Long before ‘internet’ was a word, a company called Sears, Roebuck & Company (Sears) capitalized on the new mail and railroad systems of the 19th century and began to mail out brick-like catalogues across America. Over a period of a hundred years, it advertised everything from toys and jewellery to ready-to-build houses and mail-order tombstones. With the delivery of the catalogue, the world of consumption landed on the doormat of American homes with a thud.
Sears proved particularly successful in rural America, where it offered consumers an unrivalled range of products that were unlikely to be stocked in their local general store. A now all-too-familiar complaint soon began to pour in: the company was harming small-town retailers.
There’s no question that Sears was a major disruptor of the 20th century. With its massive warehouses and efficient distribution network, it changed the way Americans shopped – it was the Amazon of its time. And just like any innovative company of today, it made data-driven business decisions that allowed the company to profit from important changes in the marketplace.
When Americans moved from farms to cities in the 1920s, Sears opened brick-and-mortar stores that were more suitable to city-dwellers to complement its existing mail-order business. And when data showed that people were spilling out of the metropolitan areas into the suburbs, the company followed suit.
However, the 21st century threw a variety of challenges at the retail pioneer, and stiff competition came in many different forms. Big-box superstores, high-end malls and hyper-specialized stores all played a hand in siphoning away its traditional target audience, but importantly, the consumer space was also experiencing a paradigm shift towards internet shopping.
Rather than edging ahead through innovation and following consumer trends as it had done in the past, Sears focused on defending its core. It cut costs drastically at the expense of customer service and largely ignored upstarts such as Amazon.com.
This proved to be a detrimental strategy in an industry defined by a state of perpetual metamorphosis. After having redefined the retail industry for an entire generation, Sears eventually filed for bankruptcy in 2018. And while it has narrowly escaped liquidation, it is now merely a shadow of the behemoth it once was.
If we had to pick just one sector within the consumer space, where the impact of technology has been most widely felt, it would have to be the retail industry. As Sears did over a century ago, the internet has changed the way we shop dramatically in recent years. More and more brick-and-mortar stores are closing down as buyers shift a seemingly ever-increasing share of their expenditure towards ecommerce.
In Figure 1, we can see ecommerce as a percentage of retail sales in the US. The chart would look similar in every other part of the world – especially in the developed markets. The dark blue line represents the market share taken by online retail. The general direction of the line is towards the upper right-hand corner of the chart, which shows that online retail is steadily taking market share away from traditional retail. However, what may be surprising to some is that we are still in the early phase of this trend.
Figure 1: In the US, ecommerce continues to take market share
Source: Bank of America, as at 15th April 2019. For illustrative purposes only
Ecommerce penetration in the US is currently only at 13.3%, and we believe this will grow to at least 30% over time. The product adoption curve typically takes the shape of an S-curve , and if we were to apply this model to Figure 1, we would find that the line represents only the first third of the curve, and this suggests we are in front of a period of accelerated adoption.
This makes a lot of sense, as we are just about to hit the biggest verticals in retail in ecommerce: food and consumables. Together, they represent almost a third of all retail sales, and yet, there is low ecommerce penetration. We believe these segments have the potential to drive the accelerated adoption of ecommerce going forward.
The Invesco Global Consumer Trends Fund has exposure to the large ecommerce names, such as Alibaba and Amazon. As previously mentioned, our view is that ecommerce will continue to take share from traditional brick-and-mortar retail, and that the magnitude of that share-shift is still underappreciated. Both these companies are leaders in digital innovation, leveraging automation and algorithms to better serve customers.
Alibaba spearheads China’s growing e-commerce industry, and whilst China’s economy has faced headwinds in recent years, we believe that over the long term, the company has a compelling position within the Chinese economy. Our fund is overweight China relative to the MSCI World Consumer Discretionary Index, but much of this exposure is due to Chinese domestic companies such as Alibaba. We believe they are not very exposed to trade issues, but in the near-term they will be affected by domestic weakness in China.
Amazon has an impressive client-centric approach. Combined with its growing product selection and its Prime membership programme, this has cultivated a remarkably ‘sticky’ customer base that is resistant to switch to a competitor. Prime membership has also been growing year-on-year, which also supports sales.
The company also bought Whole Foods nearly two years ago, and while not much appears to have changed with the latter, this acquisition has provided Amazon with valuable data that will enable it to learn about grocery buying patterns and habits. With grocery distribution capabilities close to its Prime membership base, this may prove to be very important.
