I. Sector Landscape and Outlook

e-commerce is among few sectors which are contributing to the economy amid Coronavirus emergency. The lockdowns announced globally have led many consumers to explore the online mode of shopping. This indicates that e-commerce has a potential opportunity to grow as well as expand its attractiveness in geographies, where e-commerce penetration is relatively low.

The e-commerce comprises of buying and selling of goods and services, transfer of data, funds, and information through electronic networks, in sync with additional tools such as smartphones/devices. The e-commerce industry is categorized into segments like business-to-business (B2B), businesses-to-customers (B2C), customer-to-customers (C2C), and customers-to-businesses (C2B). With the rapid expansion in the usage of the internet across the globe, which appeal to the young generation, B2B and C2C have witnessed a sharp growth in the last decade. The most commonly used B2B E-commerce technology, EDI (Electronic Data Interchange), enables data transaction and exchange between companies and organizations.

Nevertheless, as compared to B2B, the growth rate in B2C has been significantly high in the last five years, because of a) simple marketing and sales cycle, b) fixed prices, c) low volume d) easy shipping e) lower regulatory and tax complexity and f) products are easy to showcase and market.

Fig 1: Conventional E-commerce Model (Paid Image) 
 
  

The E-commerce industry had exponential growth, especially in the B2C segment in the last decade because of the rapid penetration of the internet, particularly in Asia-Pacific regions. Also, now the e-commerce sector has a substantial weight to the world GDP. In the global e-commerce market, the United States and China together accounted for the 50% share, while in Europe, the United Kingdom holds the largest market share. According to data released by the UNIDO (United Nations Industrial Development Organization) in 2017, the global e-commerce sales have surged to US$29 trillion, and the number of online shoppers jumped to 1.3 billion people around the world in 2017, which translates to a quarter of the world population. However, the Organization for Electronic Co-operation and Development (OECD) countries still have more substantial market value thanks to their early head start, more comprehensive market regulation, logistics and higher internet penetration according to the UNIDO report in 2017. The report also presented that growth is very significant in BRICS countries, particularly in China, because of its large population and lower transportation or logistics costs. 
 
E-commerce Revolution

An exponential expansion of e-commerce businesses and transactions has significantly impacted the conventional brick and mortar businesses around the world. The traditional brick and mortar retailers witnessed a reduction of 2% in Europe, especially in the UK in 2017. However, the decline in conventional stores is comparatively very low in Spain and Italy on account of the lack of comprehensive services and logistics of e-commerce.

Major e-commerce players such as Amazon and Alibaba provide a trading platform for SMEs. The conventional local market sale cluster has been shifted online and attracting consumers from both domestic and abroad. Further, the e-commerce industry has brought a paradigm shift in the shopping pattern of young people across the globe, which is primarily led by a massive penetration of smartphones among the millennials.


With the understanding of the overall picture of e-commerce in place, let us now look at the e-commerce scene in the UK.
UK’s position in the global e-commerce market
Great Britain accounted for the third-largest e-commerce market in 2017, as per the last data released by the United Nations Conference on Trade and Development (UNCTD). The industry contributed around 7.94% to the British GDP in 2019, with the B2C turnover witnessing the highest surge over the past 5-years.  The market research firm eMarketer estimates that over a quarter of retail sales in the UK will be digital by 2021, which would be significantly much higher than the proportion of total retail sales in the United States, which was at just 9.0% in 2019.  It implies that after China, the United Kingdom is the most advanced retail e-commerce market in terms of proportional sales and is expected to report strong growth ahead.

Key facts about the UK e-commerce Market
 

1. The total British e-commerce market was valued at ~$80bn in 2019.

2. Fashion is the largest segment within the e-commerce market in Britain, followed by Toys, Hobby & DIY, Electronic & Media, Furniture & Appliance, and Food & Personal Care.

3. PayPal is the most popular mode of payment in the UK and accounted for a 40% share in the payment gateway sector, followed by Credit Cards and Prepaid Cards. 

4. Home delivery in the daytime is the most preferred delivery methods in the United Kingdom

5. The e-commerce sectors’ average revenue per users (ARPU) in 2019 stood at $1,325.50
 

Time to deep dive into the sector outlook and gauge the moving parts going forward.

Outlook

 

As per Statista, the UK e-commerce market is expected to grow from $78.9bn in 2019 to $101.6bn in 2020, which implies a compounded average growth rate of 5% in the forecasted period. Average Revenue Per Users is expected to grow at a CAGR of 3.6% to $1,594.7 in 2024 from $1,325.5 in 2019. The retail sector is expected to remain a growth driver for the UK e-commerce industry in the near future, followed by Electronic & Media and Food & Personal Care. Further, in the e-commerce space, the number of users is expected to reach 63.8m by 2024 from 59.5m in 2019, which implies a CAGR growth rate of 1.4% in the estimated time. (Numbers are subject to change based on economic scenario)

 

 
Near Term Driver

The crisis led by COVID-19 outbreak has put the spotlight on the e-commerce business. During the challenging environment, people are shifting to the online mode of purchasing, partly due to the lockdown of physical stores, and avoiding in-person contact amid the fear of getting infected. It is evident that the companies such as Ocado, Boohoo, Joules and Moneysupermarket, which have an online presence are witnessing the robust demand for their offerings. As the COVID-19 outbreak seems unstoppable in the near term, we believe the businesses which have an online presence and the one operating under essential categories are expected to witness robust demand. Further, uncertainties over the opening of physical stores and social distancing practise are likely to boost the near-term demand for these businesses.
 

Once the COVID-19 crisis is over, we believe that the penetration of e-commerce will further increase as many businesses are likely to develop their online sales channel as contingency plant to deal against similar uncertainties. Consequently, we might see the entry of few businesses in e-commerce arena which are not part of the sector as of now. Therefore, we believe that the COVID-19 outbreak will have a significant impact on the e-commerce industry in both short-term and long-term.

Further, the e-commerce companies are edging higher on the LSE when the broader indices and sector gauges have tumbled significantly. On an average basis, the UK e-commerce sectors have surged approximately 31% in a month over period, and relatively outperformed the broader indices of the LSE at the same time.
 
 
II. Investment Theme and Stocks under Discussion (MONY, JOUL, BOO and OCDO)

Having understood the industry dynamics, let’s now look at the four stocks that are trending in the current situation.To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF).
 
Fig 8: Relative performance of the stocks under discussion against FTSE 100 Index (1 Month)