers given its huge customer base. For Amazon, it will also facilitate further data collection and position it strongly versus eBay’s (EBAY) Paypal and Google’s Digital Wallet.
By far the most successful mobile payment system is Paypal, which has come a long way from a mere online payment service. Last year, the company inked a deal with Discover Network (DFS), the fourth largest credit card company, bringing its seven million plus retailers onto the Paypal network. Paypal has also signed up a large number of traditional retailers such as The Home Depot (HD) and Office Depot (ODP - Analyst Report). The company is now selling its marketing services as a bundled solution to retailers and the success of this strategy is evident in Paypal’s growth numbers.
The digital wallet from Google enables in-app purchase and mobile payments in addition to PoS purchases and money transfer. Other than the credit and debit card information, users can now store loyalty cards, discount coupons and offers that they can apply during purchase. More importantly, Google has found a way to reduce its dependence on NFC technology. A non-NFC-enabled phone can now use the Wallet to transfer funds from any of the accounts saved in it.
Google now requires app developers for the Android platform to compulsorily use its payment service instead of a competing service from eBay or others. Despite the strong growth in Android devices, Google Play (its app store) has not done that well, partly because of the many steps to conversion that turns customers away. But the company is now beginning to see nice growth rates.
Apple (AAPL) has removed NFC compatibility from its devices and also introduced iBeacon, which is a BLE technology. The technology tracks the approximate location of a person, the time spent at different stores and even the location within the store. It has the potential to push highly relevant offers and promos at opportune moments.
Apple has accumulated a large number of patents for payment processing and it’s very likely that that iBeacon will be rolled into its very own iWallet. Payments on its platform are currently handled by its Passbook system. Apple is one of the largest online retailers although it also sells through traditional retail outlets, so a payment platform from Apple may be expected to catch on very fast.
The FIS Mobile Wallet from Fidelity National Information Services Inc. (FIS) 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.
Visa (V - Analyst Report) 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 several providers).
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 in 2013. Most banks already have at least one mobile banking offering, with some larger banks offering more than one option. Messaging remains most popular across the world, but apps are likely to remain the preferred channel in most developed markets.
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 it could become the most-preferred banking method by 2020. The study estimates that 20-25 million Generation-Y consumers will become new banking customers by 2015.
It is believed that high smartphone penetration, higher income 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 to increase.
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.
McAfee’s threat report for the fourth quarter of 2013 added 2.4 million new mobile malware samples. This is up 197% year over year. Moreover, new suspect URLs grew 40% in 2013 with new ransomware doubling from the fourth quarter of 2012. The report shows a growing tendency of malware producers to send handset information related to customer behavior and location details.
What is 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, Apple, Avast, Check Point, Cisco (CSCO), IBM (IBM - Analyst Report), Juniper (JNPR - Analyst Report), Kaspersky, McAfee, Microsoft (MSFT - Analyst Report), MobileIron, BlackBerry (BBRY), Symantec (SYMC - Analyst Report) and Trend Micro, among others.
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 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.
The U.S. digital advertising market has seen some very strong growth in the past few years, such that the discussion has shifted to its most effective channel, which is mobile. eMarketer estimates that while the total digital ad market will grow 47.6% from 2013 to 2017, mobile will grow 271.0%, with desktop declining 17.5%.
Total growth rates are expected to continue declining: 12.6% in 2014, 10.3% in 2015, 9.2% in 2016 and 7.1% in 2017. Retail, financial services, consumer packaged goods (CPG) and travel in that order, are expected to drive this growth. The mobile platform will remain particularly strong, growing 56.0% in 2014, 41.8% in 2015, 33.1% in 2016 and 26.0% in 2017. Spending on mobile ads is expected to increase as a percentage of total spending on digital as well as total media ads in each of the years.
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. 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 awareness online.
Google’s YouTube leads in the video segment. The increasing propensity to use programmatic buying techniques (automating the inventory buying process) is hurting both Google’s and Yahoo’s (YHOO - Analyst Report) premium placements. Yahoo is currently focusing on the content side of things in order to boost ad revenue.
Facebook (FB) on the other hand has more relevant personal data, which advertisers like. It is also very strong on the mobile platform, which has been driving its results in recent times.
While digital advertising spend has been moving to non-search portals, such as Facebook, search is likely to remain relevant and important. Google is the leader here and is using its other technologies (maps, voice, devices) to make its services more invaluable to users. It is also making a splash in the Internet of Things, with wearables, auto, TV and home automation products. If Android becomes ubiquitous, the opportunity to serve ads will be that much greater.
Search advertising 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 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 Services – Delivery and Internet Commerce being in the 176th and 218th positions, respectively are in negative territory, with Internet Services (168th position) being neutral.
So it is not surprising that the average rank of stocks in the Internet Services – Delivery industry is 3.12, for Internet Commerce, it is 3.29, while for Internet Services it is 3.09. [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 see improving growth rates.
Total earnings for the sector are expected to increase 3.9% in the second quarter on revenue growth of 7.6%. This contrasts with an earnings growth of 0.4% based on revenue growth of 3.8% in the preceding quarter.
The other companies we are discussing in the e-commerce outlook (Part 2) fall under the broader Technology sector. Here we see a decline in earnings and slight improvement in revenue.
Specifically, earnings growth is expected to drop to 2.3% (from 4.4% in the previous quarter), while revenue growth is expected to be 3.7% (up from 2.7% in the previous quarter).
The sector is under pressure right now, so we see very few opportunities. Most of the companies are dealing with significant investments or other growth-related issues, so it is hard get enthusiastic.
In this environment, we continue to like Facebook because of its growing share of digital ad revenue and swelling user base. A recent report from Forrester indicates that Facebook remains extremely popular with teens, particularly the age group of 12-17, allaying fears that teens were abandoning the platform. Importantly, the company continues to innovate, frequently enhancing and/or making relevant changes to its platform and introducing new products for advertisers.
The other company we are positive about is Priceline. The company has a strong international presence and is currently attempting to take share in the domestic market.
Priceline is attacking on all fronts: it has increased offline advertising without cutting back on online advertising, and is offering discounts and building inventory. It also picked up restaurant reservations company OpenTable to get into that vertical, while using the closer customer interaction to pull customers onto its platform. Higher costs will impact near-term earnings, but the company is likely to see market share gains, which will be positive for longer-term growth.
Yahoo is one of the few companies with significant growth issues. The company is tied up in a search agreement with Microsoft that is essentially transferring its search market share. With volumes looking unexciting and pricing under pressure from programmatic buying, the core business is under some pressure. Additionally, there is some uncertainty about the amount its Alibaba holdings will yield, which is keeping the shares range bound. CEO Mayer’s initiatives are not contributing materially to results just yet.
Expedia doesn’t have the growth issues that Yahoo does, but the company is seeing growing competition from Priceline in North America, a region it has always dominated. Priceline has taken a very aggressive approach to build market share here and this is forcing Expedia to step up marketing costs.
Chinese travel company Ctrip is seeing tremendous growth fueled by a growing middle class and increased consumerism in China, the shift from traditional to online media for booking travel and increased mobile usage. However, we are unable to recommend the shares because it is currently in investment mode to build position in the super-competitive Chinese market and has also bought ToursForFun a U.S. OTA to tap growth in the region.
Similar is the case with Baidu (BIDU), the dominant search engine company of China. Baidu is the Google of China with tremendous opportunities. The company has been investing in the business to build a position in the mobile and video segments and the company is already seeing growing monetization on mobile. While integration of recent acquisitions and investment considerations could be a slight headwind in the next few quarters, the company is clearly moving in the right direction.