Some of these technological advancements are so dramatic that they can rapidly shift huge portions of demand to a completely new market, leaving old markets reeling. Take, for example, the advent and rise of the ridesharing business model, which sparked protests nationwide as traditional taxi drivers saw their business decline 75% from less than a decade ago.1
Human intervention is not the only way to alter the path of the river—nature can as well. Consider the lasting and dramatic effect the COVID-19 pandemic is having on the economy and consumer habits. Though globally devastating, the pandemic has been a tailwind for e-commerce at a level unseen since the advent of mobile phones. In a matter of months, the pandemic catapulted the industry forward, accelerating the adoption of online shopping, 4 digital communications, website creation and other industry trends at a pace that had previously taken years. If nothing else, COVID-19 serves as a testament to our adaptability, as we are seeing e-commerce expand in remarkable and ingenious ways.
Today, the range of goods and services that can be obtained virtually is dizzying. Of course, cleaning supplies, toys, books, clothing, tools, furniture, cars and groceries are well-represented and available. However, offerings have expanded to include services such as virtual veterinarians, e-learning, digital exercise classes with a social media element, at-home blockbuster movie launches, malls in the metaverse, virtual dating, online live concerts, and new browsing experiences designed for discovery. Or, as one company puts it in their “S-1,” combining “Costco and Disneyland” into one’s shopping experience. We see opportunities everywhere, and yet, consumers have only begun to tap the potential of this new global digital marketplace.
As investors and students of innovation, we are constantly looking for change. We are dispassionately appreciative that we cannot change the flow of the river—but we can potentially profit from it. We view change as inevitable, and disruption as indicative of an opportunity ahead.
HOW THE EVOLUTION OF THE INTERNET IMPACTED THE DEVELOPMENT OF E-COMMERCE ECOSYSTEMS
We are witnessing a sizable and lasting shift to e-commerce across the economy, a movement entirely catalyzed by a single, revolutionary technological advancement—the emergence of the internet. The internet made it possible for businesses and individuals to buy and sell items and services online, and in a very short period of time, consumers had the convenience of almost unlimited selection available to them from the comfort of their homes, 24/7, with just a few clicks of a button.
Books were one of the earliest categories of items sold online and were in fact the only thing Amazon sold when it went public in 1997. Books were a logical starting category for online retail, as they are mostly the same size, easy to ship, simple to describe using typeface, and a category where virtually unlimited selection mattered. More importantly, books were easy to sell within the constraints of dial-up internet. All of the early pioneers of e-commerce, whether that was Amazon, eBay, Craigslist, or Etsy, relied on simple web pages that were typically less than 1 megabytes (MB) in size to describe and sell their product. Dial-up service, while slow, was sufficient to load these web pages. It was only as internet technology evolved from dial-up service to coaxial cable and fiber that we saw the expansion of e-commerce into many more categories. This included video streaming like Netflix and YouTube, video advertisements through platforms such as Facebook and Instagram, video calling with Zoom and Microsoft Teams, online education, cloud services, and many others. All of what we know as e-commerce today was only made possible by the existence and development of the internet, and increasing internet speeds led to expanding possibilities.
However, in its infancy, the internet, and thus e-commerce, was not available to all households. Even in 2007, less than 50% of adult Americans had a broadband connection at home.2 The invention of the smartphone, or basically a pocket computer, allowed anyone anywhere to be connected online. Smartphone penetration grew rapidly from less than 11% of the US population in 2007,3 when the iPhone first launched, to over 80% today.4
NEARLY THREE QUARTERS OF E-COMMERCE PURCHASES ARE MADE WITH A MOBILE DEVICE
Exhibit 1: Global Mobile Commerce as a Share of Total Global E-commerce
As of February 9, 2021
Today, mobile e-commerce, otherwise known as m-commerce, comprises about 70% of total e-commerce sales globally and has more than tripled since 2015.5,6
In addition, smartphone mobility has allowed the internet to move beyond category expansion and into entirely new businesses, like location-based advertisements and ride sharing. So, while the internet was foundational to the existence of e-commerce, the smartphone has made accessibility much more ubiquitous to the general population and has made e-commerce as universal as it is today.7
PAYMENTS AND LOGISTICS: CRITICAL E-COMMERCE-SUPPORTING ECOSYSTEMS
If the internet was foundational, then payments and logistics were critical. Returning to the analogy introduced earlier, when a river shifts, the diverted water pools in new areas, and in those pools form new ecosystems and biodiversity. Let us say that after this river shifted, one of the resulting pools became home to trout. For those trout to exist, other life forms—smaller fish, insects, algae, bacteria, etc.—must also develop to play supporting, yet critical, roles in the ecosystem. It is much the same within e-commerce. Big platforms, like Amazon and Alibaba, exist and flourish because critical infrastructure like payments and logistics evolved to support them.
