January 6, 2013MORGAN STANLEY BLUE PAPER                                                                                  ...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailGlobal Interne...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailTable of Conte...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailExecutive Summ...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailFive Key Concl...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional Retail3. Third-party...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailFive Disruptiv...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailSummary of Key...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailWestern Europe...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailChinaInternet ...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailRussiaInternet...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailKey AlphaWise ...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailMORGAN STANLEY...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailUS InternetSco...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailExhibit 8     ...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailTraditional re...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional Retailwhich is often...
MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailExhibit 15    ...
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
E commerce disruption a global theme
Upcoming SlideShare
Loading in...5
×

E commerce disruption a global theme

4,541

Published on

Published in: Business, Technology
0 Comments
4 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
4,541
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
147
Comments
0
Likes
4
Embeds 0
No embeds

No notes for slide

E commerce disruption a global theme

  1. 1. January 6, 2013MORGAN STANLEY BLUE PAPER MORGAN ST ANLEY RESEARCH Global 1 Scott Devitt 1 Andrew Ruud 1 David Gober 1 Joseph Parkhill 1 Kimberly Greenberger 1 Mark Wiltamuth 2 Richard Ji 2 Philip Wan 2 Timothy Chan 2 Robert Lin 2 Angela Moh 3 Geoff Ruddell 3 Edouard Aubin 3 Anisha Singhal 3 Louise SinglehursteCommerce Disruption: A Global Theme 3 Edward Hill-Wood 3 Nicholas AshworthTransforming Traditional Retail Maryia Berasneva Loredana Serra 1 3 5 Tom KierathFulfillment execution is key to realizing eCommerce’s disruptive potential. By 2016, 5 Crystal Wangour AlphaWise survey and global eCommerce model suggest a nearly 50% increase in 6 Tetsuro Tsusakapenetration of retail sales, to 9.3% (from 6.5% today), surpassing $1 trillion. As the key 1 Zachary Arrickdisruptors of the past 10 years become incumbents, their continued success hinges on 1 Nishant Vermabuilding scale and brand equity. *See page 2 for all contributors to this reportWhich companies will benefit? Amazon, eBay, MercadoLibre, and Rakuten should 1 Morgan Stanley & Co. LLCbenefit as the scale-based eCommerce platform companies. Traditional retail 2 Morgan Stanley Asia Limited+beneficiaries include Nordstrom, Sun Art, Williams-Sonoma, and eventually Walmart. 3 Morgan Stanley & Co. International plc+Niche online players like ASOS and Blue Nile could also prosper from the global, 4 Morgan Stanley C.T.V.M. S.A+ 5 Morgan Stanley Australia Limited +disruptive, long runway trend of eCommerce. For some, eCommerce is a relatively minor 6 Morgan Stanley MUFG Securities Co., Ltd.+issue. High-end apparel and footwear, price clubs, and specialty food retailers havebusiness models that seem less vulnerable to market share erosion from eCommerce.We put Costco in this category.This Blue Paper leverages insights from Morgan Stanley retail and internet analystsfrom all over the world to arrive at five key conclusions: 1) fulfillment infrastructure iscritical, 2) some categories remain resistant to change, 3) third-party marketplaces canprosper, 4) the mobile opportunity is promising, and 5) scale / brand favors incumbents. Morgan Stanley Blue Papers focus on critical investment themes that require coordinatedDriving those conclusions are the competitive advantages successful eCommerce players perspectives across industry sectors, regions,enjoy: price, selection, convenience, distribution, and cost structure. or asset classes.Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factorin making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.* = This Research Report has been partially prepared by analysts employed by non-U.S. affiliates of the member. Please see page 2 for the name of each non-U.S.affiliate contributing to this Research Report and the names of the analysts employed by each contributing affiliate.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSErestrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
  2. 2. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailGlobal Internet and Retail TeamsContributors to This ReportUS InternetScott Devitt1 +1 (212) 761-3365 Scott.Devitt@morganstanley.comAndrew Ruud1 +1 (212) 761-5978 Andrew.Ruud@morganstanley.comZachary Arrick1 +1 (212) 761-4226 Zachary.Arrick@morganstanley.comNishant Verma1 +1 (212) 761-6320 Nishant.Verma@morganstanley.comUS RetailHardlinesDavid Gober1 +1 (212) 761-6616 David.Gober@morganstanley.comBranded Apparel & FootwearJoseph Parkhill1 +1 (212) 761-0766 Joseph.Parkhill@morganstanley.comSoftlinesKimberly Greenberger1 +1 (212) 761-6284 Kimberly.Greenberger@morganstanley.comFood, Drug and DiscountersMark Wiltamuth1 +1 (212) 761-8589 Mark.Wiltamuth@morganstanley.comChina InternetRichard Ji2 +852 2848-6926 Richard.Ji@morganstanley.comPhilip Wan2 +852 2848-8227 Philip.Wan@morganstanley.comTimothy Chan2 +852 2239-7107 Timothy.Yh.Chan@morganstanley.comChina RetailRobert Lin2 +852 2848-5835 Rob.Lin@morganstanley.comAngela Moh2 +852 2848-5405 Angela.Moh@morganstanley.comWestern Europe RetailGeoff Ruddell3 +44 20 7425-8954 Geoff.Ruddell@morganstanley.comEdouard Aubin3 +44 20 7425-3160 Edouard.Aubin@morganstanley.comAnisha Singhal3 +44 20 7425-7526 Anisha.Singhal@morganstanley.comLouise Singlehurst3 +44 20 7425-7239 Louise.Singlehurst@morganstanley.comEurope InternetEdward Hill-Wood3 +44 20 7425-9224 Edward.Hill-Wood@morganstanley.comNicholas Ashworth3 +44 20 7425-7770 Nicholas.Ashworth@morganstanley.comMaryia Berasneva3 +44 20 7425-7502 Maryia.Berasneva@morganstanley.comLiz A. Rich3 +44 20 7425-7082 Liz.Rich@morganstanley.comBrazil RetailLoredana Serra1 +1 (212) 761-7954 Lore.Serra@morganstanley.comJeronimo De Guzman1 +1 (212) 761-7084 Jeronimo.De.Guzman@morganstanley.comFranco Abelardo4 +55 11 3048-9609 Franco.Abelardo@morganstanley.comAustralia RetailTom Kierath5 +61 2 9770-1578 Thomas.Kierath@morganstanley.comCrystal Wang5 +61 2 9770-1195 Crystal.Wang@morganstanley.comJapan InternetTetsuro Tsusaka6 +81 3 5424-5901 Tetsuro.Tsusaka@morganstanleymufg.com 1 Morgan Stanley & Co. LLC 3 Morgan Stanley & Co. International plc+ 5 Morgan Stanley Australia Limited + 2 Morgan Stanley Asia Limited+ 4 Morgan Stanley C.T.V.M. S.A+ 6 Morgan Stanley MUFG Securities Co., Ltd.+See page 145 for recent Blue Paper reports. 2
