Investing in ecommerce: the high street has moved online
Ecommerce has permanently disrupted traditional brick-and-mortar stores as 'clicks' have replaced 'bricks'. Firms like Etsy, Overstock and Shopify have capitalised on this trend. Global Online Retail UCITS ETF provides exposure to a basket of ecommerce stocks.
In a recent IG Trading the Markets podcast, we explored investing beyond the pandemic with Jane Edmondson, chief executive officer (CEO) and co-founder at EQM Indexes. With this year’s surge in online shopping, Edmondson says 'the mall isn’t dead, it has just moved online'.
Online retail increased its dominance through the pandemic
According to research firm eMarketer, global ecommerce is expected to approach $5 trillion this year,1 as online retailers have had fertile ground to grow their business in this new era of contactless shopping. In the US, ecommerce sales grew by 32% to $795 billion in 2020, versus previous forecasts of 18% growth.2
The coronavirus pandemic has accelerated the pace of ecommerce growth in 2020, helping online retailers expand their dominance. Value-added features such as competitive pricing, shopping convenience, greater product selection and rapid delivery options have solidified online commerce as a disruptive technology that is here to stay.
Ever-increasing internet and mobile penetration is one of the key drivers contributing to this growth, enabling more consumers to shop online anywhere and anytime. New technological innovations in electronic payment, rapid delivery, artificial intelligence (AI), and voice-assisted shopping, as well as virtual and augmented reality continue to enhance the online shopping experience, further driving the expansion and growth of this investment theme.
Additionally, due to the pandemic, ecommerce firms added new shoppers that had not previously shopped online, fueling new buying habits such as online grocery, which grew 43%.3 In the UK, online electrical goods firm AO World added two million new customers in 2020, resulting in a doubling of its share price since the start of 2020.
Back in the US, this trend has accelerated traditional retail’s woes, with 30 US retailers having filed for bankruptcy in 2020, on the heels of 17 major retailer bankruptcies in 2019.4 Amid this marketplace evolution, online retail has become a transformational and dominant force in global retail.
What is so appealing about shopping online?
A number of key benefits serve as the driving forces behind the growth of ecommerce. These benefits have proven to be valuable for businesses, consumers, and society as a whole.
Figure 1: benefits on online retail for different groups
|Lower costs associated with not having a physical presence||Enhanced product selection||Less traffic and crowds|
|Automated inventory management||No geographic sourcing boundaries||Price competition and democratization of selection|
|Customer analytics||Competitive pricing, virtual auctions||Expanded access to rural areas|
|Unlimited geographic presence||Convenience of shopping from home/office/mobile device||Shopping and delivery access for housebound consumers|
|Open for business 24/7/365||Time savings for consumers, one-stop shopping||Facilitated delivery of public services, such as education and health care|
|Reduced advertising and marketing costs||Customer reviews and social input||Global in scope|
|Scalability, fewer employees||Delivery options||Eco-friendly|
Source: EQM Indexes
Room for growth: online sales still only make up a small proportion of total sales
Given the benefits that online and virtual commerce provide, it is no wonder that this channel has grown at a quicker pace than traditional retail. US ecommerce sales now represent 14% of total retail sales, after declining slightly from its pandemic lockdown peak in the second quarter of 2020 (Q2).5
Figure 2: percentage of US retail sales derived from online retail
Globally, ecommerce is also growing at a rapid pace, with year-over-year percentage growth of 27.6% in 2020, with sales approaching $4.3 trillion in 2020, up from $3.3 trillion in 2019, according to eMarketer. By 2022, it is forecasted that ecommerce’s percentage of total retail sales worldwide will surpass the 20% mark.6
Figure 3: global ecommerce sales by country (2020)
Besides the US, countries such as China and the United Kingdom lead the way in terms of ecommerce adoption.