Today, payments is a thriving area of investment that benefits both from the shift away from cash—a trend COVID-19 accelerated—and the industry’s unique position in a positive feedback loop with e-commerce. Just as mobile phones helped accelerate e-commerce, e-commerce accelerated digital payments, helping drive demand to build new infrastructure for virtual transactions. Today, the market capitalization of the top five public payments companies is nearly US$1.5 trillion.8 Within the industry, innovation has flourished. Take, for example, Shop Pay, a Shopify service that is similar to Apple Pay and Google Pay. It allows customers to checkout 60% faster and results in 18% higher conversion rates from returning shoppers due to its one-tap accelerated checkout.9 Another example is the “p ay later” checkout option, which increases conversion and allows customers to delay payment instantly, all while utilizing alternative data and artificial intelligence to automate the credit risk assessment. These types of innovations and offerings within payments continue to chip away at customer pain points and drive further penetration of e-commerce.
If payments were pulled happily along in the wake of online buying, then logistics were grudgingly and laboriously yanked along. Logistics and fulfillment are ultimately expensive and complex networks that require significant coordination and planning. The term logistics refers to everything that goes into getting the finished product from manufacturer to end destination (as well as the reverse with returns). Relative to brick-and-mortar stores, e-commerce requires a 400% increase in spending on distribution centers and transportation to the consumers.10 In fact, the total fulfillment costs to serve an e-commerce customer is 2.5–3× that of a brick-and-mortar retail customer. However, as a result, the number of warehouses, warehouse employees, logistics robotics and technologies that improve warehouse efficiency have seen tremendous growth in the last decade as retailers increasingly shift online. Amazon, one of the largest e-commerce platforms in the world, spends US$46 billion on fulfillment alone, and these costs grew 34% in 2019 compared to the previous year (due primarily to the shift to free 1-day delivery for Prime users).11 Not surprisingly, COVID-19 accelerated logistics adoption. Amazon reported a 49% increase in shipping costs in the first quarter of 2020 and hired 85,000 new workers to deal with the increased demand for products on their platform.12 Similarly, Honeywell’s Intelligrated, a leader in warehouse automation, saw greater than 300% order growth in the second quarter of 2020 as companies scrambled to make their warehouse operations more efficient.13 Though difficult and complicated, logistics is an industry that is quickly evolving, as consumers demand greater and greater convenience. This in turn increases their willingness to buy things online, driving further e-commerce penetration.
While we have offered two significant examples here, it is important to note that e-commerce has fundamentally changed many more industries, such as social media, online security, customer support, and website development. These symbiotic ecosystems continue to evolve and accelerate the e-commerce trend, pushing our definitions of convenience and spurring further penetration and disruption. We believe a cohesive view of the entire ecosystem including supporting platforms is essential to our understanding of the pace and duration of e-commerce. We also believe that it is this cohesive view that differentiates us from other investors in this space who often have too narrow of a purview, isolated and defined by industry sectors as opposed to the underlying trends themselves.
THE FUTURE: ACCELERATION OF E-COMMERCE TRENDS
As we look to the future, we are encouraged by the trends we are seeing. In many ways, the pace of change is accelerating. Technologies like 5G and virtual reality drive our optimism, and we believe will drive further penetration of e-commerce as well. We see new businesses and new business models continuing to emerge. Globally, we see countries leapfrogging the United States, as adopting new technologies is more efficient without legacy infrastructure. Finally, we believe the COVID-19 pandemic will in many areas create lasting change in people’s habits.