  3. 3. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailTable of ContentsExecutive Summary: Retail Transformed .......................................................................................................................... 4Five Key Conclusions: Where Does eCommerce Go from Here?.................................................................................... 5Disruptive Forces and Key Stock Calls............................................................................................................................... 7Takeaways by Region ........................................................................................................................................................... 8Key AlphaWise Conclusions................................................................................................................................................ 12Segment Analysis by Region United States Internet ........................................................................................................................................................................ 14 Retail............................................................................................................................................................................ 23 Food, Drug and Discounters ................................................................................................................................. 27 Branded Apparel & Footwear ................................................................................................................................ 28 Hardlines ................................................................................................................................................................. 31 Softlines .................................................................................................................................................................. 33 Western Europe Retail............................................................................................................................................................................ 43 Retail – Luxury............................................................................................................................................................ 53 Brazil: Internet and Retail ................................................................................................................................ 54 China Internet..................................................................................................................................................................... 61 Retail ........................................................................................................................................................................ 68 Russia Internet..................................................................................................................................................................... 78 Australia Retail ........................................................................................................................................................................ 84 Japan Internet..................................................................................................................................................................... 89Key Stock Calls by Region ................................................................................................................................................... 95Morgan Stanley Global eCommerce Model......................................................................................................................... 143 3
  4. 4. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailExecutive Summary: Retail TransformedOver the past 15 years, eCommerce has evolved understand why Amazon Founder and CEO Jeff Bezosfrom what many people believed to be a convenient suggests “it’s still Day One” for eCommerce.novelty to the single largest contributor to retailsales growth. Exhibit 1 Morgan Stanley Global eCommerce Model:During the 1990s, eCommerce was dismissed as eCommerce still has a long runway for growth, evenperipheral, yet the category grew on a foundation of low in developed marketsprices. During the early 2000s, eCommerce was tolerated and eCommerce penetration of retail saleslargely ignored even as selection increased, with an ever-broadening set of product categories moving online. By the 0% 5% 10% 15% 20%mid-2000s, the disruptive effects were readily apparent, andboth retailers and consumers alike accepted eCommerce as a South Korealegitimate alternative to traditional retail.Today, we expect traditional retail sales disruption to be a USglobal trend that may actually accelerate over the nextfour years. UK 2016eThe conclusions in this Blue Paper are supported by an JapanAlphaWise survey, a global eCommerce model, and the 2012einsights of Morgan Stanley Internet and Retail analysts from Australiaaround the world. We have examined the structural drivers of 2008 9.3%eCommerce in the largest, most relevant markets and Global 6.5% 4.0%articulate actionable stock calls on best-positioned andpotentially challenged companies. We support our stock calls Chinathrough bottom-up analysis of local competitive dynamicsamong both online and offline participants, by region. Germany 1Global eCommerce sales, as defined by Morgan Stanley , Francewill surpass $1T in 2016. From 2008 to 2012, we estimateglobal eCommerce gained 250 bps of retail sales penetration, Russiaincreasing from 4.0% to 6.5%. Looking forward over the nextfour years, we forecast that eCommerce penetration will Brazilaccelerate with an increase of 285 bps to 9.3%, by 2016. Thisinflection will be driven by high-growth emerging markets such Argentinaas Russia and Latin America as well as the destabilization ofspecialty retail in developed markets, particularly within the ChileUS and Australia.For traditional retailers, there is both good news and bad Italynews. We expect eCommerce to continue to grow at aboutfour times the rate of traditional retail sales. Importantly, some Mexicotraditional retail categories, such as food, drug, club stores,softlines and branded apparel may be relatively protected Spainfrom the more damaging impacts of online distribution.However, we expect continued deterioration in areas such as Source: Morgan Stanley Research estimates, ComScore, Euromonitor, iResearch, NAB,media and electronics. At just 6.5% of global retail, we Quantium, US Census Bureau, and national statistics from the governments and various industrial bodies of the countries listed1 Morgan Stanley defines “Global eCommerce” as the sum of eCommerce sales in SouthKorea, UK, US, Japan, China, Australia, France, Germany, Russia, Brazil, Argentina, Chile,Mexico and Spain. 4
