Looking for an edge in e-commerce

E-commerce has been like a massive wave that has washed over much of the traditional retail footprint in the US and Europe.  Globally, e-commerce retail sales are projected to hit $6.5 trillion in 2024, from $4.0 trillion in 2020.1 In the US, growth in e-commerce retail sales more than doubled in 2020 due to the COVID-19 outbreak, and is projected to grow at 12% annually over the coming years.1

Amazon has established itself as a dominant player in the US and yet, virtually every general merchandise retailer has a website that looks every bit as good as Amazon’s.  So why is Amazon’s market capitalization three times Wal-Mart’s and 10 times Target Stores’?2

A history of innovation

Getting to the bottom of this question is critical to the way we manage Invesco Global Focus Fund. Our team looks for structural, durable tailwinds that can drive sustainable growth, avoids commoditized industries and businesses, and seeks to identify companies that we believe can compound growth at attractive rates over the next several years.

In our team’s view, Amazon is built for where we are now and where we are going — and we are going that way in part because Amazon and a few others are taking us there. Amazon has invested in clever, thoughtful ways to make their business model massively scalable and efficient — including back-end infrastructure to scale delivery capacity, lower costs and manage inventory.  When they concluded that their last-mile delivery was not as efficient as it could be, via UPS and the like, they developed their own delivery capability.  Over the last few years, they have deployed their own over-the-road truck fleet and invested heavily in automation.   Don’t be surprised if air cargo follows in the not too distant future.   All of this is a path devoted to efficiency, scale and optimization — and it is winning, with a stock price that’s outperformed its peers.3 

A focus on R&D

The difference between how Amazon has deployed capital, and how the retail incumbents have done it, is stark.  Tellingly, Amazon first recorded research and development (R&D) expense in 2009.  Since that time, they’ve spent a whopping $234 billion dollars, to scale and optimize.4  Wal-Mart, by contrast, has not spent a single cent on R&D, and we can’t find any evidence that, in their entire history, that they ever have spent anything on it. 4  Target, Costco, and Marks and Spencer also spent nothing.4  Who has been building the advantage over that time?  Our answer: Amazon.

Although investing is not an exercise in accounting, there is something important to note about how different types of spending are captured in financial statements.  R&D is an everyday operating expense that flows right through the income statement.  Due to this, it effectively understates current earnings and helps create future earnings, a not uncommon characteristic found in innovators. In contrast, capital expenses (capex) are amortized over time — they don’t immediately impact the income statement.  In this regard, they can, in some sense, overstate current earnings.

Wal-Mart spent $129 billion in capex over the last decade.4 Amazon has spent not that much less at $99 billion. 4  However, given the relatively newer asset base at Amazon, it’s likely that more of their capex is focused on growth and not the replacement of existing assets due to wear and tear. 

Bottom line

Amazon has built a business that is, as we say, fit for purpose, while its traditional retail competitors have not shown significant inclination to invest in R&D and innovate — in our view, they are merely adapting what they already have, which is akin to taking a horse-drawn buggy and slapping an engine and wheels on it.  Amazon just went ahead and built a car.

Some of the traditional retail incumbents will certainly survive, but we believe they are likely to be fighting over a smaller and smaller domain, lacking the margin structure and top-line growth necessary to compete, as the future comes towards them faster than ever.   As much as anything else, this is a narrative about the development and sustainability of competitive advantage, which is a critical element we look for in business that can sustain high economic returns. 

We are reminded of a quote from the philosopher Eric Hoffer that seems especially fitting: “In a time of drastic change, it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.”

Amazon represented 4.95% of Invesco Global Focus Fund as of Sept. 30, 2020. Wal-Mart, Target, Costco, Marks and Spencer and UPS represented 0%.

1 Source: Activate Consulting, “Activate Technology and Media Outlook 2021,” October 2020

2 Source: Bloomberg, L.P. As of Dec. 10, 2020, Amazon’s market capitalization was $1.55 trillion, Wal-Mart’s was $416 billion, and Target’s was $86 billion.

3 Source: Bloomberg, L.P.Over the past 10 years, on an annualized basis, Amazon’s stock returned 33%, Wal-Mart’s returned 12%, Target’s returned 13%, and the S&P 500 Consumer Discretionary sector returned 17%.

4 Source: Bloomberg, L.P.

Important information

Blog header image: Bonninstudio / Stocksy

All investing involves risk, including the risk of loss.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.

The opinions referenced above are those of the author as of Dec. 14, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Looking for an edge in e-commerce