E-Commerce: An Analysis of 4 Major Players

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Since the last technology bust, the e-commerce industry has evolved to become one of the most dynamic sectors of the global economy. According to research firm comScore, online retail sales have reached $44.3 billion for the first quarter of 2012, an increase of 17% compared to the same period last year. This marks the tenth consecutive quarter of positive quarter-on-quarter growth, and sixth consecutive quartter of double-digit growth since the figures last contracted in the third quarter of 2009. The e-commerce industry has experienced double-digit gains since the start of the fourth quarter of 2010.

These figures appear relatively strong amid the painful slowdown of the global economic recovery. Based on the report, the top performing online categories include Digital Content & Subscriptions, Computer Software, Consumer Electronics, Jewelry & Watches and Events Tickets. This threatens the existence of brick-and-mortar retailers as electronic commerce has already achieved critical mass in most of the product categories.

For example, Sears (SHLD) has experienced revenue decline of 4.75% for the last five years. Operating margins have also declined from 2.4% in 2004 to -3.6% in 2011. J.C. Penney (NYSE: JCP) is another retailer suffering from the shift to electronic commerce. The company posted revenue declines of 5.99% for the past 10 years. Despite the decline, its operating margins have increased from 3.3% in 2003 to 4.7% in 2011. Unless we see better prices from the traditional retailers, the consumer shift to electronic commerce will continue to dampen the revenue growth of the traditional retailers.

Key Driver: Rise of Tablets and Smartphones

The main attraction for consumers is that online shopping has lowered costs and increased convenience. Looking at the historical track record of Amazon (NASDAQ: AMZN) confirms this assertion. Amazon has grown its revenues by an average of 31% per year over the last ten years. This translates into operating margins increasing from 1.6% in 2002 to 1.8% in 2011, although operating margins went up as high as 6% in 2004.

At present, the key driver for the electronic commerce industry is the increased use of smartphones and tablets. This recent survey suggested that the smartphone user base is expected to grow from 99 million users to 151 million users over the next five years. Tablets are also expected to more than double from 51 million to 106 million during the same period.

Tablet and smartphone manufactures have been using different tactics to lure consumers into switching to their products. Currently, Google’s (NASDAQ: GOOG) Android devices have a market share of 48%. Earlier this year, Google launched the highly popular Chrome browser for its Android devices, and since then it has launched its highly popular Nexus tablet, also powered by Andriod. Apple’s (AAPL) iPad has a market share of 50%, down from the 72% in 2011 as more players have entered the market.

comScore also noted that global mobile internet user growth will increase rapidly, and will outpace desktop internet user growth by 2014. As of the first quarter of 2012, U.S. smartphones increased by 47% year-on-year, while multi-device ownership was also up by more than 300% compared to the same period last year. 

Going forward, I expect to see other product categories like books, music, videos and games to move rapidly into an online model. I also see newer disruptive technologies in the future that would improve the quality of the consumer experience. The trend will be towards connectivity, as consumers will have the bargaining power over suppliers. Over time, this will result in lower costs for consumer as the need for middlemen diminishes.

Strategies

This dynamic environment has prompted traditional retailers to team up with online retailers to sell their products. Well-known retail brands have started to open up their online stores and partnered with websites like Amazon.com, eBay, and Expedia. Even Costco has set up an online website and sends out daily offers to its email lists. This strategy has worked very well for the retailer.

Another smart strategy can be seen in Facebook’s (NASDAQ: FB) SocialStore. Facebook's platform uses MarketLive’s Intelligent Commerce system, enabling marketers to display the product information, promotion, shopping carts and check-out options. Given the massive user base of Facebook, this will provide smaller retailers enough exposure to be profitable.

The opportunity lies in how these online retailers will move into other regions of the world. There are countries that still favor the traditional retailers, notably the emerging markets. Some companies have started to move into China, but tight government regulation remains a key concern for them.

As far as e-commerce businesses are concerned, operating expenses have been an issue lately. For instance, Amazon’s operating expenses have been increasing, which has resulted in lower margins. This trend will most likely continue in the next few years as these companies invest in the next phase of growth. However, there will be more alliances between retailers and online players in the future as consumer demand will become increasingly complex. Those smaller e-commerce players will have a tough time, bringing more profits to the larger ones. 

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StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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