  5. 5. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailFive Key Conclusions: Where Does eCommerce Go from Here?1. Fulfillment infrastructure is critical Food retailers also have been relatively insulated from new eCommerce entrants, at least thus far. Amazon Fresh (inIn the long-term, scale wins, and the right fulfillment Seattle) and Fresh Direct (in New York City and Philadelphia)infrastructure is the means to achieve scale. Whether the are the only two eCommerce companies operating at any sortcustomer is driving to the store to pickup a web-based / shop of scale in the US. Amazon may be running Amazon Fresh atin-store order or the United Parcel Service (UPS) is providing a breakeven or low operating margin and Fresh Directnext-day delivery from a nearby fulfillment center, appears to work best where the company can achievemerchandise fulfillment is quickly becoming a key focus for sufficient route density to justify the fixed distribution costsboth traditional retailers and eCommerce players. against the contribution profit of orders. In the UK, Ocado has developed meaningful scale (it is now generating sales of $1BGlobal fulfillment networks are highly capital intensive. With a per annum) and is available nationwide, however, it still hasprojected total of 87 fulfillment centers around the world, yet to prove that it can generate attractive economic returns.Amazon operates the largest multi-node, one-to-one retail Consumers in Europe (particularly the UK and France) havefulfillment network currently in existence. We estimate clearly shown that they are interested in shopping online forAmazon has invested $8-10B in its fulfillment network, not groceries and our AlphaWise survey suggests a growingcounting planned upgrades and repairs. This represents a interest from US consumers in doing so in the future, but wematerial barrier to entry for would-be competitors. That said, believe that the existing, store-based, operators are best360buy in China, Rakuten in Japan and eBay (through its GSI placed to meet this demand.Commerce asset) in the US are all investing to offerindependent fulfillment services for their third-party Exhibit 2marketplaces. The question is whether or not these Books and consumer electronics have the highestcompetitors actually have the sustainable, core-competency online penetration, while groceries and homein fulfillment logistics necessary to fulfill global ambitions. improvement are among the lowest % bought online by global respondentsTraditional retailers are not standing idly by. Select traditionalretailers, such as Nordstrom and Marks & Spencer, are Books 53%building independent fulfillment centers to support their Consumer electronics 46%eCommerce initiatives. Others are utilizing their retail storeportfolios to fulfill customer orders, either through in-store Athletic apparel 42%pick-ups of items ordered online, or “true fulfillment” from Sporting goods 40%existing store inventory. Shoes 39%2. Some categories remain resistant to change Pet supplies 38%Branded apparel, food, drug, club stores, softlines, and homeimprovement retailers appear relatively impervious to Clothing 37%eCommerce disruption. Vertically integrated branded apparel Jewelry 36%companies, such as Coach, control both manufacturing anddistribution of their products. By operating a portfolio of full- Office supplies 36%price retail stores, outlet stores, and an eCommerce site,Coach can afford to be selective with its offline and online Auto parts 35%retail partners. Club stores, such as Costco, are relatively Home furnishings 31%immune due to their high-volume, low-SKU business model.By focusing on perishable consumables and low markups on Home improvement 29%bulk items, Costco is able to drive earnings growth throughincreased member growth and member fee increases while Personal care 28%maintaining high inventory turnover. Groceries 22% Source: AlphaWise, Morgan Stanley Research 5
  6. 6. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional Retail3. Third-party marketplaces can prosper Smartphone penetration is highest in the US and UK. Not-The success of owned-inventory eCommerce sites (“first surprisingly, eCommerce sales through mobile devicesparty,” or 1P) versus third-party marketplaces (3P) varies by represent 10-12% of all eCommerce purchases in thoseregion. The US and Western Europe have seen success in countries, which is at least 2-3x the rate for emergingintegrated eCommerce platforms, 1P+3P, dominated by markets. According to comScore, US mobile eCommerceAmazon, although eBay has re-emerged as a capable 3P- penetration has grown from 2% in 2Q10 to 10% in 3Q12.only competitor. While one could argue that selling owned eCommerce companies are beginning to disclose their owninventory alongside third-party sellers creates a conflict of smartphone eCommerce penetration. eBay, for example,interest, there are benefits to being a market maker. estimates about 13% of GMV will be purchased via aAmazon’s owned inventory business helps it set market smartphone in 2012, of which the company estimates 1/3 ispricing for third-party sellers. While this could mean lower incremental to desktop GMV. The company has alsoprofits on a unit basis for third-party sellers, it drives lower developed an app that simplifies the listing process, whichprices in the marketplace, which drives greater customer enables the company to gain traction with sellers, as well.adoption, leading to increased third-party sell-through. Exhibit 4In markets like South Korea, China and Japan, 3P continues comScore estimates 10% of eCommerce sales into lead. However, third-party marketplaces in these markets the US were made on a mobile devicetend to have an inability to bundle orders (meaning products US eCommerce ($B) Percentage Spent via Mobile Devicesare delivered from a variety of sellers) making it tough to $60 12%compete with owned inventory players on delivery speed and $50 10%consistency of experience. Therefore 3P marketplaces,particularly Rakuten, are aggressively investing in building a $40 8%fulfillment network. While MercadoLibre management $30 6%recognizes the value of offering fulfillment, the company doesnot have plans to do so in the near-term. $20 4% $10 2%4. Mobile eCommerce: A promising opportunity –for both online and traditional retailers $0 0% 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12While mobile can represent an extra layer of convenience, via Source: comScore, Morgan Stanley Researchthe ability to purchase anytime / anywhere, it can also havethe opposite effect, as 1) entering billing and shipping Mobile can also benefit traditional retailers. By equippinginformation can be cumbersome and 2) given smaller screen clerks with mobile devices, shoppers can speed upsize, the app must be highly intuitive. We believe larger purchasing by skipping the checkout line. It can also helpcompanies, with the resources to develop well-designed apps provide better inventory management when combined withthat integrate customers’ existing account information can technologies like radio frequency identification.generate incremental sales. 