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E-commerce: separating the winners from the losers

Martyn Jones, Investment Analyst, talks about the disruptive force in retailing - e-commerce, which we believe will be a key determinant of success in the future – separating the winners from the losers in an increasingly competitive environment.

E-commerce has been an extremely disruptive force in retailing, requiring transformation of operating models and significant capital investment in technology and logistics. We believe a successful online strategy will be a key determinant of success in the future – separating the winners from the losers in an increasingly competitive environment.  Inditex is an example of a company that we have invested in, which we believe has a winning online strategy.


The social and environmental impacts of e-commerce are complex and difficult to quantify. Our research has highlighted the social costs of a shift online in terms of store retrenchment and reduced employment. At first glance the environmental implications would appear positive, with a smaller store base and ultra efficient distribution, unfortunately it appear it’s not that simple.


This article will look at the disruption caused by the e-commerce, the environmental and social impacts on the retail industry and how we use this data to inform our investment decisions in this sector.




Online retail has been around for over 20 years and apparel retail is one of the most highly penetrated categories. Apparel e-commerce has outperformed physical bricks-and-mortar retailing in virtually every major market over the last several years and this trend is expected to continue as levels of consumer penetration increases. The global e-commerce fashion market opportunity is significant – currently valued $332bn and is set to grow 14% annually to $634bn by 2021, creating investment opportunities.


Not all retailers are adapting to the shift online, evidenced in waning market share, weak growth and store closures. Equally, the smaller retailers and brands have the challenge of generating online traffic to remain visible and relevant.  For these brands, partnerships with large online fashion aggregators may be the solution but this comes with a margin sacrifice.


The likely winners in this new age of retailing are the pure-players. These innovative and entrepreneurial companies have borne the brunt of investment, learned from the operational lessons of building an industry from scratch. Businesses such as ASOS and Zalando are now set to reap the rewards of a loyal fan base and a more profitable capital light business model.


Disruption - death of the High Street


Retail is undergoing major disruption with the advent of online shopping. The UK is a good example of a sophisticated retail market undergoing this shift – British retailers have been facing a declining footfall into stores over the last five years with online shopping taking meaningful market share. Since 2011 the decline in quarterly footfall has averaged 1.1% in the UK, after decades of relatively uninterrupted growth. The decline in people shopping in-store, coupled with three and a half years of non-food price deflation, has hit the bricks and mortar retailers particularly hard.


Meanwhile online ‘pure-play’ retailers such as ASOS and Yoox Net-a-Porter have grown revenues 325% and 523% respectively over the last five years.


British Retail Council – footfall data



The same picture is observable more globally with online sales growth outstripping total apparel and footwear sales across the 10 largest global markets in 2015 (Bernstein 2015). In fact, only four of the top ten apparel and footwear markets in the world experienced growth in store-based sales during 2015 (US, India, Russia and Brazil).


Back in the UK the online competition has led to a number of store closures. The latest include the high profile bankruptcy of BHS and the announcement of “dozens” of Marks and Spencer international and UK domestic stores.


Source: Centre for Retail Research 2016


Note: some of these retailers have sold their operating brand to another entity, or have been restructured with not all stores closing.


Social Impact of Online Retailing


With such a dramatic number of closures occurring there are clearly important social implications to consider when assessing the shift to more online shopping.


According to research from Centre for Retail Research 11,220 stores have been closed in the UK since the Great Financial Crisis in 2008. This has resulted in 138,000 redundancies.


Source: Centre for Retail Research 2016



Number of employees

€ Sales per employee

Online retailers
















Brick and mortar retailers
















Source: Bloomberg and company data


Online retailers achieve 2.4x revenue per employees compared to bricks and mortar retailers – with simple logic you need 0.6 less people to achieve the same level of sales.


Companies such as ASOS, Zalando, BooHoo (pure-play online fashion retailers) employ far fewer staff and achieve higher sales per employee. This is likely to result in less employment in the sector as jobs are not replaced one-for-one as we transition to more online retailing. This is rather like the situation observed in the US manufacturing during the late 20th century which offset labour with efficiency gains


Environmental Impact of Online Retailing


The closure of physical stores therefore has a potentially detrimental effect in terms of less labour required but you would assume on the other hand that the environmental impacts from online retailing are lower with a smaller store base and efficient logistics.


For example, emissions from vehicles driven to shopping malls can be avoided, heating and lighting retail space can be reduced and inventories and waste can be minimised. However, to complicate matters the method of logistics can have a dramatic impact on the environmental footprints, so too does the method of returning/exchanging unwanted items. Furthermore, the products are likely to be packaged individually using more paper and plastic packaging than traditional retail. There have been some interesting studies done on this, which you can read to find out more – these include;


1.    Economic and Environmental Implications of Online Retailing in the United States

(Scott Matthews, and Chris Hendrickson 2001, Carnegie Mellon University)

2.    Follow on study: Better for the Environment?

(Scott Matthews, and Chris Hendrickson 2009, Carnegie Mellon University)

3.    Comparative Environmental Impact of Online and Conventional Retailing

(Dr. Edwards, J.2009, Logistics Research Centre, Heriot-Watt University)


Trends in online shopping - Cheap Fashion, Fast, Easy!




The average selling price of clothing has fallen 7.1% every year since 2011 in the UK as the squeezed consumer is no longer willing to spend as much on apparel. But the product still needs to be appealing for the demographic(s) targeted. Key to this is the consumer data collected on style preference, which informs the buying teams.

Additionally the cost of delivery is an important determinant of purchase. Investment bank Berenberg have found that cost of delivery is the most important determinant of whether an order is abandoned, followed by speed of delivery - 59% of consumers have abandoned an order because delivery was too expensive.




The speed of fashion has increased, fashion cycles used to last 12 to 18 months, now fast fashion leader Inditex (owner of Zara) strives to have two to four week in-season sourcing capability. In a recent paper McKinsey found that;

-          Among all European apparel companies, the average number of clothing collections has more than doubled, from two a year in 2000 to about five a year in 2011. Zara offers 24 new clothing collections each year; H&M offers 12 to 16 and refreshes them weekly.

-          Clothing production doubled from 2000 to 2014, and the number of garments purchased each year by the average consumer increased by 60%.

-          Across nearly every apparel category, consumers keep clothing items about half as long as they did 15 years ago.



 “Brand Aggregators” like ASOS, YNAP, Zalando are the modern day department store, collating numerous brands under one roof and organising them into one curated collection making it easy for the consumer to browse on mobile/tablet from their living room.




The shift to more online shopping is well underway and that the opportunity for investors is significant with market set to grow 14% annually over the next five years. Retailers will need to adapt their business model to compete with more nimble pure online players. This will require investment and adaptation to offer value for money, fast fashion that is easy for people to search and buy and the companies that manage to do this, will be the ones that come out on top.


Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It is not a recommendation to buy or sell and the view of the Investment Manager may have changed.


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