Investing in the Future of Shopping: Where Are the Opportunities?

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In today’s Money Morning…how we shop is changing…word from the street…logistics of online shopping…cautionary tales: Peloton and Kogan…online shopping and the rise of big data…and more…

What is the future of shopping?

And what are the knock-on effects for us as consumers…and investors?

We all know online shopping is big. The pandemic only made it bigger.

5.5 million Australian households shopped online in January this year. Signs suggest engagement with online shopping will remain strong throughout 2022.

But how big will online shopping get? And how permanent is the shift to online?

How we shop is changing

This month, Australia Post released its eCommerce Industry Report, an in-depth study into consumer online buying behaviour.

With 9.2 million households now shopping online, the report found ‘it’s evident the pandemic has changed the way we shop, and new habits formed over the past two years are now firmly ingrained.

In 2021, an average of 5.4 million households bought online each month — up 39% from 2019.


Source: Australia Post

[Click to open in a new window]

Australians spent $62.3 billion on online physical goods in 2021, representing a 19.3% share of total retail sales.

But while total retail sales rose 4.3% year-on-year, online sales rose 23.4%.

The growth rate disparity will likely persist. The Australia Post report suggested:

Looking ahead, we expect online shopping to continue to grow much faster than physical retail. It’s clear Australians have grown to love the ease and convenience of buying online and are likely to continue doing so regularly throughout 2022.

Word from the street

Let’s consider a few retailers and their approaches to online shopping.

After all, no one has a bigger incentive to keep abreast of changing shopping habits than retailers.

What are they seeing…and doing?

Take Myer Holdings [ASX:MYR]. The iconic — but heretofore struggling — brick-and-mortar retailer.

Myer stock has been declining for over a decade and is down more than 50% in the last five years.

But looming extinction is energising. Myer adapted.

In its latest half-yearly results, published in March, Myer reported total sales growth of 8.5%.

Not bad.

But online sales outperformed, rising 47.5%.

Myer ended the half with a net profit after tax of $32.3 million, 55.2% higher than the prior year (adjusted for JobKeeper).

And its Return on Equity went from a measly 5.6% in FY19 to 23.2% in FY21.

Myer is pivoting to online…and profiting.

Just this February, the retailer announced it would shutter its Blacktown store in Sydney as part of its consolidation project.

The Blacktown store will be the fifth store Myer has closed since 2019.

Myer’s online sales now represent 27.9% of total sales, with the retailer setting its sights on reaching $1 billion in annual online sales ‘in the near term’.

The success of Myer’s tilt to online led CEO John King to say:

Our online business has grown nearly fourfold in the past four years and is now one of the biggest online retail businesses in the country. In key categories, our growth is significantly outpacing competitors, both multichannel retailers and online pure plays.

Electronics retailer JB Hi-Fi [ASX:JBH] is another example.

JBH is investing in online, upgrading its websites and distribution centres.

In its 1H FY22, JBH reported online sales were up 62.6% to $1.1 billion, representing 22.7% of total sales (HY21: 13.7%).

But going online isn’t a breeze. It invites its own challenges.

Logistics of online shopping

The great online migration is creating new customer expectations — and the related logistical hurdles.

As Australia Post noted in its eCommerce report:

A great end-to-end customer experience is paramount to growing and maintaining a loyal customer base. Retailers need to know every detail of their products and provide thorough information, supported by images, video, or even virtual reality. A variety of payment options, competitive shipping and a range of delivery choices are also essential, providing customers with the flexibility they’re seeking.

Online shopping is popular because it is convenient.

But a consumer’s convenience is a retailer’s challenge.

The popularity of online shopping hinges on retailers hauling goods from warehouses to fulfilment centres to consumers quickly and efficiently.

But that’s not easy, especially today.

Managing supply chains will be crucial in the years ahead as sales migrate online.

And we are already seeing sellers switch from just-in-time supply chains to just-in-case ones.

As the Australian Financial Review wrote last week:

For example, a just-in-case supply chain means holding more stock. But that stock needs to be stored somewhere, and with industrial property vacancies running at just 1 per cent, warehouse rents are on the rise.

These cost and capacity issues are compounded by customer demands for faster delivery, forcing companies to get creative in finding solutions to what is being called the “middle mile” logistics challenge. Some are using existing stores as rapid fulfilment centres for online orders, while others are partnering with delivery aggregators.