5. Scale / Brand: The big should get biggerExhibit 3Smartphone penetration by geography Traditional retailers benefit from legacy brand and storeSmartphone installed base as a % of mobile subscriber base footprint. Online retailers that can achieve scale (which is Smartphone penetration by region North America rare) benefit from brand awareness, effective online customer 74% service, and a more variable cost structure. The admittedly small number of instances of scale success, albeit with Western Europe 66% significant economic value creation, include Alibaba, Amazon, eBay, MercadoLibre, and Rakuten. Our scale / brand China conclusion is that online retail may ultimately have more 55% consolidated market share than offline retail favoring large Latin America 47% players. In this context, traditional discount retailers may be Eastern Europe best positioned to participate in the consolidation of specialty 37% retailers. Companies such as Costco and Walmart represent material distribution points for many global brands, and it may 05 06 07 08 09 10 11 12e 13e 14e 15e be difficult for eCommerce to disrupt the scale advantages ofSource: Company data, Gartner, IDC, Nielsen, Morgan Stanley Research larger, established traditional retailers. 6
  7. 7. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailFive Disruptive Forces Summary of Top Stock Calls Exhibit 5Consistent across our AlphaWise survey and geography-specific The companies listed below either exemplify – orresearch, we have identified five forces that have driven eCommerce lack – execution of the five disruptive forcespenetration. Best-Positioned US Internet1. Price Amazon Most disruptive force in eCommerce; continued share gainMany retail items are pure commodity products – consumers like to buy Blue Nile Leader in engagement; opportunity in non-engagement eBay Largest global marketplace; accelerating GMV growthsuch items at the lowest possible price. The Internet and smartphones US Retailhave taken price comparison to an entirely new level. Companies like Costco Highly defensible merchandising strategyAmazon have capitalized on the preference for low prices by working to Macys Industry-leading multi-channel sales strategybe able to afford to offer low prices over time on an ever-broadening Nordstrom Best in class operator with long-term growth initiativesvariety of products. Walmart Low price leader; build or buy stronger online positioning Williams-Sonoma Strong furnishing brands benefit from "showrooming"2. Selection Urban Outfitters Leading mobile / online initiatives; expect margin rebound Under Armour Expect 20%+ revenue growth from new sales initiativesOnline offers the opportunity for vast selection given there is no constraint Western Europe Retailof shelf space. The selection preference favors online, although offline ASOS Most visited apparel website in the worldretailers are now expanding their own virtual shelf space using their own Latin Americawebsites. MercadoLibre* Largest pure play eCommerce marketplace in LatAm3. Convenience Japan Internet Rakuten Largest eCommerce player in Japan; strong track recordOnline offers a level of convenience not available in offline retail, China Retailparticularly in the current environment of accelerated delivery programs. Belle Best-positioned to be leading specialty retailer in ChinaOffline retail has pushed back with initiatives such as ship-to-store to Intime Leading dept store chain with dominant market shareleverage store footprint. Sun Art Consolidating food industry; defensible from competition4. Distribution Potentially ChallengedOnline offers the ability for a merchant to gain global distribution in an US Retailinstant – it is not limited by the constraint of a store footprint. To be sure, Bed, Bath & Beyond Decentralized distribution; lacking eCommerce initiatives RadioShack Pressure from carriers / handset makers; strong competitiona store base heightens brand awareness, which has led to online Australia Retailaggregation points online. David Jones Highly exposed to online sales leakage due to high prices5. Cost structure JB Hi-Fi High exposure to consumer electronics Harvey Norman Minimal online presence; expected share lossTraditional retailers require stores, while online retailers require China Retailmarketing spend to become a destination. At scale, there are benefits Li Ning Focus on sportswear brand; lacks omni-channel strategyto online in that sales marketing efficiency leads to an overall lower *MercadoLibre is covered by Scott Devitt.cost structure than offline peers. Achieving scale is the difficult part. Source: AlphaWise, Morgan Stanley Research 7
  8. 8. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailSummary of Key Takeaways:United StatesInternet Key stock calls: Amazon, Blue Nile, eBay (best-positioned) 1. Over the next five years, logistics and fulfillment innovation should determine the level of disruption of traditional retail. 2. Structural and socioeconomic demographics determine the company-specific strategy an eCommerce retailer will have to lead with in a specific market; in the US, fulfillment is crucial. 3. Investments that improve an eCommerce retailer’s ability to offer low prices, broad selection and increased convenience will likely lead to higher sales growth, albeit at a potentially lower margin.Retail – Hardlines Key stock calls: Williams-Sonoma (best-positioned), and Bed Bath & Beyond and RadioShack (potentially challenged) 1. eCommerce penetration for the consumer electronics category is high (47%), and likely to keep increasing. 2. About 30% of home furnishings buyers shop online. Williams-Sonoma is well-positioned (33% of total sales online) while Bed Bath & Beyond is not, given 1% of revenue online, decentralized distribution, and high skew of branded, easily price-comparable products.Retail – Branded Key stock calls: Under Armour (best-positioned)Apparel 1. As brands control their own distribution, they remain largely insulated from typical pressures from pure online competition. 2. eCommerce provides a key means to enter markets internationally and elevate brand awareness with new users.Retail – Softlines Key stock calls: Macy’s, Nordstrom, and Urban Outfitters (best-positioned) 1. A secular shift towards eCommerce has compelled apparel retailers to develop, expand, and enhance their online platforms. 2. Softlines retail is one of the most defensible retail categories against online-only competition.Retail – Food, Drug Key stock calls: Costco and Walmart (well-positioned)and Discounters 1. Costco and the club stores can still thrive due to low prices and focus on perishables that are not easy to ship. 2. We believe Walmart has the potential to become a global leader in eCommerce sales, due to its buying power and ability to buy or build its way to a stronger competitive position. 8
