The on­line shop­ping revo­lu­tion

The first half of 2017 has seen a run of e-com­merce deals, with on­line sales glob­ally ex­pected to grow hand­somely this year. How should in­vestors re­spond?

Finweek English Edition - - Marketplace - By Mariam Isa Mariam Isa is a free­lance jour­nal­ist who came to SA in 2000 as chief fi­nan­cial cor­re­spon­dent for Reuters news agency af­ter work­ing in the Mid­dle East, the UK and Swe­den, cov­er­ing top­ics rang­ing from war to oil, as well as pol­i­tics and econom

the prac­tice of buy­ing and sell­ing ser­vices on­line has be­come fa­mil­iar to ev­ery­one with ac­cess to the in­ter­net. But e-com­merce is now in­vad­ing the re­tail space at a pace that will have far-reach­ing con­se­quences for busi­ness, con­sumers and in­vestors.

Re­tail e-com­merce sales world­wide are set to grow by more than 23% this year to $2.29tr – four times the pace of tra­di­tional sales – and ac­count for one-tenth of the com­bined to­tal for the first time, ac­cord­ing to dig­i­tal mar­ket re­search com­pany eMar­keter. By 2021 they will amount to $4.479tr, or 16%, of the to­tal.

Un­sur­pris­ingly, China is the world’s largest e-com­merce mar­ket with nearly half of to­tal es­ti­mated sales, which ac­count for just over a fifth in the coun­try it­self. It has a sig­nif­i­cant lead over the other big na­tional play­ers – the US, UK and Ja­pan.

South Africa has lagged the global trend but is start­ing to catch up. A sur­vey re­leased by Pay­Pal and Ip­sos ear­lier this year showed that lo­cal on­line spend­ing amounted to R37.1bn last year and will climb to R53bn next year.

The re­search in­di­cated that 58% of South African adults who use the in­ter­net shopped on­line in 2016, with more than 40% stat­ing that they had bought their prod­ucts out­side of the coun­try. Over half of those shop­pers said they would in­crease their on­line spend­ing in the com­ing year.

A num­ber of fac­tors are sup­port­ing the trend, in­clud­ing the greater va­ri­ety of prod­ucts of­fered, the evo­lu­tion of shop­ping apps, and the pro­file and be­hav­iour of shop­pers them­selves. The pop­u­lar­ity of mobile phones is key – eMar­keter’s data shows that mobile shop­ping will ac­count for more than 70% of e-com­merce this year in China and In­dia, and one-third of the to­tal in Ger­many, the UK and US.

Apart from con­ve­nience, on­line shop­ping is of­ten cheaper, as over­heads for on­line re­tail­ers are lower – al­though spe­cials and dis­counts are of­ten still bet­ter in tra­di­tional stores.

South African re­tail­ers are scram­bling to jump on the band­wagon. Ac­cord­ing to Tammy Binedell-Bar­ber, mar­ket­ing head for on­line price-com­par­i­son ser­vice PriceCheck, there are now at least 600 to 700 well­known tra­di­tional re­tail­ers with on­line stores. She be­lieves that if one in­cludes com­pa­nies ex­clu­sively sell­ing on­line, there should be at least dou­ble that. The num­ber of listed re­tail­ers us­ing PriceCheck’s on­line mar­ket­place has grown to more than 500 from 200 two years ago.

The ques­tion is, how should in­vestors re­spond to this dis­rup­tion of the re­tail sec­tor? De­spite the e-com­merce mar­ket’s rapid growth and rev­enue in­creases of up to 40% for some play­ers, many on­line re­tail­ers did not per­form well on stock mar­kets last year, and an­a­lysts are warn­ing that cau­tion is war­ranted, par­tic­u­larly if you’re look­ing for short-term gains. Few of the dom­i­nant gi­ants, like Amazon, are cheaply priced.

But there are ris­ing stars. On­line re­tail has be­come one of the UK’s most suc­cess­ful sec­tors; the share price of on­line fash­ion re­tailer Boohoo, for in­stance, rock­eted by 265% in 2016.

Backed by its 16- to 24-year-old fans and the pro­mo­tion of its prod­ucts on In­sta­gram, the com­pany nearly dou­bled its pre-tax profit to £31m pounds in the year to the end of Fe­bru­ary.

There’s plenty of ev­i­dence that on­line re­tail is a sec­tor to keep an eye on, glob­ally. Pri­vate e-com­merce com­pa­nies raised over $46.7bn across 3 880 deals be­tween 2012 and 2016, tech mar­ket in­tel­li­gence plat­form CB In­sights points out. Al­though there were three con­sec­u­tive quar­ters of sharp de­clines in 2016, there was a “hot streak” of deals growth in the first half of this year.

Ja­pan’s SoftBank, the world’s largest tech­nol­ogy in­vest­ment firm, re­cently in­vested $2.5bn into In­dia’s most valu­able start-up, Flip­kart – tak­ing its in­vest­ments in that coun­try so far to $6bn. The com­pany, which is listed on the Tokyo Stock Ex­change, has a $100bn tech fund and has been an en­thu­si­as­tic sup­porter of e-com­merce in de­vel­op­ing mar­kets.

In­vest­ing in busi­nesses like SoftBank – which make the choices – is a good strat­egy, says Adrian Sav­ille, founder and chief ex­ec­u­tive of Can­non As­set Man­agers. Sav­ille also sees value in Tai­wan Semi­con­duc­tor, the world’s largest ded­i­cated in­de­pen­dent semi-con­duc­tor foundry, and In­tel, an Amer­i­can global tech­nol­ogy com­pany sup­ply­ing the pro­ces­sors found in most per­sonal computers.

But many com­pa­nies are not priced for their long-term po­ten­tial, as the shift to e-com­merce is such a long and grad­ual process, says Dan Brock­le­bank, di­rec­tor of Al­lan Gray’s off­shore part­ner Or­bis. He iden­ti­fies an op­por­tu­nity in Mer­cadoLi­bre, the e-com­merce gi­ant of Latin Amer­ica – a re­gion shunned by many global in­vestors at present be­cause of slug­gish eco­nomic growth and cur­rency vo­latil­ity.

In­vestors should also be aware of the dis­rup­tive con­se­quences of e-com­merce on other sec­tors, par­tic­u­larly real es­tate. In the US, there have been nu­mer­ous store clo­sures and lay­offs that have re­duced rental costs for re­tail premises. But by the same to­ken, rentals for ware­houses used by on­line re­tail­ers have in­creased. ■ ed­i­to­rial@fin­

In­vestors should also be aware of the dis­rup­tive con­se­quences of e-com­merce on other sec­tors, par­tic­u­larly real es­tate.

Adrian Sav­ille Founder and chief ex­ec­u­tive of Can­non As­set Man­agers

Tammy Binedell-Bar­ber Mar­ket­ing head at PriceCheck

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