Online shopping

Thematic periods: the centuries-old transition to online shopping continues

E-Trade growth has been a cross-industry trend for several years, growing alongside internet/mobile use and supporting a global push towards faster, on-demand access to goods and services. But as e-commerce sales begin to normalize to more sustainable levels, e-commerce stocks felt pressure in 1Q22 against nearly two years of strong competition. Combined with negative sentiment toward the technology and broader internet sectors, inflationary cost pressures (e.g. fuel, shipping, wages) contributed to the index’s 35.2% plunge S-Network Global E-Commerce (ECOMX) since the beginning of the year. Despite weak stock prices, data from early 2Q22 suggests that e-commerce sub-sectors continue to gain market share and e-commerce jobs are increasing, suggesting that long-term demand for e-commerce could eventually outweigh these short-term pressures.

Overall e-commerce demand and sales are still relatively strong.

The United States Census Bureau released its 1Q22 retail e-commerce sales report on May 19, and the results generally supported 1Q22 management’s comment that e-commerce growth rates were slowing, but remained strong in absolute terms compared to pre-pandemic quarters. U.S. e-commerce sales grew 6.6% year-on-year, on top of growing 46.7% in 1Q21 and 20.0% in 1Q20. As a percentage of total retail sales, e-commerce fell slightly to 14.3%, which was still well above the 10% range seen throughout 2019. Additional data from Mastercard’s Spending Pulse provides similar insights after 1Q22 in the current quarter. In April, e-commerce growth fell 1.8% year-on-year compared to in-store sales which rose 10.0%. However, compared to April 2019, e-commerce sales increased by 92.0%, while in-store sales only increased by 5.2%.(1)

Most e-commerce segments have maintained or increased their share compared to physical sales.

Although the former chart is more widely used, the US Census Bureau also provides segment-level detail (less widely used) on an unadjusted basis. Since the data is not adjusted for seasonal trends, Q4 e-commerce market share is often higher due to disproportionate online shopping during the holiday season, particularly evident in apparel and general merchandise. Comparing the first quarter data with the fourth quarter data often looks more negative than it actually is, but when comparing the first quarter of 22 to the historical first quarter data, it is evident that most e-commerce segments maintain or increase their market share relative to in-store sales.

Recent cost inflation has exceeded the remaining strength of e-commerce.

Across all components of the ECOMX index, sales revenue was not significantly impacted as lower demand was partially offset by higher unit revenues. But retailers and online marketplaces have felt increased pressure from shipping and transportation costs. For example, Carvana (CVNA, 0.4% index weighting) sold 13.8% more units in 1Q22, while revenue increased significantly (up 55.8% YoY annual) due to rising prices for used vehicles. Despite higher revenues, gross profit per unit declined 20.4% year-over-year due to higher shipping costs resulting from supply chain inefficiencies, Omicron and severe weather events.( 2) Rising shipping costs for shipping companies have been attributed to higher cost inflation, especially fuel prices. On June 7, Western Railroad Union Pacific (UNP, index weighting 1.8%) announced that while margins are expected to improve further from last year, margins are likely to fall in below previously announced forecasts. But these cost pressures are generally short-term in nature, and logistics companies continue to hire employees, particularly in the last-mile space, contributing to a strong long-term outlook. Preliminary figures show that e-commerce related logistics jobs, such as couriers/couriers and warehousing, rose sequentially in April and May, even after modest demand data in the first quarter.

Conclusion :

Although cost issues and demand normalization have contributed in part to recent weakness in the e-commerce sector, long-term demand fundamentals are still relatively strong. E-commerce demand is still generally positive compared to pre-pandemic levels, and going forward, moderate levels of growth should be more sustainable and more manageable for e-commerce businesses. Even though evidence shows e-commerce growth slowed in 1Q22, data from early 2Q22 shows spending is still well above 2019 levels and supply chains continue to hire.

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[1] Mastercard SpendingPulse

[2] Carvana 1Q22 Letter to shareholders

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