  9. 9. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailWestern EuropeRetail Key stock calls: ASOS (best-positioned) 1. Online penetration varies significantly across Western Europe. About 15% of non-food sales and 5% of food sales now occur online in the UK (one of the highest rates in the world), but in Southern Europe, online spending remains minimal. 2. "Click and Collect" services are proving very popular in both the UK and France, though it is not yet clear whether this is merely because these services are offered for free by most retailers. 3. The impact of the online shopping revolution in the UK goes well beyond the retail industry. It is beginning to have a profound impact on the property industry and, increasingly, on the very fabric of society.Latin AmericaInternet and Retail Key stock calls: MercadoLibre (best-positioned) 1. Growing middle class penetration should drive future eCommerce growth. 2. Price and convenience have been the main drivers of adoption so far; shipping, payment terms, and security can drive further growth. 3. High penetration of high-ticket electronics/appliances currently but significant room for growth in new lower-ticket categories. 4. Traditional linked retailers dominate eCommerce space in Brazil; core customers vary significantly by site. 9
  10. 10. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailChinaInternet Key stock calls: None 1. We believe eCommerce in China will continue to benefit from increasing domestic consumption and higher online shopping penetration. 2. eCommerce currently represents about 5% of China’s total retail sales. Compared to the developed countries (10-12% for US and UK), China is relatively underpenetrated and has significant room for upside. 3. As B2C marketplaces enjoy higher scalability, broader product selection, and wider customer bases, they should continue to gain traction and share in China’s eCommerce market. 4. Chinese eCommerce leaders are enjoying robust market expansion but suffer from weak margins because of intense competition, lack of scale, and large investments in customer acquisition and fulfillment capacity.Retail Key stock calls: Belle, Intime, Sun Art (best-positioned); Li Ning (potentially challenged) 1. A higher level of offline market concentration translates into a higher risk of disruption from online players. The sub-segments from highest to lowest risk in China are consumer electronics (highest), department stores (medium), and hypermarkets (lowest). 2. The key challenges for a majority of eCommerce players in China are lack of scale, lack of differentiation, and a fast pace of cash burn, potentially leading to multiple years of losses and multiple rounds of fundraising. Therefore, offline players that are well-capitalized with strong cash flow generation have ample means to invest in their online operations to take part in the eCommerce growth. 3. Brands that control their retail channel by operating their own stores and efficiently managing inventory appear well-positioned to capture share in the eCommerce channel. 4. Marketplace focus: Unlike the US, about 80% of eCommerce market share in China is dominated by a marketplace-driven ecosystem. This creates retailing complexity and conflicts for brands that adopt a multi-layer wholesale business model to distribute their products. 5. “Smarter” shoppers: We believe retailers and brands in China will focus more on mobile than pure online. 10
  11. 11. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailRussiaInternet Key stock calls: None 1. Russia’s nascent eCommerce sector is approaching a tipping point, with penetration increasing from 2% to 5% of retail sales by 2016. 2. Key drivers are increasing broadband penetration and credit card usage. Distribution remains the major barrier to growth. 3. A vibrant local eCommerce ecosystem is emerging, with search, classifieds, payments, and key eCommerce verticals such as Fashion and Travel. 4. Market leader Ozon is among the fastest-growing and dynamic private eCommerce companies globally.AustraliaInternet Key stock calls: David Jones, JB Hi-Fi, Harvey Norman (potentially challenged) 1. eCommerce has permanently reshaped the retail landscape in Australia through greater price transparency and access to global retailers. A trend unique to Australia is the large amount of offshore buying, given lower pricing relative to local retailers. 2. We expect continued solid growth for eCommerce, given the relatively low starting point and high retail cost base (labor and rent), leading to ongoing price differentials. 3. Non-food retailers are potentially challenged (JBH, HVN, DJS, and MYR). Conversely, supermarkets (WOW, MTS, and WES) appear least vulnerable to market share loss to eCommerce competition.JapanInternet Key stock calls: Rakuten (best-positioned) 1. Robust eCommerce growth amidst stagnating retail sales highlights the attractive dynamics of the eCommerce market in Japan. 2. Rakuten and Amazon are the dominant eCommerce players and are poised to continue taking market share from offline retail players. 3. Marketplace business models, such as Rakuten and Yahoo! Japan, are aggressively investing in logistics and fulfillment to compete with hybrid market-maker / marketplace models, such as Amazon. 11
  12. 12. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailKey AlphaWise Conclusions1. Pursuit of “value” and “convenience” is universal Currently about 90% of online orders are fulfilled via deliverymotivation that continues to drive eCommerce to a home or work address. Although in some markets manyOf the 6,000+ online shoppers we surveyed across eight online shoppers have had the experience of ordering onlinemarkets, 49% think the top reason to shop online is “it’s and picking up in stores (UK 39%, US 33%), only one in fivecheaper,” while 34% think it’s “to save time” or the ability to globally would prefer in-store pickup to delivery.“shop from anywhere at any time.” Return/exchange is an area where stores leverage theirSimilarly, the formula for success as an online retailer is physical presence. One of the biggest obstacles tolargely the same across markets – “low prices,” “broad eCommerce everywhere is the notion that it is easier to returnselection,” “easy to use website,” and “free shipping” are the products if bought in stores. Consumers overwhelminglytop reasons consumer pick their “favorite” online retailers. (75%) prefer not having to pay shipping for return/exchange. Sixty-two percent would buy online more often if they couldConsumers’ quest for cost-/time-saving will continue to propel return or exchange products at a store.eCommerce – 65% of online shoppers feel it is increasinglymore advantageous to buy most products online. 