Even before COVID-19, the ongoing growth of ecommerce was firmly underpinned by ‘digital native’ generations becoming older and wealthier, improvement in logistics and internet infrastructure, and the rise of social media.
We believe the coronavirus has accelerated this trend meaningfully, not least by bringing new customers to online channels as they seek to acquire products safely. Globally, 18% of consumers shopped online for the first time during the pandemic. Most product categories have seen more than a 10% increase in their online consumer base in that time; categories that were underpenetrated online pre-COVID (such as groceries, over-the-counter medicine, and household goods) saw their customer base increase by 30-40%.
Moreover, as these new customers made their first purchases, they typically opted-in to mailing lists, set up payment details, and left behind a trail of data that could be used to incentivise future online purchases (“10% off if you purchase what remains in your shopping basket within the next 24 hours!”).
A recurring theme in our conversations with retail management teams is the pivoting of focus and investment to the online channel to capture this increase in ecommerce demand. Shopify* saw 71% quarter-on-quarter growth in new store creation during the second quarter of 2020, for example. We have also seen improvements in delivery propositions (e.g. the expansion of curbside pickup programmes and lower shipping fees), increased warehouse capacity (as digital’s share of revenues doubled), and a consolidation of store footprints (with more closures and slower expansion).
We therefore see a virtuous cycle whereby new and existing customers will continue to increase their spend in the ecommerce channel due to the improvements retailers have made to the online experience. In apparel retail, for instance, shopping frequency increased by 50% between 2013 and 2019 as delivery propositions improved. Further lockdowns will add more fuel to this trend, as will the shrinking of the offline channel as retailers reconsider their optimal store footprint.
Consequently, we believe ecommerce growth in the next few years will be above the run-rate we observed pre-COVID. We are not alone in this conclusion. Goldman Sachs has increased its global ecommerce compounded annual growth rate forecast for the next three years from 16% to 19%. BAML is now expecting online penetration of global apparel and footwear to reach 40% in 2025, a four-year pull-forward versus its pre-COVID estimates.
There are many ways to invest in the accelerated growth of ecommerce: players within the online ecosystem (such as marketplaces, tech platforms, payment networks, digital advertising platforms); infrastructure supporting ecommerce logistics (freight and packaging providers, warehouse owners), forward-looking brands that have invested in their online proposition pre-COVID and are now enjoying significantly increased direct-to-consumer revenues and the associated uplift in profitability; the list goes on.
Our focus continues to be on the beneficiaries of these dynamics whose share prices, in our view, do not fully reflect the earnings uplift from a multi-year acceleration in ecommerce growth.
COVID-19 has made what was once a channel championed for its convenience, a necessity. We believe exposure to the rapidly growing dominance of ecommerce is similarly becoming a necessity for investors seeking growth.
*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.
 Paysafe: Lost in Transaction: The Impact of COVID report.
 McKinsey: Perspectives on Retail and Consumer Issue 8.
 BAML Research: Higher Online Penetration Primer.