New Technology and Consumer Behavior Drive e-Commerce Growth
The world of shopping has come a long way since ordering online was a strange way to describe calling for a pizza. The mainstreaming of the Internet and the introduction of electronic outlets like Amazon and eBay – both of which opened their virtual doors in 1995 – have shifted a significant number of holiday purchases out of Black Friday’s long lines at brick-and-mortar stores and into Cyber Monday’s Web-based shopping carts.
Acknowledging the strong emergence of this sector over the past decade, e-commerce at present represents less than 10% of total retail spending in the U.S. and an even smaller portion worldwide. This is just one of many reasons to believe e-Commerce is entering an important new wave of growth, driven by ongoing secular tailwinds and the swift rise of new mobile, social and local applications.
Web Platforms With Pull
From an Internet perspective, the first decade of this century will be remembered for the explosion of second-generation Web-based consumer platforms: namely, Facebook, Google, Amazon and Apple. These are companies with scale large enough to exert a strong gravitational pull on hundreds of millions of Internet users and the consumer-oriented enterprises hoping to sell to them. For now, each of these platform leaders occupies a defensible competitive position – effectively displacing early Web pioneers such as AOL, Yahoo and MSN – and benefiting from enormous opportunity spectrums in their key markets.
However, the next battle lines are already being drawn, with Google facing its first legitimate competitive challenge emerging from the social Web and rapid rise of Facebook; Apple squaring off against Google/Android in mobile and Amazon in digital media; and Amazon itself once again facing an old nemesis in eBay – a company in the midst of a multi-year turnaround effort to rekindle its Marketplace business and expand PayPal.
Looking further ahead, the combination of local and social commerce, enabled by connected mobile devices, are spawning a new generation of Web start-ups that could yet again shake up the broader e-Commerce landscape.
New Arenas for Competition
The Internet itself is evolving as a fundamental part of the global economy, bringing people around the world together to acheive an unprecedented level of communication, information sharing and commerce.
By 2020, it is estimated that roughly 50 billion connected devices worldwide will make the Internet easily accessible via increasingly fast wireless networks. The ripple effects of these trends will drive e-Commerce into the mass market, benefiting both legacy platforms and new up-and-comers online.
2011 was a transformative year for e-Commerce, with the ascent of mobile and local applications – not to mention the emergence of Facebook as a legitimate consumer platform – placing users in greater control. The growth of flash and daily deal websites, along with smart phones providing omnipresent access to the Web, is defining a new wave of e-commerce and offering unprecedented new channels for consumer engagement.
As the new year approaches, so do new opportunities and challenges for consumer Internet companies. The rise of Molosoty (abbreviation for Mobile/Local/Social) offers unprecedented new channels and opportunities for consumer engagement and effectively blurs the lines between on- and offline shopping.
While the implications of these trends stretch well beyond e-commerce, we believe online retailers are key beneficiaries. And the enterprises with the fortitude to adapt to and embrace Molosoty are better positioned for growth, facing fewer friction points in engaging existing customers and an easier time acquiring new ones. Already, it is estimated that e-commerce over mobile devices will exceed $10 billion in merchandise volume this year, with roughly half from incremental transactions.
Mobile – Taking the “e” out of e-Commerce
U.S. smartphone penetration is expected to exceed 50% by the end of 2011, and international adoption will be even higher, driving billions of dollars in merchandise transactions every year. Verizon and AT&T are also expected to complete significant 4G deployments this year, which should increase penetration of true mobile broadband and fuel a corresponding ramp in usage from narrow-band access.
With optimized mobile websites and applications, e-tailers can generate 10% or more of their online traffic from mobile devices, although actual volumes are currently still significantly lower. For now, a rapid ascent in mobile shopping will most likely benefit larger aggregators of e-commerce, including Amazon, Google and eBay. These platforms in particular are leveraging their gravitational pull to foster growth in mobile shopping with convenient and user-friendly shopping apps. As a result, smartphones are increasingly serving as de facto showrooms for e-commerce within traditional retail stores.
Meanwhile, brick-and-mortar retailers are not standing still. Walgreens, for example, already reports that 25% of online prescription orders are originating from the company’s mobile app and website. Recognizing such trends, both eBay and Google are seeking to partner with traditional retail stores to integrate inventory data and other information within their mobile commerce apps – further blurring the lines between shopping on- and offline.
Social – The Dawn of F-Commerce
Social commerce is still in the nascent stage of growth, but Facebook’s influence on the Web today is too important to ignore.
With750 million active users spending more than 700 billion minutes per month on the site (roughly 16 hours per month per person), Facebook engages users every day – and not just to check status updates or revisit old acquaintances. They play games, find news, research products and occasionally even shop. Facebook aims to make e-commerce a more social instead of solitary experience, and thereby differentiate itself from other aggregators and marketplaces.
Facebook would seem an ideal medium for “word of mouth” marketing, with recommendations coming from trusted friends and family supplemented by opportunities for special deals, microtransactions and increasingly embedded e-commerce applications. Additionally, Facebook has the ability to extend its reach into millions of third-party websites that stand to benefit. The big question is whether consumers will turn to Facebook en masse to make purchases.