5. Category vulnerability varies by market2. In emerging markets, eCommerce needs to close the Books have the highest online penetration among over a“trust” gap dozen product categories in all but three emerging markets: ,Consumers in emerging markets are much more likely than Brazil, China, and Russia.their counterparts in developed markets to mention lack of Consumer electronics (CE) is also highly penetrated acrosstrust as an obstacle to buying on line, such as in the security all markets. Interestingly, a higher percentage of emergingof online payments (32% in EM vs. 27% in DM), online market CE buyers bought online than those in developedmerchants (23% vs. 14%), quality of online merchandise markets (66% EM vs. 55% DM).(21% vs. 12%), or worry-free shipping (24% vs. 9%). Inemerging markets this “trust gap” outweighs lack of credit Buying apparel is immensely popular in China. In the last 12cards (15%) or “delivery takes too long” (17%). months, 91% of urban mass-affluent Chinese consumers bought clothing online. And among shoe buyers, 82% bought3. Consumers want “free” shipping more than “fast” online; for athletic apparel, the figure was 73%.shipping While groceries remains one of the most insulated categories,Globally, 80% of online shoppers would choose the cheapest many consumers in densely populated markets have begunshipping options, while just 22% are willing to pay more for experimenting with online buying (44% in Japan, 29% in UK).faster shipping. Free shipping is already ubiquitous indeveloped eCommerce market such as the US and UK, andwe expect it to become standard elsewhere, as theoverwhelming majority in all markets surveyed (86%) think Core Questions for Evidence Researchthey would buy more online if retailers offer free shipping.  How are consumers shopping online today?“Same day shipping” seems to have limited appeal in  How do consumer attitudes toward online shopping differ?developed markets, but interestingly could be a strong  Which categories are more vulnerable to online threat?stimulant for eCommerce in emerging markets, which stillbattle the “trust” issue. What Gives Us Confidence  In Oct-Nov 2012, we conducted an online survey of 8,000+4. Physical stores can be a strategic asset in an omni- consumers in 8 countries. The survey sample is representativechannel retail world of the 18+ population by gender, age, geography and income inThe success of the Amazons of the world proved that the Australia, Germany, Japan, Russia, UK and US. Respondents in Brazil are a national sample of online consumers from the A,absence of physical locations is not a handicap and B & C socio-economic classes, and in China, online consumersconsumers can be “channel-neutral” so long as their need for from 14 Tier 1&2 cities with above-average education andvalue, convenience, and selection is met. Not surprisingly, income. At about1,000 sample size, conclusions based on the total sample of each country have a maximum margin of erroropinions are divided on the importance of physical stores – of +/- 3% at 95% confidence level.35% prefer buying online from retailers with brick-and-mortarpresence, while 23% prefer online-only stores. 12
  13. 13. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailMORGAN STANLEY BLUE PAPEReCommerce Disruption: A Global ThemeSegment Analysis by Region 13
  14. 14. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailUS InternetScott Devitt – while comparable traditional retail sales haveAndrew Ruud grown at just 4% over the same period. eCommerceZachary Arrick outperformance has led to significant market shareNishant Verma growth from 2% to 11%, over the same 12 year period. eCommerce market share gains are a result of both structuralExecutive Summary / Key Takeaways and traditional retail industry-specific factors that have allowedBest Positioned: Amazon, eBay, and Blue Nile eCommerce companies to evolve their business models around driving efficiencies and customer service.1. Over the next five years, logistics and fulfillment innovation will determine the level of disruption of traditional retail; Amazon is best- The US has specific structural characteristics that have positioned to breakaway from competing traditional retailers and allowed traditional retail to thrive eCommerce players that do not have a vertically integrated The US consumer may be the single most influential customer fulfillment network. demographic in the world. She has disposable income, access to consumer credit, is relatively well educated and has2. Structural and socio-economic demographics predetermine the the luxury of optionality and choice. Most importantly, the US company-specific strategy an eCommerce retailer will have to lead consumer is ubiquitous, living not only on the East and West with in a specific market; in the US, fulfillment is crucial. coasts but also in Middle America. This has had a significant3. Investments that improve an eCommerce retailer’s ability to offer low impact on the evolution of the contemporary traditional retail prices, broad selection and increased convenience will likely lead to strategy. higher sales growth; albeit at a potentially lower margin. Amazon has traditionally led the way – so far there has been no proof of any Exhibit 7 competing eCommerce or traditional retailer that is willing to do so at The US economy is the largest in the world at 22% that level. of global GDP… US 22%Exhibit 6 China 10%eCommerce penetration continues to grow steadilyand appears to have a long runway to go Japan 8% eCommerce penetration: (US$ tn) 2.0 12% Germany 5% 10% France 4% 1.5 8% Rest of World 51% 1.0 6% Source: World Bank 4% A large economic GDP in and of itself does not signify a 0.5 large potential traditional retail opportunity 2% Large GDP economies certainly have the greatest potential 0.0 0% also to be large markets for consumer consumption. Global Sep-00 Mar-02 Sep-03 Mar-05 Sep-06 Mar-08 Sep-09 Mar-11 Sep-12 GDP is highly concentrated among the top five GDP Adj. Retail Sales eCommerce Sales eCommerce Penetration economies. Unsurprisingly, these top five economies are alsoSource: US Census Bureau, Morgan Stanley Research often cited as key retail markets for global brands and retailers.Over the past 12 years, eCommerce salespenetration of traditional retail sales hasexperienced a compound annual growth rate of 20% 14
