Online shopping is big – and it’s getting bigger.
Earlier this month, the world’s biggest e-commerce event kicked off in China, with the annual Singles Day sale. Conceived in 2009 as a day for Chinese people who did not have partners to send gifts to each other or buy gifts for themselves, this year’s Singles Day saw Chinese consumers spend, in 24 hours, one-third more than all Australian retail sales in a year.
Chinese e-commerce giant, Alibaba Group, said the thousands of retailers on its platforms booked 168.3 billion yuan ($33.7 billion), up 39% on last year, and a record. The splurge was 30% higher than Australian annual retail sales of $26 billion. More than 90% of the purchases – of anything from nappies to diamonds – were done on smartphones.
China’s online retail sales surged 34% in the first 10 months, to 5.54 trillion yuan ($1.1 trillion) in the first 10 months of this year, beating the 10.3% rise in overall sales of consumer goods, according to official data. Ratings agency S&P says China’s 2017 online retail sales is approaching US$1 trillion ($1.3 trillion), which will buttress the country’s position as the largest e-commerce market in the world. S&P expects China’s online retail industry’ to grow by 20%–25% over the next 12-24 months.
In the US, this week brings “Black Friday” – the day after Thanksgiving Thursday – which traditionally marks the beginning of the nation’s Christmas shopping season, and the busiest shopping day of the year. Since 2005, Black Friday has been followed by “Cyber Monday,” when retailers slash their prices online.
According to data from Adobe, Cyber Monday 2016 was the biggest US online shopping day on record, with US$3.39 billion ($4.56 billion) of sales struck, up 10.2% on 2015, and beating the US$3.34 billion ($4.49 billion) spent online on Black Friday, which was a 21.6% rise. This year, Forbes magazine – citing research from discount aggregator RetailMeNot – predicts that consumer spending over the Black Friday weekend will grow by 47% on 2016’s numbers. More than 56% of US consumers surveyed by RetailMeNot said they planned to make a purchase on Cyber Monday this year, compared with 39% last year.
Here in Australia, online sales are growing at more than three times the rate of physical sales, at almost 10% a year, compared to 3%. And that is before Amazon launches a full-scale assault on Australian retail, expected before Christmas. Amazon’s arrival has the retail industry almost existentially nervous.
But a Credit Suisse report predicts it will not really disrupt the market until it reaches a 5% share of product categories – which could take about five years.
In the meantime, here are five potential ways to play the online retailing surge.
Kogan.com (KGN, $4.29)
Market capitalisation: $401 million
Estimated FY18 yield: n/a
Analysts’ consensus price target: $5.20
Source: ASX
Kogan.com is a pure-play online sales business: through its eponymous website, it is an online consumer electronics and general merchandise retailer, but has also launched NBN, travel, insurance and mobile broadband services. Kogan.com will be directly competing with Amazon for online shopping market share in Australia.
Established in 2006 by entrepreneur Ruslan Kogan as an onseller of LCD televisions, Kogan bought the online business of collapsed retailer Dick Smith Holdings in March 2016. In July 2016, the expanded business floated on the Australian Securities Exchange (ASX). Issued through the prospectus at $1.80, KGN got off to a disappointing start as a listed stock, making a first-day loss of 16.7%, closing at $1.50. A low of $1.34 followed later that year, and by June 2017, Kogan.com was still struggling, at $1.465.
But in August, Kogan.com reported full-year net profit of $3.74 million for FY17, a 362.3% rise on last year, and more than double the prospectus forecast, achieved on revenue that came in 20% ahead of the prospectus forecast. Kogan.com paid a fully franked dividend for FY17 of 7.7 cents a share. The share market started to notice the stock.
After a downward blip in October, when chief executive and founder Ruslan Kogan and chief financial officer David Shafer sold significant parcels of shares, a buoyant trading update in November reignited the stock. At its annual general meeting (AGM), Kogan.com told shareholders that revenue grew 36.2% in the first four months of the 2018 financial year compared to the same period the year before, with a gross margin of 18.4%, up from 17.6% in the same period a year ago. In response, the shares surged almost 9%.
The stock’s spectacular surge since June has sent its trailing price/earnings (P/E) ratio ballooning over 100 times earnings, and it is difficult to find forecasts of how earnings and dividend growth will look over the next few years. But the company has a healthy balance sheet and the continued diversification of its product portfolio is generating strong cash flows. Ruslan Kogan is definitely on the “relaxed” side of Australian retail in preparing for Amazon: he says the US giant tends to expand the online retailing market wherever it goes – besides, Kogan.com intends to compete with Amazon on price, while also selling a wide range of its private-label products through the Amazon online business.
Despite having risen so quickly in such a short time, analysts still see scope for growth in KGN: the consensus price target for the stock, at $5.20, implies 21% capital gain if achieved.
Goodman Group (GMG, $8.65)
Market capitalisation: $15.6 billion
Estimated FY18 yield: 3.2%, unfranked
Analysts’ consensus target price: $8.30
Source: ASX
Industrial property giant Goodman Group might seem a strange way to ‘play’ the growth in online retail, but the logic is simple: merchants and distributors need large warehouses and efficient supply chains, and as consumer expectations around product delivery and availability rise, landlords like Goodman are at the centre of that. At the group’s AGM this month, chief executive officer Greg Goodman spent considerable time talking about how worldwide online retail spending was a big driver of the macro environment for industrial property.
Citing research from digital commerce research firm eMarketer, Goodman said worldwide online retail spending was expected to grow by 20% to US$27 trillion ($35.5 trillion) by 2020, to be 14.6% of total retail sales. Ecommerce would grow by more than 60% in the next three years, he said, three times the rate of traditional sales.
