The strong and incessant growth of e-commerce is likely to continue, even as the economy reopens1, and with it, the investment opportunity. Among the drivers:
- E-commerce penetration is lower—perhaps far lower—than you think.
- The distinction between “born” online and legacy bricks-and-mortar stores still matters.
- There’s more to e-commerce than just Amazon, and many of these companies are showing strength.
Sources: Adjusted numbers from U.S. Department of Commerce, 2009-Q1 2021. *2024 estimate from eMarketer, October 2020.
The above chart is not a mistake. At the height of the lockdown, e-commerce penetration rose to an underwhelming 16% in the United States, a number likely much, much lower than most would guess. As of Q1 2021, e-commerce as a portion of total retail had retreated slightly, yet was still notably higher than pre-pandemic levels, even as the economy started to reopen.
If we simply returned to something like the pre-pandemic growth rate, e-commerce penetration would trend around 20% in five years. However, many forecasts are predicting the acceleration of the trendline to continue post-pandemic. In its October 2020 report, eMarketer expected e-commerce penetration to get close to 20% in just three years’ time. Keep in mind that a 20% penetration would achieve roughly a 50% increase in total e-commerce sales. There’s still lots of growth to come.
Source: Bloomberg, data as of 3/31/2021. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization.
The pandemic continued a key trend for Walmart, which is now the number two online retailer—and often cited by those who claim there’s no longer a meaningful distinction between bricks-and-mortar and online retailers. Despite Walmart’s online sales growth and a Q1 2021 stimulus-driven rebound, Walmart’s EBITDA margin has declined, while Amazon’s has dramatically improved.
Other bricks-and-mortar retailers like Target and Macy’s have fared similarly to Walmart. Traditional players can be burdened with legacy cost structures and too many physical locations, among other challenges. Born online retailers—not just Amazon, but companies such as Chewy, Etsy and Wayfair—may have sustainable advantages for quite some time.
The difference in retail business models is one of the reasons why ProShares looks at the retail universe through two lenses: traditional retailers and online retailers. Some traditional retailers that earn at least 75% of their revenue from in-store sales, such as Walmart and Target, are tracked in the Solactive-ProShares Bricks and Mortar Retail Store Index. Conversely, some retailers who sell principally online or through other non-store channels are tracked by the ProShares Online Retail Index, which includes Amazon, Alibaba, Chewy and Wayfair.
Source: Bloomberg. Date range: 5/17/2018 - 5/17/2021
Looking at which companies were responsible for the 100%+ return of the ProShares Online Retail index over the past three years, Amazon accounted for about a quarter. In e-commerce, economies of scale matter. Amazon’s average weight in the index during the three-year time period (24.11%), which was in line with its contribution to the index’s return, well matches its size and impact. But there were many other impactful e-commerce companies. The chart above shows some of the other companies, out of the 20+ index constituents, that are thriving alongside Amazon and have contributed to the index’s performance.
Prior to the pandemic, the retail industry was already undergoing massive shifts, and e-commerce’s share of the pie had been steadily increasing for years. If growth trends continue, investors may want to consider strategies that focus on companies designed for a digital environment.
Lets investors tap into the potential growth of online retail by pinpointing retailers that principally sell online or through other non-store channels.
Tap into the potential growth of online retail and the decline of bricks-and-mortar retailers through a long/short construction.
1Global retail e-commerce sales are expected to climb to over $6 trillion by 2024, up from under $5 trillion in 2020, according to eMarketer forecasts as of December 2020.
As of 3/31/2021, ONLN allocations included 25.38% to Amazon, 11.40% to Alibaba, 3.79% to Chewy, 5.88% to Wayfair, 4.70% to Etsy, 1.70% to Pinduoduo Inc., 3.60% to Stamps.com, and 0% allocations to Target and Walmart. CLIX included long-side allocations of 25.37% to Amazon, 11.42% to Alibaba, 3.80% to Chewy, 5.89% to Wayfair, 4.71% to Etsy, 1.70% to Pinduoduo Inc., and 3.60% to Stamps.com. CLIX short-side exposure included 2.12% to Walmart, 2.16% to Macy’s and 2.25% to Target. Holdings are subject to change.
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