  15. 15. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailExhibit 8 Exhibit 10…and the US also derives the greatest proportion US household wealth is higher in smaller cities /from household consumption, relative to peers towns, where population density is lower 2010 Household expenditures / GDP Average median household income by city population 80% 56,000 54,000 60% 52,000 40% 50,000 48,000 20% 46,000 0% 44,000 US Japan France Germany China Straight WeightedSource: US Census Bureau, OECD and World Bank Below 500K Above 500K Source: US Census BureauHousehold consumption expenditures drive traditionaland eCommerce sales The retail opportunity is “Middle America,” whereThe US leads all major global economies in terms of gross populations are lower and so is population densityhousehold consumption as a percentage of GDP. This Most developed economies, outside of the US, havecoupled with the fact that the US is the largest global GDP demographics that are higher in both population density aseconomy in the world, is precisely why the traditional retail well as urban household expenditures vs. non-urbansales opportunity is so large. We believe that emerging household expenditures. Therefore, the obvious internationalmarket economies have substantial upside to grow household eCommerce opportunities are typically in developed countriesconsumption as middle-class demographics evolve. where population density is high, total household / personal consumption expenditures is large and household / personalExhibit 9 consumption expenditures per capita is high. The US isThe vast majority of the US population does not live unique in that its middle-class demographic residesin areas of high population density throughout the country. This results in “Middle America” being Density per sq. mi. as % of total population a crucial component to the growth strategy for any retailer. As 12,000 the preceding exhibit indicates, household income in population centers below 500,000 people is actually higher 10,000 than those above 500,000 people. 8,000 Exhibit 11 6,000 Building a mass-market retail presence requires a 4,000 large store portfolio Average US store count 2,000 4,784 4,515 0 5% 10% 15% 20% 100%Source: US Census Bureau, World BankThe US is unique in that it is the largest economy in the 2,334 2,004world but has low population density 1,611Most large, global economies leverage population density into 1,166 1,111 993high levels of worker productivity and therefore cost-adjustedoutput. The US is unique in that its consumers reside all 84across the country, which weighs negatively on population Drug/ Auto Broadlines Home Hardlines Grocery Softlines Dept. stores Luxurydensity. Vitamin parts improvement Source: Company Data, Morgan Stanley Research 15
  16. 16. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailTraditional retailers must invest significant resources in expansion of the middle-class’ broadband connectivity hasorder to address the fragmented US population accelerated the secular transition of traditional retail toIn order to reach critical mass and address the entire US eCommerce.population, traditional retailers must either invest massiveamounts of capital to build out a store base or finance off- Fulfillment assets, while not cheap, are relatively lessbalance sheet operating leases. With very few retailers expensive as compared with retail storefrontsowning a substantial portion of their stores, rent and We estimate that a fulfillment center may cost about $30 peroccupancy costs represent sizable expenses for most square foot to buy / build the housing. We estimate that anretailers. Physical store footprints create a unique opportunity Amazon fulfillment center of 1MM square feet would requirefor eCommerce businesses since they can leverage $75-100MM for automation equipment. Despite $100-130MMcentralized inventory management in fulfillment centers to build out a fulfillment center, we believe companies such asinstead of incurring the large fixed costs associated with the Amazon are able to optimize the fulfillment asset andrent and occupancy expenses. For US department stores that generate higher inventory velocity as well as manage itspay very little rent expense, we believe eCommerce payable terms better to generate a higher cash return on thecompanies have inventory management advantages. cash investment.Structurally, the domestic eCommerce retail channel also Freight forwarding / logistics are at least partiallyenjoys favorable characteristics subsidized by the Federal and state governments.eCommerce consumers tend to be of a higher income The US is fortunate to have a strong infrastructure of roads asdemographic. On the back-end, the US still offers relatively well as commerce-friendly regulatory bodies that oversee bothlow-cost land and buildings to develop a fulfillment network. the rails and aviation space. These strengths allow freightFinally, states bear the burden for public infrastructure; the forwarders such as FedEx and UPS to operate at peakFederal Government subsidizes the US Postal Service and efficiency. Additionally, the Federal government oversees thethere are two very reliable, global freight forwarding / logistics US Postal Service, which is also leveraged by eCommercecompanies in FedEx and UPS to deliver eCommerce companies.packages. eCommerce was born out of inefficiencies in theExhibit 12 traditional retail channelBroadband penetration and household income By exploiting these inefficiencies and developing customer-distributions are at parity centric innovation by providing low prices, broad selection and Distribution of broadband users and households by income increased convenience, eCommerce was able to disrupt the 100% status quo. 80% Centralized, fulfillment-based inventory allows for an almost infinite selection of merchandise 60% $100K+ Wide product selection allows mass-market adoption by $75-100K $25-75K providing “something for everyone”. This, in turn, usually 40% $15-25K drives incremental sales volume as customers visit first to buy 20% $0-15K a specific product but then stay and shop for other items due to the breadth of selection. Discount retailers such as Walmart 0% and Target leveraged this selection-based business model Broadband users US households and incrementally built upon it when they expanded intoSource: US Census Bureau, Morgan Stanley Research grocery. Wide selection, however, usually implies high levels of inventory holdings. The leaner a company can run itsThe primary demographic responsible for the majority of inventory, the lower risk it takes on any given stock keepinghousehold expenditures now also has broadband unit (SKU) and the broader the selection of SKUs theconnectivity company can offer. The biggest problem a traditional retailerFrom 2004 to 2011, broadband penetration of households faces is that each store must carry the full line of merchandisewith income of $75K+ has more than doubled. During that or it risks losing the sale to a competitor. An eCommercesame time-period, broadband penetration of households with company, however, effectively has only its fulfillment centersless than $75K grew less than 50%. We believe the to stock (assuming each carries the same merchandise, 16
