By Neal Austria & Erica Furfaro, ClearBridge Investments
Key Takeaways
- With most stores and restaurants closed during the height of the COVID-19 pandemic lockdown, consumers shifted their purchasing online, with e-commerce sales soaring across multiple categories and formats.
- Retailers large and small are leveraging investments in in-house or third-party e-commerce technology to handle surging demand, with the buying experience for groceries and restaurant meals seeing the greatest transformation.
- While we expect the share of online sales to decline off current peaks as the economy begins to reopen and physical stores and restaurants welcome back customers, the inroads made by e-commerce in certain areas of retail are likely permanent.
E-Commerce Sales During COVID-19 Lockdown Near Holiday Levels
To the multiple benefits of online shopping – price, convenience, wider inventory and easy product comparisons – the COVID-19 pandemic has highlighted another: safety. As shelter-at-home and social distancing policies have kept a majority of U.S. brick and mortar retailers shuttered since March, e-commerce sales have soared (Exhibit 1), with both online merchants and traditional retailers with a digital presence seeing above-average volumes. Online enablement provider Shopify released data in April indicating that its e-commerce platform was handling global commerce traffic in line with 2019 holiday season levels. Restaurants have also been forced online to keep their businesses open, with the food delivery market growing by multiples during the crisis.
Source: ShawSpring Research, Bank of America, U.S. Department of Commerce. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
While we expect the share of online sales to decline off current peaks as the economy begins to reopen and physical stores and restaurants welcome back customers, the inroads made by e-commerce in certain retail categories are likely permanent. The department store and specialty retail channels were already deeply challenged ahead of the pandemic and things are expected to get worse for the weakest players. JCPenney, Neiman Marcus and J.Crew have filed for bankruptcy protection since the onset of the pandemic, which should accelerate a cycle of permanent store closures.
Having an online or omnichannel sales presence should be a differentiator in terms of who survives, but even those retailers that continue operating may do so with a reduced physical store base. This environment gives retailers an opportunity to look at their store fleet and optimize in a world where some mix shift to online is permanent. Many physical stores are being repurposed as local distribution points or hubs and for buy online pick up in store (BOPIS) formats. While there are challenges in doing this, these stores can help lower fulfillment costs (last mile cost is cheaper if local) and improve shipping speeds to same-day or within a few hours using third party delivery services or their own in-house solutions.
The experience of the last several months illustrates the importance of having robust e-commerce capabilities. The goal is to give customers many options to increase share of wallet and often times omnichannel customers will use multiple solutions depending on their need at the time. We see general merchandise, e-commerce enablement and food delivery as categories likely to benefit from the shift online.
Online Sales Surge at Large Retailers
Digitally native e-commerce companies have seen sales accelerate as COVID-19 lockdowns occurred. Amazon.com remains the dominant player in e-commerce and has benefited from consumers stocking up, particularly on essential items. Accelerating retail revenue growth in the first quarter was accompanied by higher spending on hiring, fulfillment and safety precautions related to COVID-19.The crisis is also allowing Amazon to accelerate progress around strategic ambitions in grocery, where delivery capacity expanded 60% in 1Q.
After an initial period of stocking up in physical supermarkets, many consumers relied on online purchases of groceries as the stay-at-home period wore on – a trend that benefited retailers offering grocery assortments and likely has staying power. As shown in Exhibit 2, first-quarter online revenue gains were substantial at Target (+141%), Walmart (+74%) and Costco (+50% in March and +88% in April). Most of Walmart’s online grocery sales, for example, are for curbside pickup while Costco offers two-day delivery of non-perishable products. We believe both retailers are well positioned for changing purchase habits – Walmart for its ongoing investment in online pickup and now delivery and Costco for its attractive pricing relative to e-commerce pure plays that make it a formidable online competitor when value is the focus. For the grocery category overall, we expect to see an accelerated shift to online shopping in its various formats – BOPIS, direct delivery from supermarkets and third party delivery services such as Instacart – from the COVID-19 experience.
Source: Company Reports, ClearBridge Investments. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
Home improvement chains have also seen spikes in e-commerce activity. 1Q online sales were up 80% year-over-year at Lowe’s compared to growth of just 3% in the second half of 2019 while Home Depot saw online growth spike to 79% in 1Q from 21% in the second quarter of 2019. Lowe’s, which has struggled with online sales compared to Home Depot, benefited from its recent migration of e-commerce operations to the cloud which provided the needed capacity and functionality to handle increased traffic during the lockdown. Online sales for both companies are mostly BOPIS. We see a permanent shift to digital in many categories across big box retailers, whose previous investment in sales and fulfillment infrastructure should continue to increase going forward.
Technology Keeps Smaller Merchants Competitive
Online enablement providers like Shopify and Wix.com are helping many small businesses establish and expand e-commerce presence during the COVID-19 crisis. Shopify provides back-end technologies that allow merchants to establish online stores, market their products, and manage their burgeoning customer bases. The company also helps merchants convert those new customers into regular buyers by enabling such services as free shipping and easy returns. Shopify unveiled an expanded tool set for merchants and customers last month including a local delivery option at checkout and an application for customers to manage their orders. Wix has also seen an influx of new demand from customers creating websites utilizing its tools, including adding payment capabilities to facilitate e-commerce. Wix has discussed seeing traditional businesses like fitness establishments begin training clients online, leveraging the company’s technology.
Etsy.com, a diversified e-commerce marketplace driven by single proprietor or small business sellers, has also seen sales growth accelerate in recent months, including over 100% growth in April. Etsy pivoted quickly as lockdowns expanded, updating search algorithms and calling on sellers to produce more in-demand goods, highlighting astute management execution and the nimble nature of its marketplace. The company is focused on continuing to engage new buyers which could yield lasting results. Etsy’s experience highlights the success that can be achieved online through investment in digital technologies and continuously delivering improved experiences for buyers and sellers.
Lastly, Facebook provides another example of a company expanding tools to help small businesses sell online. Facebook Shops was announced in May and will enable businesses to easily set up a shop for free, have it run across all Facebook apps and allow users to check-out natively without leaving the website. Given Facebook’s scale both in users (2 billion daily active users to one of Facebook’s family of apps globally) and small businesses (160 million small businesses already use free Facebook tools to reach customers), Shops has the potential to further accelerate e-commerce penetration.
Food Delivery Becoming Essential for Restaurants
Just as brick and mortar retailers have relied on e-commerce through the COVID-19 crisis, restaurants have kept their doors open by offering food delivery. With new social distancing polices that will limit sit down traffic when dining establishments do reopen their tables, we expect delivery/takeout to become a core part of the business model for many restaurants. Chipotle Mexican Grill noted in its 1Q earnings report that delivery and contactless pickup channels are helping mitigate a significant decline in walk-in traffic. Digital was already a higher percentage of its business compared to peers and penetration has accelerated to close to 70% of its sales mix. Overall, reduced dining room seating should end up being a positive for the food delivery market.
Uber, which operates the No. 2 food delivery service Uber Eats, believes the total addressable market for food delivery has expanded significantly as a result of the COVID-19 crisis. Higher food delivery volumes have been driven by an influx of both new restaurant sign-ups and new consumer demand. Average check sizes for delivery have also increased in the stay-at-home environment as customers buy for their families instead of just themselves.
Legg Mason Key risks and Disclaimers
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
MeDirect Disclaimers
This information has been accurately reproduced, as received from Legg Mason Investments (Europe) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.
The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.
If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.