Online Retail As an Exciting Investment Field: When Elephants Fight, digitalization-online-retail-as-an-investment-field

Online Retail As an Exciting Investment Field: When Elephants Fight

Due to increasing digitalization, our entire economy is in the process of changing. Shopping malls are disappearing and online retail keeps growing. Infrastructure funds are one possible investment for participating in this change.

"When two elephants fight, it's the grass that suffers," according to an African proverb. Are Amazon and Walmart the elephants of their sectors? Will shopping malls continue to be trampled like blades of grass during their conflict? The weekly list of shuttered shopping centers in the USA certainly gives that impression.

For instance, Amazon recently announced that it was acquiring Whole Foods Market for USD 13.7 billion. The transaction not only accelerates the structural transformation of a sector, it also illustrates how digital technologies are changing the entire economy.

The mass extinction of stores is part of the process of the rise and fall of business models. What's more, the omnipresent sell-outs in the oversupplied retail trade have a consumer-friendly deflationary effect and explain why strong consumption and low capital market yields currently go hand in hand.


Retail sales by general merchandise stores (GMS) and online shopping (as percent of total in-store + online GAFO1)

GAFO (general merchandise, apparel and accessories, furniture, and other sales) includes retailers that specialize in department-store types of merchandise such as furniture and home furnishing, electronics & appliances, clothing & accessories, sporting goods, hobby, book and music, general merchandise, office supply, stationery, and gift stores.

2 Electronic shopping and mail order houses.

Source: Broker Research, Credit Suisse

Digitalization Forces Retailers to Rethink

"Convenience food" is the response of supermarkets to the competition from e-commerce. Online retail cannot (yet) compete with freshly prepared dishes. The prepared-meal business is growing worldwide. In the US, with over USD 900 billion in sales, it is the biggest growth segment for supermarkets.

Will a herd of elephants also storm through this business in the future? Possibly, if online retailers soon send fresh sandwiches via drone. It is a highly competitive business. Many dealers require manufacturers to offer the lowest price available for 80% of their products.

Despite strong online retail, the retail trade index (S&P 500 Food & Retail Index) is still at a price-earnings ratio of 15.5x – despite its growth rate decreasing to 3.4%. The last time sales growth was this low was in 2009 – at the time, the index was at a price-earnings ratio of 8.7x. Food for thought?


Convenience food beats retail sales (Retail Sales)

Source: Census Bureau and Bureau of Economic Analysis, Credit Suisse

Investing in E-Commerce with Infrastructure Funds

Who will be trampled next? For the past six years, Amazon has offered operating loans to intermediaries. Last year, business grew by 50%, from USD two to three billion. The Financial Times reports "very, very low defaults" in this attractive business for Amazon. This is because the online giant can verify and pay a loan within 24 hours and, due to its immediate insight into the business processes of its debtors, can better assess and hedge it than traditional lenders.

Will banks also feel the elephant kicks? While elephants fight, investors might find better opportunities with those companies that are building their physical or digital infrastructure. This is because this capital-intensive activity is less exposed to the margin pressure of the internet.