To some extent, the rise of F-commerce will be a self-fulfilling prophecy, with more sellers proactively reaching out to consumers and incentivizing social shopping behavior.
Current examples of F-commerce in action include:
Using the “Like” button to connect with merchants, brands and products. Simply put, this establishes a connection, which in turn can help build awareness and interest through users’ implicit recommendations. According to Facebook, customers of American Eagle Outfitters who “Liked” the e-commerce site spent 57% more than a typical shopper.
Check-Ins (similar to FourSquare) and Deals (similar to Groupon and Living Social) are newer initiatives on Facebook that allow merchants and brands to connect with consumers and drive engagement. Facebook also recently introduced a “Send” button, which can facilitate private discussions between users regarding potential purchases or gift giving.
Sponsored Stories are ads that feature user photos and commercial activity. Think of them as the analog to sponsored search results – essentially highlighting activity that companies would like users to see.
Perhaps the most interesting part of Facebook ads is the ability to target consumers based on their profiles, including location, age, gender, activities, interests, etc. Companies can also promote their presences on Facebook, facilitating direct communication with shoppers.
Local – A Savory Blend of Mobile and Social
If the strong wave of mobile commerce applications is driving e-commerce to Main Street, daily deal and social shopping sites, through integration with larger marketplace platforms such as eBay and Google, are specifying the intersection.
Very quickly, locally connected online commerce is expanding the reach of comparison shopping and product research, ultimately driving better access and selection for consumers. Not only are websites such as OpenTable, Angie’s List and Yelp driving more online interaction with local businesses, but new apps such as Milo (owned by eBay), ShopKick and Zaarly are connecting stores with potential customers who are already on-the-go. Likewise, geo-location is leading to geo-targeting, which enables merchants and brands to leverage the power of new mobile devices to reach consumers in new ways and drive incremental sales.
Daily Deals – a Huge Opportunity While They Last
There are more than 500 daily deal sites worldwide, representing an entirely new form of e-commerce created just in the past few years with a unique blend of group buying power and customer lead generation.
Generally speaking, there are two distinct segments in the daily deal space: private or flash sales of products, such as apparel and home décor, and group buying of local services. In both cases, daily deal sites have created another channel in e-commerce – in turn helping to broaden the reach and benefits of online shopping.
While the long-term benefits of daily deals for merchants and service providers are subject to debate, the popularity of sites like Groupon and Living Social is undeniable.
Groupon recently disclosed that its number of subscribers increased to 83.1 million at the end of 1Q from just 3.4 million a year earlier. Likewise, the company’s revenues increased more than 10-fold over the same time period, reaching $645 million in Q1. Meanwhile Living Social has raised more than $500 million in funding and is in the midst of its own rapid expansion.
In some cases, daily deals have become part of routine shopping for consumers, even a daily habit. More importantly, these sites serve as an incremental online marketing platform for brands and merchants by leveraging exposure to a large audience of eager “coupon clippers.”
In recent periods, the average price of deals has increased, combined with a rapid rise in the number of offers to create strong growth in the daily deal market.
As this market matures, we expect further consolidation, with Google and Facebook taking share and fewer successful stand-alone sites. The utility of these sites for merchants should improve as the survivors provide better analytics and more flexible business terms.
The Bigger Picture
The recent recession compressed growth rates and, more recently, shares of Internet/e-Commerce companies have been subject to the same volatility impacting the broader equity market. However, the secular shift online is reaccelerating, as evidenced by the strong holiday for e-Commerce last year and current consumer spending trends. And there is still significant appreciation potential in the sector driven by the large number of underlying positive growth drivers as well as favorable secular tailwinds in Internet usage.
According to estimates by Internet World Stats, there are now more than two billion people worldwide with Internet access, or roughly 30% of the planet. The fact that 70% of people are not yet using the Internet may be the more relevant point, underscoring the enormous opportunity for seeding development in second-tier markets and growth economies.
In terms of overall penetration, North America is approaching 80% of residents using the Internet, followed by 60% in Europe, and almost 40% in Latin America. Asia represents by far the single largest and fastest-growing market opportunity with nearly four billion people and only 24% Internet usage. Importantly, the fast pace of deployment of mobile devices and high-speed broadband access should accelerate Internet usage across the globe, hastening the development of commercial opportunities.
It is also reasonable to expect spending per user online to grow as a more engaged population of Internet users spends more time on Facebook and smartphones and be more inclined to shop over the Web. And generational shifts will ultimately drive an even higher portion of shopping online, as surveys suggest younger people are less inclined to purchase from brick-and-mortar stores.
Baird currently estimates U.S. online retail spending of $160 billion in 2011, an increase of 13% year-over-year, and 10–15% growth again in 2012.
Outside of North America, we expect e-Commerce growth in Europe in a similar range (low- to mid-teens percentage increase), with even faster rates in Latin America and Asia, and the latter likely to surpass the U.S. market size within the next three-to–five years.