Global Market Commentary

July 24, 2015

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“Winner Take All” in E-commerce…

and Who’s Protected

On June 11, the European Union opened a probe of e-book pricing by Amazon (NASDAQ: AMZN), continuing the rumbles that have surrounded allegedly anti-competitive practices by the online giant. Last year, AMZN and publisher Hachette squared off over similar issues, with prominent authors being drawn into the fray.

U.S. E-commerce — Not Following the Script

The U.S. Census Bureau has tracked online retail as a proportion of total retail sales since 1998 — when online sales were tiny. As of the first quarter of 2015, they’re at about 7 percent. As you might guess, though, when those sales are broken out by segment, the average is seen to conceal wide variation in online penetration.

Online Retail

Online Retail Penetration By Market Segment                                        Data Source: Census Bureau


Whatever the outcome of the EU’s probe, the accusations of anti-competitive practices against AMZN illustrate a characteristic of retail’s move online. When online retail began, it was hailed as a disruption that would create greater marketplace diversity, with consumers reaping the benefits. AMZN’s dominance, however, is beginning to make some pundits and activists talk about “monopoly” and the Sherman Antitrust Act. AMZN’s rapid rise, they say — mirrored in the segment data for media e-commerce above — would run the risk of constraining consumer choice rather than expanding it, if AMZN used its considerable power to guide consumers away from suppliers who refuse to dance to AMZN’s tune. (That is, in essence, the accusation made against AMZN by Hachette.)

This process may play itself out across e-commerce, and indeed, it may prove to be a broader consequence of the internet. What seemed at first to be a force that would enable the competitive rise of the small producer (think of platforms like Etsy or Bandcamp) may, in the bigger picture, instead enable the rise of dominant monopolies or oligopolies.

We do not necessarily think that “monopolies” — which are usually temporary rather than enduring — are always a bad thing in the short run. In a sense, every successful business pursues a monopoly, and if it achieves it, attempts to maintain it as long as possible. As long as its weapons are legitimate and don’t stifle the rise of competition, the rewards of that temporary monopoly act as a powerful inducement to innovation. (In this sense, “monopoly” and “moat” are synonymous.) But we think it is worth noting that the internet may not just be a force that propels the rise of the small, but one that can also enable the rise of giants. (For investors, this means additional caution in approaching new e-commerce names when they come public. E-commerce incumbents in a winner-take-all world can provide just as much trouble for new rivals as incumbents in traditional retail.)

Who’s Protected?

The “winner-take-all” character of the e-commerce giants extends also to their influence on their brick-and-mortar competitors; AMZN’s strategy proved too much for Borders, and may prove too much for Barnes and Noble (NYSE: BKS). Further, some analysts believe that AMZN’s aggressive and razor-thin margins for print and e-books are “loss leaders” for their higher-margin retail items. In short, AMZN’s strategy is to hook consumers with books as a loss-leader, to get them buying electronics and appliances (as well as AMZN’s other services).

Investors should note, though, that there are retail segments that are relatively insulated from e-commerce disruption. Grocery is one of these — although AMZN is making an attempt with its “Fresh” service, and Google (NASDAQ: GOOG) with Google Express, penetration has been small, and may be difficult to expand outside a niche of buyers. (Obviously restaurants and fast food, including so-called “fast casual,” are relatively immune from e-commerce competition.) Health and personal care is another; the neighborhood drug store will always be a place where most consumers buy Band-Aids and shampoo that they need immediately and won’t be ordering from AMZN or GOOG (even as same-day delivery options are rolled out and taken up by some consumers). Looking at the growth rates of e-commerce penetration above, you can see that clothing and furniture are midway between the well-protected segments (food and personal care) and the highly vulnerable segments (media and electronics). In these retail segments, e-commerce has made inroads, but a screen can’t yet give consumers the accuracy they need in color, feel, and function, so growth has been slower. This may change as the rise of virtual reality (VR) makes more immersive shopping experiences available. Financial e-commerce (including peer-to-peer lending and similar applications) is beginning to rise, but the data on its growth rate are not yet clear.


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