How big can Online Retail / e-Commerce get?

March 9, 2015

eCommerce Value CreationThe total value impact of the long-term growth story for e-Commerce should not be underestimated, in our view. One of the key reasons for this relates to current annual online spending per buyer. Across the developing world, eMarketer estimates that buyers spend c.US$600 per year. This compares with an average of US$1,500 for most developed countries and very high levels of more than US$3,500 for buyers in the UK and Australia. Estimates from eMarketer indicate that the total value for the online retail market in the key emerging and largest developed countries may reach US$2trn by 2018. This would represent an annual average increase of 19% from 2013 levels.

Scenario analysis for the e-Commerce globally
Retail We calculate total retail spending for the key regions by forecasting nominal GDP by year for the next 10 years and assuming that the share of retail as % of GDP remains constant for each of the regions or countries.

Online Online retail globally is currently c.5% of total retail spending. We apply three long-term scenarios for the share of online retail spending in total retail consumption. These are 15%, 20% and 25%. We assume a linear trajectory towards these 2025 targets.

We estimate that the annual online retail market across the key regions may reach US$4trn by 2025 assuming that the share of online across these markets rises to 20% by then. This would represent an annual revenue CAGR over the next 10 years of c.14%. These revenue forecasts do represent upside in our view as they do not assume that spending-per-buyer across the developing world converges with levels currently seen in developed countries.

The online retailing market in the US could be worth c.US$400bn if net margins do not improve (i.e., no change in product mix towards more apparel) and 20% of retailing moves online. The Chinese online retail market is likely to become the largest globally, in our view, with a ‘moderate scenario’ NPV estimate of US$600bn.

The online retailing e-Commerce sector encompasses a number of sub sectors and is in different stages of development depending on geography. For example, online retailing is most developed in the US in terms of history and size, followed by Asia. Online retail in Continental Europe remains relatively underdeveloped in terms of turnover or penetration.

Amazon is a good example of such a company. The company’s cash flow return on invested capital has more than halved to 10% in 2014 from almost 21% in 2006. This structural decline might indicate that Amazon’s ability to create shareholder value is eroding; however, the share price performance suggests the opposite. The answer to this conundrum in our view lies in the fact that Amazon increases its asset base at such a rate that its total economic profit (i.e, value) still increases. Value creation is therefore a function of both cash flow returns (relative to the cost of capital) and asset growth.


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