Winners and Losers of the E-Commerce War
It’s been a year for the record books…
The Dow Jones industrial average set 70 new all-time highs. A new record in its own right.
And the Nasdaq crossed more than 7,000 for the first time ever.
The markets are on track for their best year since 2013. And investors are cheering into the new year.
But there’s a sector that has left the Dow and Nasdaq in the dust…
It’s been one of my favorite sectors to cover over the years. And the war within it is starting to heat up…
‘Tis the Season for Winners and Losers
Right now, U.S. holiday shopping is still in full swing.
These are the last frenzied days before Christmas. Shoppers are scurrying to check off the final presents on their lists so no children, spouses, siblings or friends will be disappointed on Christmas morning.
And thankfully, there’s a variety of ways to accomplish this – online and in store.
Over the years, more and more shopping has gone digital.
So it’s no surprise, in my view, that the biggest winners of the holiday season are e-commerce giants like Amazon (Nasdaq: AMZN).
But they’re not the only option.
As I’ve written and talked about here before, you can’t ignore brick-and-mortars with a renewed omnichannel focus like Best Buy (NYSE: BBY), Wal-Mart (NYSE: WMT) and Macy’s (NYSE: M).
On the digital front though, 76% of shoppers said they will do most of their shopping online at Amazon. Wal-Mart is second at 8%. It then dwindles from there…
But we also tend to overlook the digital divide in the U.S. when it comes to online shopping and income.
For instance, 62% of Americans making $100,000 or more will do most of their shopping online. But just 20% of those making $30,000 or less will do the same.
So there are disparities.
Now, Amazon would love the U.S. to get to a point where everyone buys everything online or with a mobile device – or at least does so more often than we visit a store. In some instances, we’re already seeing that, which is why retail, grocery stores and pharmacies have all felt the pressure from Amazon.
But there is a place where Amazon’s dream is real. Ironically, it’s also a place where Amazon has struggled to get its foot in the door.
Where Retailers Dream of Electronic Sheep
In China, 46% of consumers visit a physical store on a daily or weekly basis.
That’s lower than the 52% who make purchases on mobile devices on a daily and weekly basis.
And in China, Amazon is a nobody…
In fact, over the past five years, Amazon’s measly 2% share of the Chinese market dropped to 1.3% in 2016.
Competition is stiff in China, where there are multiple “Amazons.”
So far this year, shares of Amazon have risen a little more than 58%. That’s a great return, and it beats the markets.
But that’s half of what shares of Alibaba (NYSE: BABA) and Tencent (OTC: TCEHY) have done. And it also lags those of JD.com (Nasdaq: JD).
Amazon may rule the roost in the U.S., but in China it’s being pushed out… And this is one of the most exciting online retail environments in the world.
Right now, the Chinese market is dominated by Alibaba. But Tencent and JD.com are also trying to improve their fortunes.
In 2014, Tencent took a 15% stake in JD.com. Last year, it increased this stake to 21.25% – making Tencent the largest shareholder in the company.
And this week, Tencent and JD.com forked over a combined $863 million to take 7% and 5.5% stakes, respectively, in Vipshop Holdings (NYSE: VIPS).
There’s a battle for control underway. And it’s going to be won through acquisitions and strategic alliances.
Spreading the Wealth
Between now and 2022, the U.S. e-commerce market is forecast to grow 55.9% to $638 billion.
During the same stretch, China’s e-commerce market will nearly double – growing almost twice as fast as the U.S. market. And it could potentially top $1 trillion.
As I wrote recently, China’s “anti-Valentine’s Day” holiday – Singles Day – is the largest online shopping day in the world. It dwarfs anything the U.S. could ever hope to produce in a day… or even during our busiest online shopping week.
For investors, the e-commerce market in China is one of the most exciting markets in the world. And it shows enormous upside potential.
Now, it can be played by buying shares of Alibaba, Tencent, JD.com, etc.
Or, for those looking for wider exposure to the sector, there are exchange-traded funds (ETFs). These include options like the KraneShares CSI China Internet ETF (NYSE: KWEB) or the Guggenheim China Technology ETF (NYSE: CQQQ).
Both are not only outperforming the Dow and Nasdaq… they’re also outperforming Amazon…
The two largest holdings in both are Tencent and Alibaba. The difference is the China Internet ETF holds 35 companies and has an expense ratio of 0.72%. The China Technology ETF holds 70 companies – twice as diverse – and has an expense ratio of 0.70%.
No matter how an investor chooses to get exposure to the Chinese e-commerce market – through a single company or a broad-based ETF approach – it’s going to be one of the most exciting consumer environments over the next several years.
And we’re seeing battle lines drawn as alliances, acquisitions and partnerships are made… with the intention of keeping Amazon out.
About Matthew Carr
Matthew’s expertise ranges from classic industries such as oil and mining to cutting-edge markets like small cap tech, cannabis, 3D printing and cloud computing. With almost two decades of financial experience under his belt, Matthew’s knack for finding market trends never fails to surprise us, which is why we keep a close eye on his free e-letter, Profit Trends.