  17. 17. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional Retailwhich is often not the case). Amazon operates the largest Exhibit 14domestic fulfillment network, by far, totaling 30-35 fulfillment Amazon’s working capital spread, measured incenters. By comparison, the average discount retailer has days, has been extremely stable for over 15 years Inventory vs. payable days (through Sep-12)about 2,000 stores. 80Exhibit 13 70Amazon’s centralized inventory appears to drivemore efficiencies vs. Target’s decentralized model 60 Payable Inventory turnover (through FQ3:2012) 50 days 45x 40 40x 30 35x Inventory 20 days 30x 25x 10 20x -- 15x Dec-97 Jul-99 Feb-01 Sep-02 Apr-04 Nov-05 Jun-07 Jan-09 Aug-10 Mar-12 10x Source: Company Data 5x Amazon has negotiated favorable payment terms, --x 1997 1999 2000 2002 2003 2005 2006 2008 2009 2011 offsetting the inventory-related “growing pains” Amazon Target Despite inventory turns declining over time, it is apparent thatSource: Company Data, Morgan Stanley Research the company does not necessarily manage to working capital metrics, but rather to a level of operating risk management.Amazon has enjoyed high inventory velocity over time, For over 15 years, Amazon has consistently managed itsbut “growing pains” are evident cash conversion cycle to a negative 30 days. We believeIt is difficult to argue against Amazon’s ability to drive investors and business operators alike would be hard-pressedinventory management efficiencies through its fulfillment to find another example of such a stable cash conversionnetwork. The chart above compares Amazon to one of the cycle for over 15 years, given the level of growth the companymore efficient discount retailers in the US, Target. One cannot experienced in that timeframe.help but notice the degradation in inventory turnover throughthe course of Amazon’s reported history. We do not believe eCommerce is not limited to owned-inventory models;this is in and of itself a bad thing; in fact, we see this as a third-party marketplaces also succeednatural side effect of the company growing into a broader set It is economically impractical for an eCommerce retailer toof product verticals. Going forward, we expect Amazon’s always have every SKU in stock. A third-party marketplaceinventory turnover to stabilize or even inflect upward as the allows an eCommerce company to “carry” an infinitelycompany continues to build fulfillment centers closer to the scalable selection of merchandise and may operate as aend-customer. standalone business in the case of eBay or a complementary business in the case of Amazon.Best-in-class eCommerce retailers tend to generate cashthrough negative cash conversion cyclesBecause of their relatively fewer fulfillment centers (vs. retailstores) and the benefits of centralized inventory, eCommerceretailers have the opportunity to generate very high levels ofinventory velocity while maintaining comparable paymentterms to those of a traditional retailer. If managed correctly,this can generate a positive cash float that increases so longas sales growth continues and the spread between inventoryand payable days stays negative (days inventory, minus dayspayable). 17
  18. 18. MORGAN STANLEY RESEARCHJanuary 6, 2013eCommerce Disruption: A Global Theme – Transforming Traditional RetailExhibit 15 Exhibit 16Amazon’s growth in third-party units allows more Amazon has lower owned-inventory merchandiseprofit dollars to be invested into first-party growth gross margins than Target and Walmart TTM first-party / third-party paid unit mix (bn) Comparable merchandise gross margins 3.5 35% 3.0 3P Units 30% 1P Units 2.5 25% 2.0 20% 1.5 15% 1.0 10% 0.5 5% -- --% Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- 02 03 04 05 06 07 08 09 10 11 12 TGT WMT AMZN 2009 2010 2011Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley ResearchCombined with its owned-inventory, Amazon’s third-party Amazon’s primary strategy for taking market share frommarketplace significantly extends selection traditional retailers is leading with low pricesAmazon’s third-party marketplace plays two important roles We find the preceding exhibit particularly telling as groceryfor the company. 1) The marketplace backfills SKUs that are constitutes 19% and 55% of Target and Walmart’s sales mix,inefficient to sell through the company’s owned-inventory while Amazon provides grocery only in Seattle, Washington.business, as well as SKUs that are temporarily out of stock. 2) Amazon does not employ an everyday-low-pricing strategy,Amazon realizes marketplace revenue on a net fee basis and however. The company is very mathematical in pricing itstherefore has very few direct costs associated with generating merchandise and scrapes other websites as well as monitorsa marketplace sale. This allows the company to generate unit sell-through at the SKU level. Amazon sets pricing withprofit dollars that enable it to subsidize lower prices and more such precision that other retailers, both eCommerce andconvenience (better shipping terms) for Amazon’s first-party traditional retail, actually calibrate their pricing to be in linecustomers. with Amazon pricing in order to stay competitive. For this reason, we often think of Amazon as the market maker forLow prices usually win retail sales retail pricing.Any consumer will tell you that paying less for a product is toppriority. eCommerce businesses do not have physical product eCommerce only works if the overall level of conveniencedisplays nor do they have a friendly sales associate who can is higher than shopping in-storedemo a product in real-time with a prospective buyer. For this Shopping in-store has its benefits, including being able toreason, they must win the customer over by leading with low physically see and touch as well as ask questions about theprices. In our AlphaWise survey, lower online pricing was the product and the instant gratification of being able to walk outmost frequently cited reason for shopping online (41% of of the store with the product immediately. The bar for qualityrespondents placed it in their top three). of experience is set rather high for an eCommerce company to win the sale, especially if the company does not have a price or selection edge. To meet and exceed consumer expectations, eCommerce retailers have invented numerous ways of reducing transaction friction. Some key examples include Amazon’s well-known “Buy now with 1-Click” button, Amazon Prime, the company’s two-day shipping subscription, eBay’s integration of PayPal, real-time shipment tracking, free return shipping (case-by-case basis), and product recommendations. 18

×