The National Retail Foundation came out with its holiday sales projections for 2023, and expects retail to increase 3-4% over last year. But much of that growth is coming from online retail and other nonstore sales. Those categories are expected to increase between 7%-9%, approaching $280 billion in digital commerce. Online remains the “sweet spot” of retail.
Pandemic Transformation
The pandemic has powered a huge shift in consumer behavior toward shopping online. Of course, this trend was already in place pre-pandemic. Then, many brick and mortar retailers and shopping malls losing share to online retail. Remember reading “the mall is dead”? But the pandemic has accelerated and extended the trend beyond all expectations. “The toothpaste is not going back into the tube” is a common sentiment that applies well in this case. Retail has been permanently disrupted and transformed. The mall isn’t actually dead, however — it has just moved online.
Another important trend that has arisen from the pandemic has been the rise of omnichannel retail. That category has evolved from concept to reality. That is due to traditional retailers embracing online commerce with new hybrid services such as curbside delivery; buy online, pickup in store); and flexible payment options like buy now, pay later. Omnichannel, as depicted in the graphic below, helps promote an integrated and cohesive consumer experience.
Source: EQM Indexes, Total Retail
Previously, the battle in retail was “clicks versus bricks.” But, increasingly the bricks have embraced clicks as a path to survival. Obviously, some retailers are doing it better than others, and not all will survive. Bed Bath & Beyond finally met its demise this year, only to be resurrected by Overstock.com, which has rebranded it online.
Investing in Online Retail
As the economy reopened post-pandemic, we saw an initial spurt of revenge shopping. Since then, consumers have reverted to shopping online thanks to its 24-hour convenience, better selection, and flexible delivery options. In addition, as prices have risen due to inflation, online shopping makes price comparison much easier for cost-conscious consumers.
In recent weeks, many online retailers and related services have posted strong earnings, including Amazon, Affirm, and Shopify. And among omnichannel retailers, Walmart’s U.S. online sales grew 24% in Q2, and international ecommerce sales grew 26%, fueled by pickup and delivery orders. Online retail is truly an international story, with Latin American marketplace Mercado Libre surpassing expectations with strong Q3 earnings results.
Digital Commerce-Focused ETFs
YTD, the bifurcation in retail is quite pronounced, with online retail ETFs like the Amplify Online Retail ETF (IBUY), the ProShares Online Retail ETF (ONLN), and the Global X E-commerce ETF (EBIZ) all trouncing its traditional retail competitor, the SPDR S&P Retail ETF (XRT).
The Amplify Online Retail ETF (IBUY), which holds approximately $170 million in assets and tracks an EQM/VettaFi Index, is up almost 15% year to date. And month-to-date has been helped by a sharp rally in holdings like Shopify, Affirm, Figs, DoorDash, and Carvana. Online retails stocks are indeed alive and well!
IBUY’s equal-weighted structure provides broader exposure than just big weights in Amazon and Alibaba, with only a 28% weight in the largest names. Furthermore, as of August 2023, it now includes up to 10% omnichannel retail, the first online retail ETF to do so.
Tangential ETF Plays
What are some other tangential plays to the online disruption of retail?
For those wanting targeted exposure to ecommerce growth in emerging markets, the Emerging Markets Internet & Ecommerce ETF (EMQQ) provides exposure to the growth of digital commerce among emerging market consumers in China, South America, India, and Africa.
In the real estate sector, the Pacer Industrials and Logistics ETF (SHPP) targets logistic and warehouse plays that should benefit from the growth in online commerce.
Along the payment angle there is the ETFMG Prime Mobile Payments ETF (IPAY) focused on companies providing cashless, digital payment services.
And finally, there is no industry that has been more transformed by the revolution in online retail than travel. Whereas many of the online retail ETFs like IBUY and EMQQ also include exposure to online travel, there is a “pure play” in the online travel category as well in the ETFMG Travel Tech ETF (AWAY).
‘Tis the Season for Online Retail
As the holiday season approaches. expect to hear more about online retail sales with Black Friday, Cyber Monday, and more holiday purchases in general being made online. According to a survey of consumers by CommerceHub, nearly 80% of respondents plan to do all or most of their holiday shopping online this season. One thing is for sure, in the fierce battle competing for consumer dollars this holiday shopping season, a robust online presence will be paramount to success.
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