1. UK E-Commerce Sector Landscape

Over the past decade, internet penetration and rising smartphone users have spurred the growth of the e-commerce sector, which has bridged the gap between the digital and physical space. It has disrupted the approach of how selling and purchasing of goods are being done. The blend of internet and e-commerce has empowered the consumers and given them the liberty to choose when to shop, where to shop and what to shop with multiple payment alternatives. It has given a platform to businesses to start really small and grow large. The domain is yet evolving, and new features are being added as per the customers need and development in new technologies.

China and the US are the two largest e-commerce markets in the world. As per eMarketer report, China and the US had an e-commerce market size of around USD 1,934 billion and USD 586 billion, respectively in 2019. The UK is not far behind as it held the third place, and it had an e-commerce market size of USD 142 billion in 2019. As per Statista, the revenue of the UK e-commerce market is expected to grow at a CAGR of around 5.6 percent between 2018 and 2023. The UK is expected to lead the growth in the e-commerce sales as a share of total retail sales in Europe, and much of this is due to the mid-age tech-savvy UK population that drove the demand for online shopping.

 (Source: Kalkine Research, e-Marketer, Statista)

In the year 2020, revenue in the UK e-commerce industry is likely to reach US$96.9 billion. As per Statista, the e-commerce revenue in the UK is expected to grow by ~4.7% between 2020 to 2024 and reach ~US$116.3 billion by 2024.

Key Players: Amazon UK is the biggest player in the UK e-commerce market, which generated a revenue of US$9.8 billion in 2019 and held 30.1% market share. It is followed by eBay and Sainsbury with a market share of 9.8% and 4.6%, respectively. Altogether, the top three players constitute over 40% of online revenue in the United Kingdom.

Key Statistics

• Fashion is the largest segment of the UK e-commerce market, with a projected market volume of US$32,527 million in 2020.
• The ARPU (average revenue per user) is expected to be around US$1,695.04 in 2020.
• In 2020, 45% of total e-commerce purchases are likely to be paid by Cards.

As per the Office for National Statistics data, 97 percent of the UK population aged between 16-34 years did online shopping in 2019. Mobile internet penetration in the UK remains high, with 90.3 percent in 2020, which is expected to grow to 93.59 percent by 2025, and it would further support the growth.

UK online retail sales during the pandemic

In the last six months, we have seen a significant shift in the demand pattern as consumers have changed their spending from in-store to online, and the presence of e-commerce was so critical to make sure the businesses stay afloat. The health crisis has accelerated the growth of the sector, and e-commerce has reached a size in 2020 that we might have seen over the next few years in the usual scenario.

Online sales have played a crucial role during the lockdown as it kept the lives moving with the purchase of food, medicines and clothing. If we look at the data provided by the Office for National Statistics, the online sales contribution in total retail sales, in one year to March 2020 moved from 18.9 percent to 21.9 percent. In contrast, it only took two months to jump to 32.8 percent in May 2020. As we analyze the average weekly online sales, we have observed that it has moved from £1,279 million in January 2019 to £2,032 million in August 2020 after touching the peak of £2,347 million in June 2020.

(Source: Kalkine Research, Office for National Statistics)

If we assess the online sales data for August 2020, as reported by the Office for National Statistics, we would see that the year on year growth has been massive for all the categories. But the online sales have started to settle from the summit it had in May 2020, and the majority of this fall is credited to the re-opening of the economy and stores.

(Source: Kalkine Research, ONS; *August 2020)

The pandemic adds new jobs in the UK’s e-commerce market

As per the Barclays Corporate Banking report, 15 percent of the UK companies created new jobs during the pandemic to advance online capacity and enhance digital sales. Some of the e-commerce companies in the UK were on the hiring spree when at the same time, the UK’s job industry was struggling with layoffs and needed government’s support to pay their staff.

Key trends thriving in the e-commerce sector

The top trends in the e-commerce sector that have revolutionized the buying pattern:

(Source: Kalkine Research)

• Mobile Commerce: Many companies experience a gigantic amount of traffic through the mobile application and thus providing a great user experience is the utmost priority. Progressive Web Application (PWA) is an innovative trend that e-commerce has caught up early. PWA delivers a flawless user experience that helps in improving conversion rate, uses a lesser amount of data and enables search engine optimization. PWA jointly with Accelerated Mobile Pages (AMP) leads to instant loading of pages on the mobile phones.

