E-COMMERCE BACK ON THE STARTING BLOCKS

STOCK MARKET ANALYSIS

The e-commerce sector experienced a real boom at the start of the Covid-19 pandemic. Between the correction in March 2020 and the peak in 2021, e-commerce and Internet stocks posted a stratospheric performance (see Chart of the week). With economies reopening and interest rates rising, the sector has seen its biggest correction since the dot com bubble burst 20 years ago. The similarities end here. Today's players are multinationals, with billions in sales and profits thanks to their size and economies of scale.

▪ The sector continues to expand inexorably

Online sales are experiencing strong growth worldwide, fuelled by increasing internet penetration, technological advances and changing consumer preferences. E-commerce was worth more than $5trillion in 2021 and could approach $8 trillion by 2026 (see Fig.2). It is growing at a slower rate than during the pandemic period, but represents an increasingly large share of total retail sales worldwide.By the end of this year, e-commerce will account for one in five sales (see Fig. 3).

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Fig. 2 - Growth (%) and E-commerce sales (bn$)

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Fig. 3 - E-commerce penetration

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However, the explosive growth experienced by the sector during the Covid-19 pandemic was accompanied by a sharp reduction in profit margins. Online retailers have had to deal with growth and cost issues simultaneously. With supply chains paralysed around the world, procurement costs rose, pushing inflation to new heights. In addition, intensifying competition weighed on margins. These problems now seem to be a thing of the past. Sales growth has stabilised, while inventory management and cost inflation seem more under control.

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▪ Consumer behaviour is changing

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The COVID-19 pandemic has accelerated the adoption of e-commerce, with consumers favouring online shopping as a means of maintaining a social distance. Although the impact of the pandemic is lessening, customers have become accustomed to the convenience of shopping from home, and this trend is likelyt o continue. As more and more consumers adopt e-commerce for their everyday shopping, companies in the sector have the opportunity to gain market share and customer loyalty over the long term.

But after months of lockdowns and restrictions, people now crave meaningful relationships in all areas of life, including shopping. Physical spaces make these points of connection between retailers and customers possible, whether we're talking about online or offline commerce. E-commerce is becoming social and more interactive. The Chinese company, Pinduoduo, is a perfect example of this, thanks to its WeChat social network. In fact, a large part of Pinduoduo's appeal lies in its group buying function, which enables as many people as possible to buy a product and reduce the price. Pinduoduo translates as "together, more savings, more fun", alluding to the platform's unique selling point: group buying at reduced prices.Users become unofficial recruiters for the platform, enabling Pinduoduo to keep the cost of acquiring new users below that of its competitors.

Nine out of ten people buy from brands they follow on social media. Social commerce reduces thefriction between discovering a product and converting it into a purchase, simplifying individual engagement and potential sales. Using social networks for marketing and promotions is becoming the most important customer acquisition and retention strategy for businesses to drive sales growth (seeFig.4). The growth in the number of users of mobile phone applications for online purchases has exploded since 2018 (see Fig.5).

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Fig. 4 - The objective of marketing on social networks

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Fig. 5 - Growth of the main Chinese APPs

▪ Technological innovation with the help of AI is making its way into purchasing decisions

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‍Technological advances have revolutionised the environment around E-commerce, enabling businesses to reach customers more easily, personalise shopping experiences and optimise the supply chain (see Fig.6). Technologies such as artificial intelligence (AI), machine learning (ML), BigData analytics and blockchain have been integrated into various aspects of the e-commerce ecosystem, improving efficiency and customer satisfaction.

Generative AI could help transform the e-commerce platforms of Amazon and other retailers. More than 50% of online retailers are already using AI (see Fig.6). Amazon has been using AI/ML in virtually every area of its business for 25 years. Likewise for Zalando, AI remains at the heart of its business as it not only helps to create a personalised shopping experience for customers, but also to optimise its business operations, from supply chains to seasonal demand and fraud prevention.

There are four key areas where generative AI could transform e-commerce and strengthen the offerings of Amazon and other online retailers :

‍1) When searching for products ChatGPT can create an interactive conversational experience and enable Amazon.com and other retailers to offer a more personalised customer experience, highlight relevant search results and improve the overall customer purchasing process.

2) Leveraging historical customer purchase data with AI to make more personalisedrecommendations, helping consumers discover relevant products, increase conversion rates topurchase and build customer loyalty.

3) AI helps improve ad targeting and measurement across the Amazon ecosystem, while providingadvertisers with more relevant placement closer to high-potential consumers; and

4) AI improves stock management and automates order fulfilment, so that stock requirements and locations can be forecast more effectively, parcel collection routes can be optimised, and delivery times can be shortened.

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Fig. 6 - AI in e-commerce : key figures

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AI also enables companies to better protect consumers' personal data by identifying malicious activity more accurately. It is said to have already improved the accuracy of fraud detection by 40%.

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▪ E-commerce multinationals gain momentum

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One of the main advantages of e-commerce is its ability to operate on a global scale with relatively low infrastructure and logistics costs compared to traditional businesses with physical shops. Thanks to e-commerce platforms, companies can easily extend their reach to international markets and take advantage of the growth of the middle class in emerging economies. This scalability not only opens up vast market opportunities, but also allows companies to diversify their revenue streams and reduce their dependence on a specific region or market.

WalMart's purchase of a 72% stake in Flipkart in 2018 is the best example of this geographical diversification of revenues. WalMart thus becomes the e-commerce leader on the Indian market, ahead of Amazon (seeFig 8). The Indian e-commerce market is one of the fastest growing in the world (see Fig.9). The countries ofLatin America are also experiencing very strong growth in e-commerce, of which one of the leading local operators, MercadoLibre, is taking full advantage.

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Fig. 7 - E-commerce leaders in India (2021)

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Fig. 8 - E-commerce growth by country (2021)

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Conclusion :

Inflation and exploding costs have led to the burst of this second e-commerce bubble, 20 years after the first. The growth in online sales has slowed following an exceptional craze during the Covid-19 pandemic, but it remains sustained and higher than that of the bricks & mortar retail sector. Large platforms capable of bringing together the entire e-commerce ecosystem (logistics, payment, etc.) under one roof now seem to be doing better in what remains a highly competitive environment. The use of the latest technologies and AI will also make a difference.

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RETURN ON FINANCIAL ASSETS

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