The US E-commerce market continued its mid-teens growth trajectory in 2016 driven largely by Amazon.com, Inc. (NASDAQ:AMZN). Given Amazon’s impressive growth and market dominance Wedbush believes the common perception of mid-teens e-commerce market growth is more of a misperception, with the relevant market growth rate for e-commerce participants ex-Amazon being much lower. In the battle for the remaining e-commerce consumer spend the firm sees gainers emerging at the top and bottom of the spectrum as consumers gravitate toward familiar retailer banners at the high end and smaller retailers gain access to enterprise-level e-commerce tools at the low end. Our bias remains skewed to the e-commerce tool providers given competitive dynamics.
The firm estimates AMZN grew its e-commerce in the US by ~25% in 2016, accounting for the majority of the overall e-commerce market growth in the US and raising its share of the e-commerce market to ~50%. Given this market dominance it believes the common belief of mid-teens e-commerce market growth in the US is misleading as it pertains to other market participants. The firm estimates US e-commerce market growth exAmazon in the high-single-digits which represents a less favorable growth environment than the common narrative of midteens growth.
The other non-Amazon half of the e-commerce market is comprised of a multitude of disparate players ranging from large legacy pure-play e-commerce companies such as Ebay, traditional B&M retail banners such as Wal-mart, newly formed SMBs, and hundreds if not thousands of entities in between. Among these players Wedbush sees share gainers emerging from traditional B&M retailers such as WMT, HD, BBY, and TGT, among others. The firm believes these share gains can be attributed to retailers’ investments in ecommerce capabilities combined with consumers’ familiarity with these retailers in the offline world. At the other end of the spectrum, it believes Shopify is allowing SMBs to gain incremental e-commerce share due to its cutting-edge technology, ease of use, low price point, and integrated payments platform that removes friction at the point of purchase. The firm believes the majority of share losses are coming from retailers lacking advanced e-commerce site functionality (i.e., non-mobile optimized pages), retailers lacking competitive positioning around price, selection or specialization, and fad-based business models such as flash sales, etc.
Wedbush believes profitability favors the asset-light marketplace model (e.g., EBAY) while growth and subsequent share gains favors the merchant model (e.g., AMZN). AMZN has out-invested the competition particularly in logistics and fulfillment resulting in robust share gains at the expense of profits. For the remainder of e-commerce participants, the firm believes the decision between growth and profitability has largely been made for them by AMZN; invest now or succumb to eroding market share. It sees evidence of this in the elevated focus on customer acquisition spend in FY17 by many of the companies in its coverage including EBAY and ETSY.
The firm’s bias remains in favor of the e-commerce enablers such as SHOP, CHUBA, and in the online-to-offline space QUOT. It expects SHOP to continue its robust growth trajectory as SMBs and larger brands leverage its cutting edge tech platform and ease of use to successfully launch and operate sites with full e-commerce functionality that in many instances rivals that of larger enterprises. Wedbush expects CHUBA to maintain its midteens top-line growth as it enables large B&M retailers to expand their virtual inventory via dropship. The firm’s analysis indicates B&M retailers successfully growing their e-commerce volumes above the rate of e-commerce market ex-Amazon growth and in line with the overall market rate of growth. The firm expects QUOT to continue to take incremental share of CPG promotional spend as CPGs leverage its online platform to drive sales volume in an offline environment. Wedbush expects these share gains to drive outsized earnings growth for the next few years as the company reaches scale given the inherent operating leverage in the business model.
The firm believes the margin profiles of marketplaces will continue to be under pressure as they invest in customer acquisition, which may come with declining ROI profiles given an increasingly competitive e-commerce environment at both the high- and low-end of the spectrum.
The companies mentioned in this article are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of VoiceObserver.com