• Social Commerce: Shopping, paired with social media platforms, is a growing trend in the e-commerce market. It is a recommendation based strategy that targets communities as like-minded people follow similar fan pages, and it is relatively easy to connect with them. We have seen a rising trend in shopping driven by social media influencers, which advertise the products by showcasing them, and sales of sportswear and cosmetics have well responded to it. 

• Voice Search: The purchase through voice command has increased, and as per voicebot article, close to 25 percent of the UK households have smart speakers. The reason voice search is gaining popularity is that it enables the consumer to perform in natural language, and it is 3.7x faster than typing as per Bing. Voice search has set-up a more human-like interaction with technology, and it is majorly used while on the go, such as while driving. Local businesses have been a major beneficiary as medicines and groceries are the standard products that are ordered. The voice commerce sales are expected to grow in the future with an increase in adoption of smart speakers by the households.

          (Source: Kalkine Research, Voicebot.ai)

 

• Augmented Reality: It enhances the physical world around us and helps consumers try things in the comfort of their own space. Augmented Reality, along with Artificial Intelligence-based advertising optimization, would take shopping to another level. It uses the camera of the phone to take the size of the object in 3D, and it can help in the purchase of clothing or furniture. It gives an exact size of the product, and users can interact with the products, and they can see the details.

• Robot at fulfilment centres: Robots reduce the human effort and save time at the e-commerce fulfilment centres, and they have optimized the supply chain. Robots have expedited the process at the warehouses, help in quickly replenishing the supply and keep the cost low that the customer can pay. Robots and humans work together at these fulfilment centres, and robots help in heavy lifting, stacking and identification of products. As per the Interact Analysis report, the UK warehouse automation market is expected to grow at a CAGR of around 11 percent between 2019 and 2023.

• Direct-to-Customers: It is another field that is gaining momentum as manufacturers are directly selling to the customers and bypassing the retail partners. Selling directly to the customer makes brand labels own the customers, which help in performing repeated sales, and it lends a hand in providing a more personalized and customized touch. Many private label brands have risen by selling directly to customers using e-commerce platforms. 

E-Commerce Sector: Growth Catalysts

• Increasing online penetration shall support the market growth. The user penetration of e-commerce services is expected to hit 88.4% by 2024 from 84.2% in 2020.
• The growth is likely to be propelled by lagging offline shopping infrastructure and expanding middle-class population.
• Rising preference of online shopping among millennials.
• Rise in use of mobile wallets.
• In 2020, the retail e-commerce sales are expected to contribute 27.5% of total retail sales, and the proportion is likely to be one-third by 2024 as the post-pandemic hit would continue to weight on physical retail.
• Increasing penetration will also support the ARPU (average revenue per user) to surge, which is expected to reach US$1.907.29 by 2024.
• Retailers are closing brick-and-mortar shops, and online grocery sales have been multiplied during the pandemic.

 

Key Risks in the e-commerce sector

• Dispute & Return of products: Lack of feel and touch can lead to a higher return of products as there can be issues related to size, look or quality of the product. Although the majority of the products come with a disclaimer of refund policy, still this is a major problem that is making e-commerce companies to spend a lot of money.

• Poor Customer Service: A successful sales of any product is based on an incredible customer service, and online shopping is no different. Buyers look for ease in finding the products, quick uploading of pages on the platform, details about the product, quick payment solutions and fast shipping, and lacking out on any of these fronts can lead to a loss of a customer and sale. 

• Online Security Threats: There are a lot of phishing attacks, spams and frauds that happen online while browsing a website or buying a product. If online cyber-attacks take place while browsing the platform, it may have a bad impact on the customers’ faith to make a purchase online.

• Search Engine Optimization Ranking: The links that appear first on searching in Google will have an upper edge over the others. SEO is considered to be more essential tactics as compared to other marketing strategies, and missing out on this can make a platform lose the spot.

