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Industry Outlook

The retail sector appears to be growing steadily, according to recent estimates from eMarketer. The research firm says that while retail sales grew 3.3% in 2015, it may be expected to grow 3.5% this year. The U.S. remains the largest retail market, but developing countries are growing pretty fast.

Ecommerce remains a fairly small part of total retail at just 7.1% of U.S. retail sales, but eMarketer is optimistic that the share will grow to 9.8% by 2019. Note that the share of ecommerce sales in total retail sales is relatively lower in the U.S./North America with Western Europe and Asia/Pacific already doing 7.5% and 10.2% of their purchases online.

As a reminder, data formats continue to vary widely, data collection and evaluation remain difficult, so reliance on surveys by government and private agencies remain relevant.

The U.S. Census Bureau says that the manufacturing sector is relatively more reliant on e-commerce (60.9% of their total shipments), followed by merchant wholesalers (27.7% of their total sales). These two segments make up the business-to-business (B2B) category.

Retailers and service providers generated just 6.4% and 3.8%, respectively of their revenues online, with retailers growing faster than service providers. The Bureau categorizes these two segments as business-to-consumer (B2C).

Manufacturers and retailers grew their business double-digits, while wholesale and services saw single-digit growth. [All the above data from the U.S. Census Bureau relate to 2014, as published in June 2016].

Government data indicates that retail ecommerce has outpaced total retail sales growth in recent times even in bad quarters for the sector. Some of this is on account of the continued shift from offline to online retail, as customers (baby boomers) move to online channels. But it’s also because new consumers (millenials) often start out on online channels. These consumers spend more time in a connected, social environment and take for granted many of the online tools previous generations struggled to understand, appreciate and then adopt. Therefore, ecommerce will likely continue to outpace total retail sales in the foreseeable future.

Buyer Trends and Preferences

1.     Mobile, Wearables: It just isn’t possible to overstate the importance of mobile devices, and now wearables, as a factor driving ecommerce sales. eMarketer estimates that mobile commerce will be 32.0% of ecommerce sales and 2.6% of total retail sales in 2016. Smartphones in particular are seen as becoming a bigger driver, growing to 50% of mobile commerce next year and 53.5% by 2020. Forrester says that mobile devices don’t just drive sales but also influence sales (it estimates that mobile influenced $1 trillion in 2015 sales). The strength continues to be driven by larger mobile screen sizes, new categories (cars, grocery, luxury that were earlier restricted to offline purchase) and greater comfort in using online payment systems. The increasing number of devices per person is leading to a trend of using multiple devices during the process of gathering information and buying a product and a tendency in many cases for the process to move from online to offline channels.  

2. Social Networking: The traditional buying experience often involves friends or family getting together to look through merchandise and select after much discussion. The online experience has been more restrictive in this respect. Despite the fact that personal recommendations and comparison shopping have been around for a while, these are helpful in making a selection, but don’t make buying a collaborative exercise. So the shopping experience has been more of a chore than fun. Once the novelty of doing things online wears off or for those who have been doing it online from the get-go, there will be a natural tendency to start looking for more, so this is where social networks like Facebook (FB - Free Report) and Twitter (TWTR - Free Report) will start playing a bigger role. Facebook has already announced Buy buttons and store fronts and more is sure to follow. Twitter has a Buy button as has Pinterest and Google Shopping.

3. Geography Isn’t a Barrier Any More: These days, if people want to buy something they don’t get at the retail store, the first thing they do is check online (or they might check online first and decide their point of pickup accordingly). So the world is getting ever smaller as shoppers see local, state, national and international barriers melt away. And satisfaction leads to higher demand and also, higher expectations. The following projections by eMarketer are illustrative:

Before going into the seller strategies, let’s just touch upon prospects in the Chinese and Indian markets since they are likely to grow very strongly this year.

China

The general things the Chinese look for when shopping online are good service and high-quality products (especially if they are the fast-growing upper middle class and affluent customers in cities). But they also reportedly prefer online marketplaces rather than brand sites to avail of discounts, promos, payment options and choice. With the digital revolution in China, many Chinese also have multiple devices they use to research a product or shop on.

