The evolution of e-commerce


Raymond James Equity Research shares what themes are shaping the shopping shift to online.

From 2016 to 2020, e-commerce is expected to grow by 12%. By 2020, it will likely represent around 39% of incremental retail sales and 78% of adjusted sales. Non-store companies, like Amazon, continue to gain share – estimated at 58% of total e-commerce in 2016.

What’s driving most of this growth longer term? Mobile commerce. In the U.S., it increased 47% in 2016, representing 16% of e-commerce sales. In fact, 82% of smartphone users turn to their phones when making purchase decisions inside a store. With engaging camera features, like searching by photo and product scanning, along with better integration of payment and shipping, mobile penetration is expected to rise.

We explore the following global themes that will impact “pure-play” e-commerce companies.

eTail: Factors for success

Everything being equal, the bigger the market the better for a company’s long-term growth. And, brand strength doesn’t hurt either. A strong brand and value proposition, evidenced by the easy comparison shopping and convenience of Wayfair’s online home goods marketplace, can be key differentiators to help lower customer acquisition costs and increase repeat traffic.

Since consumers increasingly expect delivery in two days or less, the presence of a strong network, sizeable logistics and geographic capabilities like Amazon’s Prime ecosystem are also factors. Technology advances are yet another differentiator. The most successful companies – Amazon, Alibaba and Wayfair – continue to innovate with and invest in their robust homegrown technologies.

Excluding scaled marketplace models like Alibaba and eBay, e-commerce companies typically have fairly low margins. Because of this, operating margins and leverage remain the biggest source of debates, with customer acquisition being vital to success.

For both transaction- and subscription-based companies, frequency of purchase is relied on to gain advertising influence and drive operating margin leverage.

And since consumer behavior is to install a limited number of apps, mobile is a benefit for larger companies as they strive to remove purchasing friction points and enhance the shopping experience.

A seemingly Amazonian challenge

With Amazon driving 50% of incremental e-commerce sales in the U.S., it’s no surprise that the biggest concern for many investors is the ability to compete against the large players. The starting point for e-commerce, Amazon’s price and selection, as well as order innovation like using Alexa or Echo, contribute to the use of Prime in more than 50% of U.S. households.

However, companies can compete by going deeper and providing richer shopping experiences in specific categories. In home goods, Wayfair’s strong brand and curated content provide an arguably better shopping experience than Amazon’s category. By dominating a smaller niche market, companies like Fanatics, with its focus on sports apparel and fan gear, can carve out a niche as the leader.

What’s more, the search-based approach online used for larger companies can be overcome by focusing on more of a browsing experience similar to Pinterest. Increasingly driven by social elements, e-commerce purchases are guided by social networks for 74% of consumers.

Other areas that can set smaller companies apart include building a strong direct-to-consumer brand, leveraging private label goods, providing better customer service/access to experts and leveraging omni-channel.

Priming a competitive market with change

The e-commerce market is constantly changing in order to compete, with the below shifts a big part of the evolution.

Disruption in traditionally non-e-commerce categories

Given the massive size of many of these markets, including food, eyeglasses, autos and consumer packaged goods, companies are expected to aggressively target them. Meal-kit delivery companies like Blue Apron are looking to disrupt the grocery market and restaurant sales. In 2016, the U.S. home goods market was estimated at $269 billion, and is shifting online due to greater selection, lower pricing and better experiences found with companies such as Wayfair, Houzz and mattress-in-a-box options like Casper.

Advertising shifts to mobile and social

Though traditional TV advertising still works, Google, Facebook and Amazon are the biggest beneficiaries, with potential for emerging companies like Pinterest and Snapchat. To drive the highest brand awareness, companies should focus on a multi-channel strategy.

Improving customer experience with data

An increasingly critical capability, data science drives greater insight into customer behavior. Think highly personalized style recommendations from clothing disruptor Stitch Fix and Wayfair’s search with photos capabilities.

Acquisitions of pure-play e-commerce companies by traditional retailers

This accelerated trend will continue as traditional retailers look to gain e-commerce expertise and scale – and digital native consumers bypass traditional retail. A recent deal example includes Walmart’s acquisitions of Jet.com, Bonobos, Shoebuy, Moosejaw, Modcloth and Hayneedle.

Rise in adoption by consumers, public and private companies

Several key e-commerce models are increasingly being adopted with many enabling companies to better compete and differentiate. Examples include direct-to-consumer brands (Casper, Blue Apron, Warby Parker), subscription models (Birchbox Beauty Box, Amazon Subscribe and Save), rentals (Netflix, Rent the Runway), personalized styling services (Stich Fix, Amazon Echo Look), re-commerce (The RealReal), and local peer-to-peer commerce (LetGo).

Conclusion

Whether consumers are walking into a storefront or buying online, when companies put the customer first they create loyalty – increasing the lifetime value of the customer. The customer experience always is, and always will be, at the heart of any company’s success. By integrating practices that respond to how we want to shop, e-commerce companies will continue to shape the shopping landscape.

        

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change.
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