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With most retailers now supplementing their brick-and-mortar operations with an online presence, shopping will never be the same. This transformation brings with it a gamut of new investment possibilities.
Come learn how Letko Brosseau can grant you entry into the promising world of e-commerce.
We sure don’t shop the way we used to. No more needing to get dressed, hop in the car, and rush to the mall before closing time. Today, thanks to the World Wide Web, we can browse a veritable limitless array of goods available online from the comfort of our own home, 24/7, many of us still in pajamas.
While historians would be loath to agree on the identity of the first online retailer, Amazon—incorporated in 1994 by Jeff Bezos—has arguably become the world’s largest and best-known. Countless companies have followed suit, making online shopping a way of life. NPR has found that despite the fact that 56% of online shoppers claim they prefer an in-person shopping experience, 69% say they go online to purchase.
Online sales may still be relatively small—they represent just 10% of the total market, according to the U.S. Census Bureau—but the practice is quickly gaining share. NPR estimates 58% of the U.S. population has bought clothes or shoes via the internet, The Atlantic reports that 30% of all 2018 computer and electronic purchases were made online, and Reuters attests that U.S. consumers spent $US126 billion online during the 2018 holiday season.
“It’s no longer a choice,” says Charmaine Uy, a 15-year veteran of Letko, Brosseau & Associates who currently serves as senior portfolio manager and partner, covering retail, among other sectors. “E-commerce is here to stay. Customers demand it, so companies have to provide it.”
The stalwarts of retail will always be choice, value, and convenience, but online shopping is by no means a one-size fits all experience.
For both buyers and sellers—who now have universal access to one another—the infinite inventory that can be presented via the internet is definitely win-win. However, the ability to comparison shop quickly is more one-sided. “Price discovery is an issue for retailers online,” says investment analyst and partner Paul Younes, who has been with Letko Brosseau for five years. “Retailers now have pricing pressure—and therefore profitability pressure—that they didn’t have before. That said, they can also swiftly adjust pricing.”
Another big advantage for both vendor and client is the amassing of detailed personal data on the latter. Through this relationship, products can be targeted to repeat customers, and the establishing of individualized accounts permits easy sign-in, payment method storage, and one-click purchasing.
For all the plusses, there are definitely minuses. Not all products lend themselves to online purchasing. High-end jewelry, for example. How can a diamond’s luster and quality be ascertained via a computer or smart phone screen? “Food retailers have skinny margins and bulky items,” adds Uy. “So delivering them may not work financially.” Not to mention that many customers would prefer to inspect an item’s freshness in person.
For the retailer, the infrastructure required to go online—the acquiring of complex digital capacity, the providing of packaging and shipping—is no small expense.
And let’s not forget that for some customers, even waiting one day for a purchase to arrive is too long. They want the instant gratification in-person retail provides.
Finally, the handling of unwanted items—such as when a buyer orders a sweater in three different sizes only to return the two that don’t fit—is yet another nuisance for merchants.
For many vendors both large and small, the omni-channel model—which enables them to sell an almost infinite amount of items online and have the customer choose between home delivery or in-store pick-up—seems to represent the best of both worlds. “It gives the customer more options as to how they can obtain their goods,” says Uy. “Not everyone can stay at home all day to receive a package.”
Walmart’s adoption of the omni-channel model is just one reason that the company—which boasted online sales of more than $US16 billion during the year ending January 31, 2019, a 40% increase over fiscal 2018—is so attractive to Letko Brosseau. “Walmart is thriving,” offers Uy. “Its E-commerce sales have been growing 30-40% annually over the last two years. That’s still very small in terms of their overall sales, but it’s growing very, very quickly.”
Letko Brosseau’s stake in Walmart is exemplary of the firm’s investment philosophy, where valuation is paramount. “We approach what we think is an attractive trend, but we do it in a more price-conscious manner,” says Younes. “Everyone gets really excited about the primary players, but we don’t just go for the big behemoths that everyone knows about. If you buy a company that’s fairly expensive, there’s always the risk that it won’t deliver on expectations. To protect against this downside risk, we want growth while being disciplined about the price we pay for it.
“There are still retailers that have an online presence and that are doing it the right way—like Walmart—yet that trade at a much more reasonable price. There’s also a way to play that structural trend through other industries.”
At Letko Brosseau, that means looking at a packaging company such as Smurfit Kappa Group PLC, whose commitment to creating shipping- and eco-friendly containers—such as the Tide Eco-Box, which uses 60% less plastic than a bottle, and whose dimension, weight, and strength make it easier to ship—positions the company to benefit greatly from the rise in demand created by e-commerce. Parcel delivery services such as United Parcel Service, Inc. (UPS) should also see an uptick in demand.
Letko Brosseau is committed to its proven investment pillars—fundamental research, price sensitivity, long-term horizons, ESG (Environmental, Social and Governance) integration, international perspective, and investing in public markets. Adhering to these principles has been vital to its success over the last 30 years. The firm believes there are many ways to invest and participate in the growth of the e-commerce while maintaining its values. Come learn how Letko Brosseau can provide you entree to this promising world of opportunities.
This article has been prepared by Letko, Brosseau & Associates Inc. for informational purposes only and is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. Where the information contained in this document has been obtained or derived from third-party sources, the information is from sources believed to be reliable, but the firm has not independently verified such information. Any opinions or estimates contained herein constitute our judgment as of this date and are subject to change without notice. This article contains certain forward-looking statements which reflect our current expectations or forecasts regarding economic and market conditions. Forward-looking statements are inherently subject to risks, uncertainties and assumptions that are believed to be appropriate in the circumstances which could cause actual events or results to differ materially from those expressed in, or implied by, these forward-looking statements. These statements may also include the expression of opinions that are speculative in nature and should not be relied on as statements of fact.
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