Retail eCommerce Eyes 2014 Holiday Season - Zacks Analyst Interviews

The Electronic Commerce -- or e-commerce -- industry is evolving very rapidly, so data collection and evaluation are particularly difficult. Consequently, one has to rely largely on surveys by both government and private agencies.

According to the U.S. Census Bureau, the manufacturing sector is relatively more reliant on e-commerce (51.9% of their total shipments), followed by merchant wholesalers (26.4% of their total sales). These two segments make up the business-to-business (B2B) category.

Retailers and service providers generated just 5.2% and 3.1%, respectively of their revenues online, with retailers growing faster than service providers. The Bureau categorizes these two segments as business-to-consumer (B2C).

All except the services segment grew around 5% over the prior year. Services grew 4%. [All the above data from the U.S. Census Bureau relate to 2012, as published in May 2014].

The U.S. Commerce Department estimates that ecommerce sales in the country grew 16.9% in 2013 to reach $263.3 billion.

Retail

Total retail e-commerce grew 2.8% sequentially and 15.0% year over year to 6.2% of total retail sales in the first quarter of 2014, according to the quarterly retail trade survey by the Census Bureau. Forrester Research estimates that this share will go up to 11% by 2018. Another Forrester study indicates that online spending (excluding travel) in the U.S. will increase at a 9.5% CAGR to reach $414 billion by 2018.

comScore data (as compiled in the table below) indicates that this segment recovered very quickly from the economic downturn and continued to grow rapidly over the last few years.



Key Drivers

• The holiday season will be the strongest driver of retail ecommerce sales in the next two months. eMarketer estimates that Nov and Dec 2014 ecommerce sales will jump 16.6%, up from 15.5% in the last two months of 2013. Overall improvement in the retail selling climate will help.
• The biggest underlying factor driving ecommerce sales remains the adoption of smartphones, tablets and other mobile Internet devices. M-commerce sales in 2014 will grow over 37% (it was up 70% last year). Product categories driving this growth are event tickets, digital content/subscriptions and to a lesser extent, books, apparel and CE. Larger screen sizes (phablets and larger tablets) make it easier to shop. Currently at 19% of total retail, m-commerce share is expected to go up to 25% by 2016. In-app purchases to grow 16.3% in 2014 and 16.9% in 2015. [eMarketer estimates]
• Continued advancements in technology are improving navigation and customer experience on ecommerce sites, which is improving reviews and thus drawing more traffic to the sites. For instance, beacon technology -- which enables retailers to track customers in the store and push promos and offers to them -- is expected to assume great importance this holiday season. New payment technologies such as near field communication (NFC), quick response (QR) code, Soundwave and Bluetooth low energy (BLE) are facilitating the process. Additionally, TVs and game consoles are increasingly getting connected and digital versions of books, music, video and games are becoming available. Since the shift in consumption patterns is resulting in multi-functional electronic gadgets that are no longer optimized for a particular activity, there is a great drive to develop technologies that could improve the quality of each experience.
• Retailers generally provide discount coupons that do particularly well during the holiday season. Some like Groupon (GRPN) have entered the coupon-selling business in a big way. The company offers huge discounts to attract buyers and collects a percentage of the sales thus generated. A deals marketplace is also in the making.
• Traditional retailers these days have an online presence as well in order to maximize the advantages of customer reach and local presence. Online sales also show better conversions since searches usually draw consumers with a prior intention to purchase. Big online retailers like Amazon (AMZN) on the other hand are seeing the advantages of local pickup. Logistics is a major challenge for online retailers so an omni-channel model is useful. Tying up with marketplaces like eBay (EBAY) is also helping.

Since the industry is in evolution, the drivers are changing. For instance, the initial push came from the time savings and convenience of online transactions. To this were added the benefits of comparison shopping and personal recommendations.

As technology required for personal recommendations developed, became more available and its benefits more evident, most e-tailers started adding the feature until it is now considered a must-have. This in turn led to the recognition of the social factor driving sales and increased the importance of social networks like Facebook (FB), Pinterest, Twitter, LinkedIn, etc.

Facebook's SocialStore, as it is called, uses MarketLive's Intelligent Commerce Platform that enables marketers to display product information, promotions/discounts, shopping carts and check-out options. Both comparative shopping and comparative pricing are possible. The basic advantages of the system that are that it allows easy brand building, enables meaningful commercial relationships and makes use of account-holders' social connections to attract new buyers.

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 Services – Delivery and Internet Commerce being in the 20th and 74th positions, respectively are in positive territory, with Internet Services (146th) being neutral. 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, appears to be in investment mode.

Total earnings for the sector are expected to decline 3.4% in the third quarter despite revenue growth of 7.6%. This contrasts with an earnings growth of 1.9% based on revenue growth of 7.9% in the preceding quarter.

The other companies we are discussing in the e-commerce outlook (Part 2) fall under the broader Technology sector. Here, too, we see increased investment resulting in decelerating earnings growth despite accelerating revenue growth.

Specifically, earnings growth is expected to drop to 5.5% (compared to 12.6% in the previous quarter), while revenue growth is expected to be 9.0% (up from 7.2% in the previous quarter).

Market Position

Since ecommerce entails the buying and selling of goods or services over electronic systems, it includes companies that are totally dependent on these sales, those that are gradually moving to it, as well as those that want to use it partially. Therefore, the biggest sellers or the ones growing the strongest are not necessarily those that are solely dependent on the Internet.

According to a recently-released report from Internet Retailer, Amazon remained miles ahead of the competition in the retail ecommerce market. Amazon's sales in 2013 were more than the next nine companies combined. Apple (AAPL) was in second spot, as Internet Retailer started including its online hardware sales for the first time. Apple was followed by traditional retailers Staples (SPLS), Wal-Mart Stores (WMT) and Sears, followed by Liberty Interactive, Netflix (NFLX), Macy's (M), Office Depot (ODP) and Dell.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
WAL-MART STORES (WMT): Free Stock Analysis Report
 
STAPLES INC (SPLS): Free Stock Analysis Report
 
OFFICE DEPOT (ODP): Free Stock Analysis Report
 
NETFLIX INC (NFLX): Free Stock Analysis Report
 
MACYS INC (M): Free Stock Analysis Report
 
GROUPON INC (GRPN): Free Stock Analysis Report
 
FACEBOOK INC-A (FB): Free Stock Analysis Report
 
EBAY INC (EBAY): Free Stock Analysis Report
 
AMAZON.COM INC (AMZN): Free Stock Analysis Report
 
APPLE INC (AAPL): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research