E-commerce has been displacing brick-and-mortar stores for years, but the trend accelerated dramatically in 2020 as lockdowns and shuttered retail locations forced consumers to the internet in droves. In the U.S. alone, e-commerce gained 5% penetration in a few short months, a milestone that previously took 6 years, from 2014-2019, to reach.1 With demand pulled forward by approximately 2 years, e-commerce penetration is expected to reach 25% by the end of the year.2 This reality spells disaster for traditional retailers that don't fully embrace new technologies. While an online presence is now a prerequisite for survival, a website alone isn't enough for success in today's increasingly digital and interconnected world.
Not all retailers are equipped to serve customers who have become accustomed to instant gratification, seamless transaction options, and choices of products and delivery methods tailored to individual preferences. Historically, it has taken significant investment in infrastructure and logistics to support this type of business model. A case study is Amazon, which started as an online bookstore in 1994 and slowly built itself up to be the U.S. e-commerce juggernaut that other retailers fear. Much of Amazon's success can be traced to two powerful forces—the coming of age of digital-native millennials and the failure of other retailers to as effectively scale their businesses to meet the demands of this critical demographic. Today's retail leaders marry strong digital ecosystems with stellar customer experiences and convenience, which has been a source of resilience amid the pandemic as well as an avenue for durable growth for years to come.
RETAIL LEADERS AROUND THE WORLD
Source: Statista. Data as of December 2019 for Nike and Alibaba and as of April 2020 for Shopify and Meituan. All other data as of September 2020.
THREE TRANSFORMATIVE SHIFTS FOR RETAIL INVESTORS
MILLENNIAL MAKEUP AND MINDSET
Born from 1981 to 1996, 1.8 billion millennials make up the largest adult cohort in the world, accounting for close to a quarter of the global population. While there are 72 million millennials in the U.S., China is home more than 5 times that number.3 Tech-savvy millennials do their research online, want high-quality merchandise, are price-sensitive and comparison shop, care about sustainability, and turn to social media for help with purchase decisions. They seek both luxury and value brands and also want convenience. This information-inundated group poses a distinct challenge to retailers aiming to differentiate themselves.
Notably, millennials accounted for 32% of the global luxury goods market in 2018 and are projected to represent 50% of that market by 2025.3 Tomorrow's winning brands will focus on first reaching consumers online—likely through social media—and then using physical storefronts to provide memorable experiences and exclusive products to enhance brand engagement. Luxury brands like LVMH and Kering's Gucci are prime examples. LVMH, the world's most valuable brand, has large scale advantages, a robust digital platform, and strong distribution control, which collectively help generate consistent and meaningful cashflows. Gucci is the most followed luxury brand on Instagram, the leading social media platform for luxury goods globally.
With the pandemic halting tourism this year (a key source for luxury sales), the luxury market has been challenged, but remains underpinned by robust structural growth. Digital and local strategies for strong luxury brands have worked particularly well this year, especially in major markets like China. The global luxury market has been a long-time pillar for growth for investors, outpacing both broader global and U.S. equity markets, often recovering faster from setbacks. If this dynamic holds up, European luxury could be one of 2021's sleeping giants.
TAILORED LOCALIZED CONNECTIVITY
Amazon established a winning formula in turning inventories quickly and charging lower prices through a vertically integrated, direct-to-consumer ecosystem. Its flexible, robust, logistics network has driven its dominance in U.S. markets. However, replicating this model in certain global regions has proven difficult, with local firms retaining market control through extensive delivery networks and a deep understanding of local shoppers. Amazon has found it extremely difficult to gain traction in regions such as Latin America and China facing stiff competition from Mercadolibre and Alibaba, both strong brands with dominating market shares. These regions are both critical for e-commerce growth given their burgeoning middle classes.
Meituan is another company that not only understands the millennial market and its lifestyle, but also addresses their needs in a one-stop super app. The app integrates Amazon-like services, deals akin to Groupon, reviews made popular by Yelp, food delivery services like UberEats, and serves up tailored suggestions based on consumer preferences and notifications-based geolocation. Meituan efficiently connects consumers and merchants with a comprehensive support system that includes marketing, on-demand delivery infrastructure, and cloud-based payment systems.
INTEGRATED DIRECT-TO-CONSUMER MODELS
While getting "Amazoned" is a serious threat for businesses and industries as Amazon's footprint continues to expand, companies like Shopify, a cost-effective e-commerce enablement service, helps small businesses around the world compete globally through digital means. The service facilitates website creation and connectivity to vendors and platforms—such as for digital payment and logistics—that create a more integrated customer experience. While Shopify boasts a 46% 5-year compound annual growth rate, the company's revenues grew 97% year-over-year in 2Q 2020 alone, as many businesses quickly set up online operations to not only survive, but thrive.4
Vertically integrated omni-channel brands with control over their distribution are well positioned for retail success, as they offer customers the best of both online and offline worlds. Direct-to-consumer (DTC) models not only cut out middlemen, but provide brands with pricing control and critical information. This intelligence allows them to build demand-driven supply chains and better meet evolving consumer needs. Responsiveness to customers, in turn, boosts sales and profits for both the brands and investors. Nike and Lululemon are examples of companies in the rapidly growing athleisure market whose DTC sales have grown dramatically. Nike saw a fivefold increase in its DTC sales over the last decade which now comprise 35% of its total revenue, while Lululemon's DTC sales represented 61% of its total net revenues in its fiscal 2Q20, compared to 25% in the second quarter of fiscal 2019.3,4
The aftershocks of COVID-19's disruption of the retail industry will be felt for months, if not years. However, e-commerce is a bright spot within retail, offering both strong short-term gains and compelling long-term growth opportunity in a post-COVID world—that is, for retailers that can reinvent themselves for the modern consumer. Investors that identify and tap into emerging trends early may be better able to ride the waves of the retail tsunami that is underway in the NEXT—or new exceptional technologies—economy.
Want to learn more about the NEXT economy? Explore 6 innovative accelerating themes driving strong durable growth at pgimfunds.com/nexteconomy
1 U.S. Census Bureau
2 Morgan Stanley
4 Company website
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