Outlook Scenario

The UK is an evident e-commerce leader in Europe. The outbreak of Covid-19 pandemic and social distancing practices have shifted consumers’ preference for online shopping. Even the global e-commerce market is projected to reach nearly US$6.07 trillion by 2024, growing at a CAGR of 11.34% between the period 2020 to 2024. Adjacently, the fashion e-commerce sector in the UK was valued at ~US$27.8 billion in 2017, and it is forecasted to reach ~US$39.1 billion by 2024. Similarly, the projected market size of other e-commerce segments can be seen in the image below:

The key market driver includes a high preference of online shopping among millennials, rapid urbanization, rise in use of mobile wallets, growth in third-party logistics, increasing number of smartphone users, rising usage of the internet, and an upsurge in disposable income.

During the pandemic, it has also been observed that retailers are shutting-down brick-and-mortar shops, online grocery sales multiplied, and online time is increasing. By 2026, m-commerce experience will further boost the market, while the curated shopping and digital assistant are likely to be widely used. The consumer would expect a high level of personalization and convenience, and hyperconnectivity shall create new dynamics in retail. Similarly, virtual reality and augmented reality should further enhance the online retail experience.

In the short to medium term, it is imperative to maintain focus on the supply chain to meet consumer demand, while preparing for impending challenges imposed by Brexit. Moreover, retailers need to offer better value and greater accessibility, especially when the consumer spending is tight. The focal point of e-commerce is enhancing the user experience and increasing the conversion rate, and everything else is placed around it.

Technological advancement would play a critical role in the success of the e-commerce sector as order accuracy would be the key metric to gauge the performance. Seamless developments on shopping platforms and fulfilment centres would make the ecosystem flexible, faster, cost-efficient, and it would lower the risk. Robotic-related innovations would drive the way for fulfilment centres, which is an essential element of e-commerce. Artificial Intelligence and Machine Learning have improved the forecast of inventory supply and predictive analysis of consumer demand. Setting up a perfect first-in-first-out system is essential for operational performance and technology has made it more accurate and resilient. Online has become a habit for people as they spend more time at home, and the e-commerce sector is on the opportunistic side of the pandemic tide to perform new and repeated sales. The facet of e-commerce would grow multifold in the years to come.

 

2. Investment theme and stocks under discussion (ASC, BOO, STU and AO)

After understanding the recent trends in the sector, let ’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF).

1. LSE: ASC (ASOS PLC)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP: 4.89 Billion)

Asos (LSE: ASC) is an online fashion and cosmetic retailer based in London, U.K. The Company sells over 850 brands and its own range of clothing and accessories. Asos currently have employs close to 4,755 people.

 

   

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~18.5% over the closing price of GBX 4,900 on 21 September 2020.

 

2. LSE: BOO (BOOHOO GROUP PLC)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP: 3.90 Billion)

Boohoo Group PLC (LON: BOO) is a Manchester, U.K. based FTSE AIM 100 listed online fashion retailing Company. The Company was founded in 2006 and has grown rapidly in the U.K. and internationally.

            

 

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~14.5% over the closing price of GBX 310 on 21 September 2020.

 

3. LSE: STU (STUDIO RETAIL GROUP PLC)

(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: GBP: 193.63 Million)

Studio Retail Group plc (LON: STU) is an online home shopping retailing company. Its products include greeting cards, toys, games, clothing, home, and garden items.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~17.6% over the closing price of GBX 224 on 21 September 2020.

 

 

 

4. LSE: AO (AO WORLD PLC)

(Recommendation: Expensive, Potential downside: Low Double Digit, Mcap: GBP: 904.44 Million)

A.O. World Plc (LON: A.O.) is an electrical retailer, which sells small and major domestic appliances and consumer electronics. The Company’s operations are differentiated in two segments, namely the United Kingdom and Europe. The Company employs close to 3,227 staff members. 

 

Valuation

Our illustrative valuation model suggests that the stock has a potential downside of ~22.9% over the closing price of GBX 189 on 21 September 2020.

Note: All the recommendations and the calculations are based on the closing price on 21 September 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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