While China’s economy has cast a shadow on retail sales expectations this year, findings of Boston Consulting Group and AliResearch (a part of Alibaba) say that China’s consumer economy will expand by about half, to $6.5 trillion by 2020, even if annual real GDP growth cools to 5.5%. They identify three drivers: a growing upper middle and affluent class, a new generation (between 18 and 35 years of age) of freer spending and more tech-savvy consumers. Ecommerce will contribute 42% of total consumption with 90% of this coming from mobile. Services rather than goods will contribute 51% of the growth. Moreover, in a survey of 2,000 Chinese consumers just 7% said that stock market trends would affect their decision to spend, 8% also added housing market concerns but a whopping 35% said that rising incomes would be a greater influence on spending.

Cross-border trade is another driver, as Chinese youngsters are extremely brand conscious and like to buy foreign goods, especially if they’re from the U.S., South Korea or Japan. The Chinese Ministry of Commerce says that cross-border transaction value will make up 20% of total Chinese foreign business and continue to grow at over 30% year.

India

According to the Associated Chambers of Commerce and Industry of India (ASSOCHAM), ecommerce in India will grow 67% this year into a $38 billion market. This is 10x the size in 2009 when it was worth $3.8 billion.

The top drivers were stated to be the increasing Internet and mobile penetration, growing acceptability of online payments, favorable demographics, aggressive online discounts, wider choice and rising fuel price. Mobile platforms handled 78% of shopping queries in 2015 compared to 46% in 2013. Apparel, electronics, baby care, beauty & personal care and home furnishings were top categories in 2015, each growing strong double-digits. 26-35 year-olds constituted the biggest segment (52%), followed by the 18-25 year-olds (38%), 36-45 year-olds (8%) and 45-60 (2%). The male to female ratio of shoppers was 65%/35%.

Companies like Amazon (AMZN - Free Report) and eBay (EBAY - Free Report) in the U.S., Alibaba (BABA - Free Report) in China, and Flipkart and Snapdeal in India have facilitated the ecommerce revolution so they are in many ways the benchmarks of success in the industry. Traditional retailers are adjusting their strategies studying the strengths and challenges these businesses have faced. But it’s now apparent that everything that works for the big players may not be ideal for smaller ones, so some new strategies are also emerging.

Also, since ecommerce is basically a new way of doing an old thing, the challenges for the segment are both with respect to the traditional model and the new evolving one.

Seller Trends and Strategies

1. Focus Shifts from Device to Consumer: This is a direct offshoot to the phenomenon that many people currently use multiple devices so that the device on which a product is researched is not necessarily the one where the purchase is completed. Also, the purchase may finally even be completed in the physical store, leading to what is being called the online to offline (O2O) trend. Therefore, it has become important to follow the customer on the various devices rather than follow the device. The market is still relatively nascent, but Facebook did recently announce an enhancement that makes it possible.

2. App Versus Mobile Web: As the ecommerce market matures, it’s becoming very clear that smaller players can’t compete with what companies like Amazon offer. Also, their customers don’t already know them, which means that they aren’t eager to download their apps. These players need a platform to be able to display their wares and promote their brands. This is where Google plays an extremely useful role as the search engine can now pick out and display relevant information not just from across the web but also from individual apps that have been indexed. As smaller players are more dependent on the mobile web, its importance versus apps is increasing by the day.

3. Omnichannel Approach: Logistics is one of the most important considerations for ecommerce retailers. Whether building their own warehouses like Amazon does or relying on specialists like Alibaba does, ecommerce companies are required to act nimbly because customers want quick delivery and quick return options. For smaller etailers, it doesn’t make sense to go it alone as customers are hard to serve and the business is hard to scale. So they usually prefer to join an online marketplace to leverage its capabilities.

The challenge is more complex for the big players because the number of buyers and sellers is growing as is the volume of transactions. Amazon deals with this through its warehouses and encourages sellers to store with it through the Fulfillment by Amazon (FBA) initiative. FBA requires sellers to store inventory in Amazon warehouses with Amazon taking care of sales and support. This helps to cover cost of the warehouses that Amazon needs to invest in anyway. In some cases, Amazon ties with retailers to use their brick-and-mortar locations as pickup points for customers with those requirements. Recently, Amazon also leased 21 aircraft to support its logistics operations.

