The Growing Impact of E-Commerce

//The Growing Impact of E-Commerce

The Growing Impact of E-Commerce

Thematic investing is a loosely defined term that can reflect different meanings to different audiences.  For us, it means a form of investment that aims to identify macro-level trends and the companies that stand to benefit most.  Not every investment needs to fit a theme, but often a theme quickly becomes clear. E-commerce is one example of a theme we expect to persist for years to come.  Retail behavior is shifting around the world and we want exposure to the companies most likely to thrive.

While e-commerce has grown steadily for several decades in the U.S., as recently as 2019 it only represented 16% of total retail sales.  The shift in shopping habits experienced in 2020 as the result of COVID-19 increased that to 27%, nearly 1/5 of which runs through Amazon, part of our Growth Equity portfolio since 2016.  For reasons many of us have now experienced first-hand, Amazon has been and is expected to be, the standout leader in e-commerce in the U.S for the immediate future.

E-commerce is even bigger globally.  In 2019, China was the biggest e-commerce market at $740 billion, followed by the U.S. at $561 billion; the respective five-year annualized growth rate of each is 71% and 46%.  Amazon tried to compete in China but dropped out in 2019 given its inability to overcome barriers placed on foreign companies.  Alibaba Group, part of our International Equity portfolio since 2018, is the biggest e-commerce player in China and globally; their Taobao and Tmall marketplaces rank first and second in terms of gross merchandise volume, with Amazon at number three.  One distinction between the two business models is that Alibaba Group revenues are almost exclusively driven by third-party marketplace sales while Amazon’s revenues are mostly derived from first-party sales.

Outside the U.S. and China, e-commerce markets are more fragmented and sellers less concentrated. Mercadolibre, part of our International Equity portfolio since 2014, and the 7th most visited e-commerce site globally stands out due to their market leading coverage across much of South and Central America.  Headquartered in Buenos Aires, the company started in 1999 and conducts most of its business in Mexico, Colombia, Brazil, and Argentina.  Their marketplace services offer an e-commerce platform, shipping solutions and advertising support for sellers. They also offer payment services which, as of March 2019, includes a partnership with Paypal, part of our Growth Equity portfolio since 2018,  to expand client options and geographical reach.  In 2019, their payments services transacted more volume off-marketplace than on-marketplace, engaging users, and strengthening their network even more.

Compared to other geographic markets, online shopping in Latin America is only getting started, representing less than 5% of total retail sales in the region.  Only 57% of the population has internet access and 31% have purchased something online compared to 75% and 72% in the U.S. respectively.

Mercadolibre enjoys a demonstrable lead in the region with more than 2.5 times the traffic of its nearest competitor, Amazon; Alibaba is even further behind.  Their ability to conduct business across national borders is a distinct plus for their sellers.

E-commerce is here to stay and is an increasingly accepted way to conduct business.  We want to own those best positioned to benefit from changing consumer habits.

Disclosure:  The information above is intended solely to provide insight into how the manager analyzes securities, and are not a recommendation for any particular security or strategy.  There is no assurance securities will remain in the portfolio or that they were or will be profitable.

2020-12-11T15:15:07-06:00 November 18th, 2020|Newsletter Exclusive Content|0 Comments


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