The invention of the World Wide Web almost 25 years ago by English scientist Sir Tim Berners-Lee has transformed the way we work, communicate with others and also the way we shop. This has given rise to the term e-commerce. E-commerce is very simply the buying and selling of goods and services online. More and more of us are now online and this is driving a large boom in online sales.
Global E-commerce Growth (Bn)
The chart above shows that e-commerce globally has been growing over 20% per year and it is estimated worldwide sales from e-commerce reached a massive $1.3 trillion dollars in 2014. China and the US are by far the leading e-commerce markets, together comprising more than 55% of global internet retail sales. The strong growth in e-commerce is likely to continue as it is still only a small share of overall retail sales, approximately 5%.
There are a number of factors driving the growth in e-commerce. Firstly, the world is becoming more connected as internet penetration increases globally. This is especially the case in fast growing emerging markets such as China and India. The chart below shows how the number of internet users in China has gone from 80 million users in 2003 to 618 million users in 2013 and is expected to keep growing.
Number of internet users in China (blue)
Number of internet users in China Growth Y/Y (red)
The second most important factor is rising smartphone penetration globally, as many consumers are now buying goods direct from their mobile phones. In fact it is reported that approximately 35% of global online sales were conducted from mobile phones in 2014. As indicated in the chart below the number of smartphone users was over 1.6 billion in 2014 and by 2018 is expected to reach over 2.5 billion. Since smartphones are always connected to the internet, we are spending more time online, meaning all these users can shop from any destination e.g. at the beach, on the bus or in the park.
Number of smartphone users
Other factors boosting online shopping include better price discovery, which means we can very quickly find out where the best bargains are; greater convenience; and, enormous choice of products. Finally, as e-commerce has been around for many years, consumers are becoming more trusting about buying online.
China is now the largest e-commerce market in the world surpassing the US in 2013. The combination of a fast growing economy, strong wage growth, more smartphones and faster internet speeds is leading to a better shopping experience and a huge growth in e-commerce. Also, the clear objective of the Chinese government is to move away from an export/investment led economy to one focussed on consumption. This will benefit e-commerce. The growth in China has led to the emergence of e-commerce giant Alibaba that recently listed on the New York Stock Exchange.
Alibaba was founded by Jack Ma and friends back in 1999 and initially operated out of Jack’s apartment in Hangzhou. Jack was determined to challenge US e-commerce giants Amazon and Ebay and what a success story Alibaba has been. It is now one of the most profitable and fastest growing internet companies globally with over 300 million users. Alibaba is currently valued at over US$ 200 billion and for a while was in the top 10 largest companies in the world. Alibaba dominates e-commerce in China and you can buy almost anything on Alibaba including Boeing 747s, cruise liners and even submarines. Alibaba operates the world’s largest online sales day, called singles day, on the 11th November every year. Amazingly, last year Alibaba sold $9.3 billion worth of products on that day a staggering 278 million orders in 24 hours.
In conclusion, at Milford, we like investing in long term trends/themes such as online shopping. Dominant, innovative companies such as Alibaba and Amazon are key beneficiaries of the strong growth we anticipate in e-commerce. We believe that e-commerce has great growth prospects, especially in under penetrated emerging markets.
Stephen Johnston
Senior Analyst
Disclosure of interest: Milford holds shares in the companies mentioned on behalf of clients.
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