E-commerce has been displacing brick-and-mortar stores for years, but the trend accelerated dramatically in 2020 as lockdowns and shuttered retail locations forced consumers to the internet in droves. In the U.S. alone, e-commerce gained 5% penetration in a few short months, a milestone that previously took 6 years, from 2014-2019, to reach.1 With demand pulled forward by approximately 2 years, e-commerce penetration is expected to reach 25% by the end of the year.2 This reality spells disaster for traditional retailers that don’t fully embrace new technologies. While an online presence is now a prerequisite for survival, a website alone isn’t enough for success in today’s increasingly digital and interconnected world.
Not all retailers are equipped to serve customers who have become accustomed to instant gratification, seamless transaction options, and choices of products and delivery methods tailored to individual preferences. Historically, it has taken significant investment in infrastructure and logistics to support this type of business model. A case study is Amazon, which started as an online bookstore in 1994 and slowly built itself up to be the U.S. e-commerce juggernaut that other retailers fear. Much of Amazon’s success can be traced to two powerful forces—the coming of age of digital-native millennials and the failure of other retailers to as effectively scale their businesses to meet the demands of this critical demographic. Today’s retail leaders marry strong digital ecosystems with stellar customer experiences and convenience, which has been a source of resilience amid the pandemic as well as an avenue for durable growth for years to come.
3 Transformative Shifts for Retail Investors
Tailored Localized Connectivity
Amazon established a winning formula in turning inventories quickly and charging lower prices through a vertically integrated, direct-to-consumer ecosystem. Its flexible, robust, logistics network has driven its dominance in U.S. markets. However, replicating this model in certain global regions has proven difficult, with local firms retaining market control through extensive delivery networks and a deep understanding of local shoppers. Amazon has found it extremely difficult to gain traction in regions such as Latin America and China facing stiff competition from Mercadolibre and Alibaba, both strong brands with dominating market shares. These regions are both critical for e-commerce growth given their burgeoning middle classes.
Meituan is another company that not only understands the millennial market and its lifestyle, but also addresses their needs in a one-stop super app. The app integrates Amazon-like services, deals akin to Groupon, reviews made popular by Yelp, food delivery services like UberEats, and serves up tailored suggestions based on consumer preferences and notifications-based geolocation. Meituan efficiently connects consumers and merchants with a comprehensive support system that includes marketing, on-demand delivery infrastructure, and cloud-based payment systems.
INTEGRATED DIRECT-TO-CONSUMER MODELS
While getting “Amazoned” is a serious threat for businesses and industries as Amazon’s footprint continues to expand, companies like Shopify, a cost-effective e-commerce enablement service, helps small businesses around the world compete globally through digital means. The service facilitates website creation and connectivity to vendors and platforms—such as for digital payment and logistics—that create a more integrated customer experience. While Shopify boasts a 46% 5-year compound annual growth rate, the company’s revenues grew 97% year-over-year in 2Q 2020 alone, as many businesses quickly set up online operations to not only survive, but thrive.4
Vertically integrated omni-channel brands with control over their distribution are well positioned for retail success, as they offer customers the best of both online and offline worlds. Direct-to-consumer (DTC) models not only cut out middlemen, but provide brands with pricing control and critical information. This intelligence allows them to build demand-driven supply chains and better meet evolving consumer needs. Responsiveness to customers, in turn, boosts sales and profits for both the brands and investors. Nike and Lululemon are examples of companies in the rapidly growing athleisure market whose DTC sales have grown dramatically. Nike saw a fivefold increase in its DTC sales over the last decade which now comprise 35% of its total revenue, while Lululemon’s DTC sales represented 61% of its total net revenues in its fiscal 2Q20, compared to 25% in the second quarter of fiscal 2019.3,4
The aftershocks of COVID-19’s disruption of the retail industry will be felt for months, if not years. However, e-commerce is a bright spot within retail, offering both strong short-term gains and compelling long-term growth opportunity in a post-COVID world—that is, for retailers that can reinvent themselves for the modern consumer. Investors that identify and tap into emerging trends early may be better able to ride the waves of the retail tsunami that is underway in the NEXT—or new exceptional technologies—economy.
1 U.S. Census Bureau
2 Morgan Stanley
4 Company website
S&P 500 Index is a market capitalization-weighted index of 500 U.S. stocks, providing a broad indicator of price movement. S&P Global Luxury Index measures the performance of 80 companies engaged in the production, distribution, or provision of luxury goods and services. MSCI All Country World Index (ACWI) is a market capitalization-weighted index designed to provide a broad measure of equity-market performance throughout the world. Indices are unmanaged and an investment cannot be made directly in an index.
Risks—Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Investments in securities of growth companies may be especially volatile. Due to the recent global economic crisis that caused financial difficulties for many European Union countries, eurozone investments may be subject to volatility and liquidity issues. Value investing involves the risk that undervalued securities may not appreciate as anticipated. It may take a substantial period of time to realize a gain on an investment in a small or midsized company, if any gain is realized at all. Diversification does not guarantee profit or protect against loss. Emerging markets are countries that are beginning to emerge with increased consumer potential driven by rapid industrial expansion and economic growth. Investing in emerging markets is very risky due to the additional political, economic, and currency risks associated with these underdeveloped geographic areas. Investing involves risks. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost.
The views expressed herein are those of Jennison Associates LLC (“Jennison”) investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. This commentary is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. This commentary does not constitute investment advice and should not be used as the basis for any investment decision. This commentary does not purport to provide any legal, tax, or accounting advice.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
1042882-00001-00 Ed: 11/2020
Consider a fund's investment objectives, risks, charges and expenses carefully before investing. The prospectus and the summary prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and the summary prospectus. Read them carefully before investing.
An investment in our money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the funds seek to preserve the value of your clients investment at $1.00 per share, it is possible to lose money by investing in the funds.
Mutual fund investing involves risk. Some mutual funds have more risk than others. The investment return and principal value will fluctuate and investor's shares when sold may be worth more or less than the original cost. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. There is no guarantee a Fund's objectives will be achieved. The risks associated with each fund are explained more fully in each fund's respective prospectus. Consult with your attorney, accountant, and/or tax professional for advice concerning your particular situation.
Investment products are distributed by Prudential Investment Management Services LLC, a Prudential Financial company, member SIPC. Separately Managed Accounts are offered through our affiliates. Jennison Associates and PGIM, Inc. (PGIM) are registered investment advisors and Prudential Financial companies. QMA is the primary business name of QMA LLC, a wholly owned subsidiary of PGIM. PGIM Fixed Income and PGIM Real Estate are units of PGIM. © 2021 Prudential Financial, Inc. and its related entities. Jennison Associates, Jennison, PGIM Real Estate, PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
Investment Products: Are not insured by the FDIC or any other federal government agency, may lose value, and are not a deposit of or guaranteed by any bank or any bank affiliate.