The retail revolution – looking beyond the FANGs

Raphael Pitoun of Seilern Investment Management

It is now a certainty that e-commerce will win. A glance at the spending habits of each generation is enough to be convincing, writes Raphael Pitoun, CIO of Seilern Investment Management.

Young people spend most of their money online and it is unlikely they will suddenly start shopping at stores when they get older.

Today, 30% of the baby milk in China is purchased online, and in the US 20% of the sporting goods and 50% of the apparel bought by millennials is purchased in this way. This dynamic seems unstoppable.

The online offer becomes better by the day: websites and e-retail platforms offer increasing loyalty benefits and evermore convenient delivery experiences. 

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Additionally, the ability of the consumer to shop online in the future could be massively enhanced. 

Estimates are that, by 2020, 20 billion consumer devices (tablets, phones, watches) will be connected to the internet and enable purchases wherever the consumer is located.

Moreover, with the development of the industrial 5G networks, which could speed up online access up to ten times according to some industry reports, the combination could be very powerful.  

Vulnerable companies

From an investment strategist’s standpoint, traditional retail companies look vulnerable. Typical profit margins of high-street retailers are quite thin and the loss of even a small part of their revenues could jeopardise their business.

Even the supposedly resilient and internet-proof retail formats, such as DIY for example, may not be immune from the phenomenon. 

It pays to carefully select companies which make sense in the new world either because of the nature of the products they sell (take cosmetics retailer Ulta Beauty) or because their infrastructure and offer are relevant in the digital world (fashion retailer Inditex). 

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Even among the pure e-commerce players, it is hard to predict the winning business models; most companies have a limited history and the marketplace they operate in is as unstable as their clientele are fickle.

For example, in the apparel market, what margins will be left by the time costly services such as same day delivery and free returns have been added?

Will the price of the products ultimately allow for this kind of cost structure while price transparency constantly pushes price down?

Winners emerging

Winners will eventually emerge, just as some companies will fail, so it is important to have a robust investment process to take advantage of the switch to online from an investment perspective.

First, payments. The big payment networks are among the winners of the switch to online. Visa, for example, has a 15% market share in offline payments but 42% in online payments. 

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Consequently, e-commerce creates a formidable tailwind for these companies. We cannot ignore the risk of disruption coming from emerging payment systems (a complex topic), but both Visa and MasterCard have expertise in managing new competition and, so far, have not only perfectly resisted but thrived.

That is the beauty of investing in companies with a long and proven track record.

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