For big traditional retailers, omnichannel is a stepping stone to the online world. They already have the logistics and physical stores in place though of course they are adjusting locations in line with expansion plans. So while they continue to invest in the physical store experience they are supplementing this with online channels to expand their reach.

4. Technology Investment: Traditional retailers like Wal-Mart (WMT - Free Report) and Target (TGT - Free Report) want to build their online apps/websites/storefronts in a way that they can preserve their brand value while expanding their reach. Therefore, they are in competition with the big online players rather than in partnership with them. Online players are faster to adopt new technologies that help them improve navigation and customer experience, which in turn improve reviews and thus draw more traffic to them. But traditional players are pulling up their socks now. For instance beacon technology that enables retailers to track customers in the store and push promos and offers to them is expected to increase in importance. New payment technologies such as near field communication (NFC), quick response (QR) code, Soundwave and Bluetooth low energy (BLE) are facilitating the process. Innovative new technology is influencing every aspect of the buying experience spanning gadgets like TVs and game consoles that are increasingly getting connected to digital versions of books, music, video and games that are becoming available for online purchase and consumption.

5. App-based Services an Emerging Category: While apps have been around for a while, they are now targeting a growing a number of devices across the world. Uber’s taxi-hailing service is one of the most successful, but there are many others offering unique experiences. Take for example, apps like Feastly, EatWith and Cookapp that connect tourists with locals who will share their meal at a cost. Or regular valet service apps like ZIRX and Luxe, or even healthcare or payments apps. Reportedly, service providers are focusing on a single service per app to reduce complications in opening or using apps or paying for services. Difficulties of using apps are likely the reason that a greater percentage of sales are closed on desktops and tablets than smartphones. But the volume of transactions is likely higher on smartphones, making it worthwhile for app developers.

6. Discounting Remains Important: The market is more competitive than ever before, so retailers compete very hard on the number and percentage of discounts One format that Groupon (GRPN - Free Report) pioneered didn’t do so well however  because of the low barriers to entry and the company has since launched a marketplace to increase scale.

Emerging New Format

Alphabet’s (GOOGL - Free Report) Google has launched “Purchases On Google,” which is a variation of its usual product listing ads (PLAs) for Android and iOS devices. The objective is to speed up the purchasing process for customers. There are no additional charges/CPCs for these ads. The Google carousel displays the products in the usual way, but if they qualify, a “Buy On Google” message appears that leads the user to a seller-branded page. Either fresh payment information or the details stored on Google allows immediate checkout from this page. Google only processes the sale but order fulfillment, customer interaction and customer data remains available to the retailer.

Zacks Industry Rank - Positive

We rank the 264 industries across the 16 Zacks sectors based on the earnings outlook and fundamental strength of the companies in each industry. Two (Retail/Wholesale and Computer & Technology) of the 16 broad Zacks sectors are related to the ecommerce industry.

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 98th position is Neutral, while Internet Services being in the 147th position and Internet Services – Delivery being in the 229th position, are in negative territory. To learn more visit: About Zacks Industry Rank.

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.


Earnings Trends

The broader Retail/Wholesale sector, of which Internet Commerce is a part, did better than the S&P 500 in the first quarter. Revenue growth of 6.1% outdid the S&P 500 average of -0.8%. Also, while earnings growth of 3.6% was not exciting, it was better than the S&P 500 average of -6.5%. For the second quarter, the sector is expected to report revenue and earnings growth of 4.7% and -0.6%, respectively. The S&P 500 will decline 0.7% on revenue and 6.2% on earnings.

The other companies we are discussing in the e-commerce outlook (Part 2) fall under the broader Technology sector. The sector didn’t do as well as retail in the first quarter posting revenue and earnings growth of 0.4% and -4.5%, respectively. For the second quarter, its expected revenue and earnings growth will average at 2.2% and -6.4%, respectively.