Expanding internet and mobile penetration will support ecommerce growth rates
Mobile is playing an increasingly important role in driving ecommerce sales. Mobile sales reached $2.8 trillion in 2020, an increase of 32% over the $2.1 trillion registered in 2019, with now more than half of online transactions now being initiated on mobile phones.7
Bigger screens, engaging mobile shopping applications and secure payment options have helped encourage mobile commerce growth. Mobile has exploded as a shopping channel, not just from a traffic standpoint, but in terms of sales and dollar growth. Mobile commerce is expected to account for more than half of ecommerce by the end of 2021.8
More than 63% of the world now has access to the internet and the opportunity set has rapidly expanded with broad availability worldwide, thanks to smart mobile devices allowing consumers to shop online anywhere, anytime.9
The growth of mobile ecommerce in China, now $873 billion in market size, is a prime example of mobile commerce’s potential.10 China’s more than 1 billion WeChat users can make purchases on their smartphones using WeChat Pay without leaving the messaging and social commerce platform.
Technological innovation in online retail
While mobile penetration is a big driver of current online retail growth, future technological innovations such as seamless and secure methods of electronic payment, voice-assisted shopping, virtual and augmented reality and AI will take the online shopping experience to the next level and further drive market expansion.
Key drivers of future online retail innovation:
- Electronic payments
- Voice assisted shopping
- Virtual and augmented reality
One could argue, as consultant Deloitte does, that the traditional brick and mortar retail apocalypse is really a retail 'renaissance'.10 A renaissance upends many of the ideas and conceptions that have long governed human behavior, uprooting traditions, institutions and habits of thought. The rapid growth and expansion of retail ecommerce has led many to proclaim that the high street is dead.
The renaissance of retail in online shopping offers consumers a wider selection of merchandise, better prices, and a superior level of convenience. The mall isn’t dead, it has just moved online.
IG’s view: investing in ecommerce stocks
Ecommerce stocks have seen their share price rise significantly over the pandemic as increased growth prospects has boosted future potential earnings. For instance, Asos has seen its share price rise by over 50% since the start of 2020 as sales have risen snowballed as more and more shoppers bought clothes online for the first time. Sales rose by 19.4% to £3.2 billion in 2020 and analysts are predicting +20% growth in 2021 followed by +18% in 2022.
But Asos is just one of many rapidly growing ecommerce firms that is benefiting from the structural changes outlined above.
The table below shows the top ten holdings for Global Online Retail ETF (PBUY), an exchange traded fund (ETF) available on the IG share dealing platform which launched in March 2021. PBUY invests in 48 different ecommerce firms from around the world and has an annual cost of 0.69%.
Figure 4: top 10 holdings for Global Online Retail ETF
|Stock||Code||Weight in ETF||Sales - 3 year average growth||Forward Price-to-Sales ratio||Total return (31 Dec 2019 - 20 Apr 2021)|
*DoorDash went public on 8 December 2020. Its total return shown to 20 April 2021 is from this start date.
Since the start of 2020, the value of the underlying index that Global Online Retail ETF aims to track has risen by around 180%. The high street is not dead, is has simply moved online.
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1 Worldwide ecommerce will approach $5 trillion this year, eMarketer, January 14, 2021
2 US Ecommerce Growth Jumps to More than 30%, Accelerating Online Shopping Shift by Nearly 2 Years, eMarketer, October 12, 2020
3 Koetsier, John, 44% Of Global eCommerce Is Owned By 4 Chinese Companies, Forbes, October 21, 2020
4 The running list of 2020 retail bankruptcies, Retail Dive, February 5, 2021
5 US Census Bureau, Quarterly Retail E-Commerce Sales 4th Quarter 2020, February 19, 2021
6 Cramer-Flood, Ethan, Global Ecommerce Updated 2021, eMarketer, January 13, 2021
7 Mobile Commerce Sales 2020, eMarketer
8 Brandt, Ari, How the pandemic transformed mobile apps into the new storefront, February 17, 2021
9 Internet World Stats, 2020 Q4 Estimates
10 Ecommerce payment trends: China, 2019 JP Morgan Global Payment Trends