“Warehouse proximity to consumers has become a critical factor in reducing delivery time and cost. In this shifting consumer landscape, having the right footprint matters,” said Goodman. With the lack of large land areas in the inner city, where demand is expected to be high for online shopping, particularly with high-density living, more vertical warehouses will be constructed, said Goodman: “already we have large warehouses that are multilevel and are run by robots and other artificial intelligence, this will increase,” he said.
Goodman made the point that in the recent Singles Day in China, the major Chinese retailers needed to employ advanced robotics, artificial intelligence and other smart warehouse solutions, just to keep up with demand and process sales. He said the group had positioned its business and global portfolio to take advantage of the global online retailing trend.
ZipMoney (ZML, 69 cents)
Market capitalisation: $269 million
Estimated FY18 yield: n/a
Analysts’ consensus target price: $1.275
Source: ASX
ZipMoney operates a “buy now, pay later, no interest” service, which it integrates into online retail stores to reach consumers. The business’ intellectual property is in the artificial intelligence and big data technologies that drive its credit and fraud decision engine.
ZipMoney has two “digital wallet” products: zipPay is designed for smaller purchases, with a maximum limit of $1,000: zipMoney has a limit of $10,000. Account holders can buy goods, and then have two months to pay off their balance. ZipMoney also offers the personal budgeting app Pocketbook, after buying the fellow fintech in September 2016.
This month, in time for the Christmas shopping season, Kogan.com joined the Zip platform, meaning that more than one million active Kogan.com customers now have access to the zipPay digital wallet at checkout. This followed a deal in October with cloud-based retail software provider Retail Network, under which its network of more than 4,000 retailers are to offer Zip payment options for no activation costs.
ZipMoney has had a strong 2017, after arranging a $260 million debt facility in May, led by National Australia Bank, which was the largest banking facility in Australian fintech history; and subsequently landing a $40 million investment from Westpac. The company is not yet profitable but analysts expect the breakthrough next year (FY19), when ZML is expected to earn 0.9 cents a share, on Thomson Reuters’ collation. The analysts’ consensus share price target of $1.275 is almost 85% above the current share price.
Afterpay Touch Group (APT, $5.57)
Market capitalisation: $1.18 billion
Estimated FY18 yield: n/a
Analysts’ consensus price target: $5.69
Source: ASX
Fintech star Afterpay is also involved in the buy-now, pay-later market: its frictionless payments technology allows shoppers to buy goods and split the payment over four equal fortnightly instalments, with payments linked to the customers’ debit or credit accounts. Anyone registered on the Afterpay platform can buy a product, and pay later: Afterpay pays the retailer upfront and assumes all credit and fraud risk for the payment.
Afterpay can be embedded into the retailer’s website or at the store counter. In return for being paid upfront by Afterpay, and handing off the payment risk, the merchant – not the shopper – pays Afterpay a fee. Each order placed through the Afterpay system generates a merchant fee: the merchant fees are based on a percentage of the end-customer order value, plus a fixed per-transaction fee.
The company says it has more than 1.1 million customers shopping at more than 8,600 retailers: about 85% of its transactions are linked to a debit card, not credit. Afterpay is very well-positioned for the growth in online shopping.
In June, Afterpay merged with its technology partner, digital payments software developer Touchcorp, which owned 26% of its stock. Analysts expect the company to earn 10.5 cents a share in FY18, rising to 17.8 cents in FY19, which lowers the forward P/E from 53 times FY18 earnings to a more palatable (for a growth stock) 31.3 times FY19 earnings. But after rising from $2.70 in its start as a combined entity in June to $5.57 at present, analysts feel a pause is in order: the consensus price target is $5.69.
Harris Technology Group (HT8, 6 cents)
Market capitalisation: $8 million
Estimated FY18 yield: n/a
Analysts’ consensus price target: n/a
Source: ASX
A highly speculative play on online retail is Harris Technology Group, a business that is based around the Harris Technology operation that it bought in 2015 from Officeworks. The Harris Technology online operations sell a large range of laptops, routers, communications networking equipment, headphones and baby products, through the Harris Technology, Anywhere, WowBaby and Audion brands. In FY17, Harris Technology Group brought in revenue of $51.1 million, down 5.5%, and generated an underlying net profit of $750,000.
The two most interesting things about Harris Technology are its strategy to build a manufacturer-to consumer (M2C) model, to source products directly from Chinese manufacturers, and its positive view on the arrival of Amazon. Harris Technology believes that M2C will allow it to offer large discounts, because of the lower costs, with product support and warranties handled by Harris. Under M2C the company will not have to carry the stock – just ship it straight to the distributor, and then the consumer. The company says the M2C strategy will kick off with reselling mobile accessories, before later expanding into products such as toys, apparel and others.
As for Amazon, Harris Technology chief executive Garrison Huang says it is not the company’s competitor – on the contrary, Amazon is its friend. “We see Amazon’s entry in Australia is a positive thing because Amazon is not only a seller of Amazons own products, but to a larger extent, it is more an e-commerce platform on which many sellers conduct business.
“We intend to utilise the Amazon platform to assist our M2C business implementation. Amazon will not only raise the consumer use of e-retailing which in Australia is still lower than in places like China, but it will ultimately drive more consumer traffic to Harris Technology, which will have its store on the Amazon shopping portal. Amazon to Harris will be like Westfield to a small retailer – it provides enormous traffic that would not otherwise have walked past the store,” says Huang.
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