Technological advancements like 5G will accelerate penetration Advancements in technology have historically accelerated e-commerce penetration and we believe will continue to do so. After all, it would be impossible to have media streaming services or cloud services running on dial-up internet. Today, we are on the precipice of 5G, which promises latency speeds as low as 1 millisecond versus 50 milliseconds in 4G. Longer term, we believe this will allow for advancements in augmented reality and virtual reality. Lower latency will be integral to industries that require specificity on an individual basis. Imagine a world in which, using augmented and virtual reality, you could “ walk around” the home you’re interested in buying, feel what it’s like to drive a certain car, see how clothes look on yourself without trying them on, and see how a piece of furniture would look within your home virtually. With this technology in mind, we look at the industries that still have very low penetration of e-commerce and we see promising futures—these include real estate, auto, furniture and health care.
PLENTY OF GROWTH TO GO: WE ARE EARLY ON THE S-CURVE
Exhibit 2: E-commerce penetration in select industries
As of February 9, 2021
New business models will emerge The ability of the internet to bring together a vast set of diverse consumers, with a wide range of preferences, instantaneously creates a rich backdrop for new businesses and business models to emerge. For instance, the sharing economy is an economic model that allows users to maximize their assets’ utilization, therefore increasing economic efficiency. Though made famous with ride and auxiliary home sharing, these new business models can also extend to primary residences, campgrounds, freelance services, office space, and even clothing and jewelry. Creating a two-sided, trust-based market requires a lot of innovation, including rating systems, more complex distribution, and new forms of customer service.
Another area where we see the emergence of new businesses is in online price discovery. Price discovery has become more efficient as multiple types of auction models emerge, such as: the highest bidder auction format; the lowest price clearing auction (Dutch auction) format; and, finally algorithm-enhanced auctions where frequency, relevance, and other factors are blended together to produce the best outcome. These new business models have created more powerful competitors within existing industries, expanding their respective addressable markets.
Group buying, social media and influencers are also making shopping more engaging and fun. As we look to the future, we are excited by what additional retail technologies we see emerging on the horizon. For example, new technology that solves the tremendous complexities of managing individual low price point Stock Keeping Units (SKUs) in an omni-channel environment, allowing online purchases, and returns or exchange in-store. We’ve even seen software developed to help businesses navigate the 12,000 different local tax jurisdictions in the United States in real time. Same-day shipping, third-party fulfillment, facial recognition, authentication security software, edge computing—all areas of promising new growth. We believe this Cambrian-like explosion of new businesses and business models in the e-commerce world will create significant opportunity for investment. That said, we are always aware that the innovators and disruptors of today may one day be disrupted themselves tomorrow. Ever vigilant of this concept, we firmly believe active management is necessary to invest in innovation.
International leapfrogging Many countries do not have the equivalent legacy infrastructure as the United States. At first blush this may seem like a disadvantage, but in some cases, the lack of incumbents and existing infrastructure allows them to leapfrog the United States. For example, China is the largest e-commerce market in the world. With nearly US$2 trillion in retail e-commerce sales and 36% penetration rates in 2019, it has far surpassed the United States US$600 billion or 16% penetration rates.14,15 Despite similar geographic size and four times the population, China has only 2.8 retail sq ft/per person, less than 1/8th that of the United States at 23.5 sq ft/person.16 The country’s lack of a legacy retail footprint has allowed it to quickly adopt e-commerce trends at a faster pace than the United States.
We see similar dynamics in mobile payments. China never fully embraced the use of credit cards, and this fact allowed them to adopt mobile payments significantly faster than the United States by jumping straight from a cash society to a mobile payment society. We believe the same phenomenon will happen in other countries and other emerging markets. For example, Latin America is only about 4.5% penetrated in e-commerce with a nearly 22% growth rate. Mexico’s e-commerce penetration grew 35% in 2019.17 India, the Philippines and Malaysia are three of the top five fastest growing e-commerce countries in the world.18 Looking at e-commerce globally, we see the leapfrogging of many countries as further accelerating e-commerce trends.