The rise of online shopping is coinciding with a rise in warehouse rents…and people are noticing.

Last week, The Wall Street Journal ran a story on how the current supply chain crisis is ‘great for warehouse stocks.

Globally, freight shipments are arriving late at record rates, so companies are holding more stock to prevent missing out on sales.

But storage comes at a cost.

The WSJ reported that ‘big logistics landlords think inventories will eventually settle 10% to 15% higher than pre-pandemic levels.’


Fat Tail Investment Research

Source: Wall Street Journal

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Cautionary tales: Peloton and Kogan

Pivoting online may bring new logistical challenges.

But retainers will also have to face traditional problems associated with sales, demand, and inventories.

Consider the cautionary tales of Peloton and Kogan.

As a Bloomberg piece on Peloton’s post-pandemic troubles noted:

By the beginning of 2022 … Peloton was finally making enough bikes to meet pandemic-era demand. The only problem was that pandemic-era demand was now gone. In January, CNBC reported that the company had such a glut of inventory it was pausing bike and treadmill manufacturing for several weeks. In a note on the company website, Foley denied the report but conceded that Peloton was “right-sizing our production.”

Peloton was still growing; it just wasn’t the wild growth Foley had aimed for.

It was a similar story for Kogan.com [ASX:KGN], which could not repeat the pandemic-driven sales of FY20 in FY21 and saw profit plummet and inventory rise.

As The Sydney Morning Herald reported:

Kogan.com’s alarming 87 per cent collapse in full-year profit was, in large part, the result of a wrong call about the future consumer demand.

Having experienced a massive lift in 2020 on the back of the glut of online shopping, Kogan.com overestimated future levels of demand and loaded up on stock, which left it with an inventory problem.

That issue then snowballed, as sourcing that additional inventory fed into ballooning logistics and warehousing costs, which then ate into profits. The need to get rid of the bloated inventory required Kogan.com to discount stock, which in turn sliced margins.

Even though we’ll conduct more shopping online, it doesn’t mean we’ll buy more of every product simply because it can now be found online.

Retailers will still have to grapple with customer preferences for particular products, even if they satisfy consumers’ payment preferences — online, in-store, click and collect, etc. 

Online shopping and the rise of big data

As we make more purchases online, we also grant sellers something of potentially greater value than the money we part with…

Information.

Our buying history contains revealed preferences savvy online retailers can leverage to target us with tailored products, discounts, or promos.

Information is the digital gold of the 21st century.

Ben Gilbert, head of Australian research at Jarden Australia, told a special conference earlier this month that comprehensive databases are ‘becoming the most valuable currency in retail’.

But this digital gold needs mining and processing. 

Artificial intelligence, machine learning, big data, statistical analysis, algorithms…

Online shopping has kicked off an information technology arms race.

Lines of code are now legitimate weapons against online retailers’ rivals.

Kogan itself often quips it is a statistics company masquerading as an e-commerce firm.

As Amanda Bardwell, managing director of Woolworths’ digital arm WooliesX, said this week:

How we bring our offers to life for customers in a personalised way has taken a massive amount of investment in data science, AI and machine learning.

There’s also a big focus on automation, particularly for e-commerce so we can more efficiently serve that immense volume that we’re now seeing.

We are incredibly fortunate to have so much data, but we’re really focused on how we get it to be insightful and actionable, so that it really matters for customers in the moments that matter most to them.

Which retailers will have the best actionable data insights? And will these retailers come out on top and consolidate market share?

Will retailers launch proprietary programs to assess consumer preferences? Or will retailers outsource this work to intermediary tech firms offering data analytics services?

As online shopping habits solidify, more resources and brainpower will come on board to shape the answers to these questions.

Nothing is certain, but technological advancements coupled with the rise of online shopping will likely impact the retail industry — and the concomitant supply chains — in a major way.

Regards,

Kiryll Prakapenka,
For Money Morning

About Kiryll Prakapenka

Kiryll Prakapenka is a research analyst focusing on investigating the biggest trends in investments. Kiryll brings sound analytical skills to his work, courtesy of his Philosophy degree from the University of Melbourne. A student of legendary investors and their strategies, Kiryll likes to synthesise macroeconomic narratives with a keen understanding…

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