Long-term effects of COVID-19 Today, we are seeing a drastic acceleration in the secular shift to e-commerce because of COVID-19. This crisis is unprecedented, but like so much of the history that we like to study, we have some parallels. We have witnessed other exogenous events in the past that have had similar accelerating and lasting effects. India’s banknote demonetization is one such example. On November 8, 2016, Indian Prime Minister Narendra Modi announced in a live unscheduled televised address that the use of all 500- and 1,000- rupee banknotes—86% of Indian currency in circulation at that time—would be invalid past midnight.19 One of the many and widespread effects of this sudden cash shortage was that online retailers saw a noticeable and sustained increase in the adoption of digital payments following the demonetization. Most consumers maintained this level of usage even after the cash shortage had concluded, showing that macro events can have long lasting effects on consumer behaviors.20,21
COVID-19 will likely have a similarly lasting effect on our economy. As shelter-in-place continues to rely on e-commerce to fulfill consumer demand, cashless and contactless payments, fast fulfillment, online security and virtual “window shopping” will become an even more integral part of our day-to-day lives, and we believe companies supporting these capabilities will thrive.
On the other hand, as with any sudden shift in demand, some companies will struggle. J.C. Penney, Neiman Marcus, J. Crew and Barneys are just a few casualties filing for bankruptcy in 2020. And as these businesses fade, it will only further accelerate e-commerce trends as their customers will be forced to adapt in an online retail world.
In 1570, a 5.8 magnitude earthquake struck the city of Ferrara in Italy and changed the course of the Po River, moving it 20 kilometers to the north.22 As it turns out, the earthquake was the last of a series of tectonic events—the “straw that broke the camel’s back”—that lifted the southern portion of the Po Valley substantially and shifted the Po River a total of 40 kilometers north over 3,000 years. Where the river shifted, new aquatic life formed where none existed before. Where it disappeared, so too did many incumbent life forms. In time, we may very well see the COVID-19 pandemic as similar to the earthquake that moved the Po River. The pandemic shifted consumer behavior irreversibly. It as an event created winners and losers in all parts of the economy, and for us, an opportunity.
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- Source: The New York Times, “Los Angeles Rethinks Taxis as Uber and Lyft Dominate the Streets,” January 12, 2020.
- Source: Pew Research Centre, “Home Broadband Adoption 2007,” July 3, 2007.
- Source: OECD, “OECD Internet Economy Outlook 2012,” Chapter 2, Figure 2.4, June 2012.
- Source: Pew Research Centre, Mobile Fact Sheet, June 12, 2019.
- Source: Business Insider, “Rise of M-Commerce: Mobile Ecommerce Shopping Stats & Trends in 2021,” December 30, 2020.
- Source: eMarketer, Global Ecommerce Update 2021.
- Today almost 20% of Americans rely solely on their mobile phones for internet access with no home broadband service.
- Source: Bloomberg L.P., Sum of Market Cap of Top 5 Financial Transaction Processors.
- Source: Shopify.
- Source: Prologis, “Unlocking Supply Chain Value,” June 2018.
- Source: Digital Commerce 360, “Jeff Bezos Sets his Departure as CEO as Amazon reports a Record Year,” February 2, 2020.
- Source: Supply Chain Dive, Amazon’s Fulfillment Slows, Coronavirus Adds $4b in Projected Q2 Operational Cost,” April 30, 2020.
- Source: Honeywell SPS analyst day.
- Source: eMarketer, “E-commerce Continues Strong Gains Amid Global Economic Uncertainty,” June 30, 2019
- Source: Bank of America, US Department of Commerce, Shaw Sprint Research.
- Source: Business Insider, “The retail apolocypse is still in its ‘early innings’—and thousands more stores will close before it ends,” October 3, 2018.
- Source: Morgan Stanley, “Playbook for the Digital Age: Initiating on LatAm Retail & e-commerce”, 2020.
- Source: eMarketer, “E-commerce Continues Strong Gains Amid Global Economic Uncertainty,” June 30, 2019.
- Source: Bandi Chaithanya, Moreno Tom, Ngwe Donald, and Zhiji Xu, The Effect of Payment Choice on Online Retail: Evidence from the 2016 Indian Demonetization, June 27, 2019.
- Source: Chodorow-Reich, G., Gopinath, G., Mishra, P., and Narayanan, A. (2018). Cash and the Economy: Evidence from India’s Demonetization. Technical report, National Bureau of Economic Research.
- Source: Agarwal, S., Basu, D., Ghosh, P., Pareek, B., and Zhang, J. (2018). Demonetization and digitization. Social Science Research Network Working Paper.
- Source: Pettenati, F., Sirovich, L., Source inversion of the 1570 Ferrara earthquake and definitive diversion of the Po River (Italy), JGR Solid Earth, American Geophysical Union, Volume 120, Issue 8.
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