The most reliable retail trend of the past decade or two has been the growth of e-commerce. Few retailers have been able to thrive, or even survive, without a robust strategy for selling online and integrating their digital operations with their physical locations. Digital retail platforms and sellers have jumped into the fray, making it more convenient than ever for shoppers to find the right product at a good price.
The growth of e-commerce over traditional retail only looks to continue. In the 2018 fourth quarter, domestic e-commerce sales grew 12.1% year over year, while total retail sales increased only 3.1% in the same period, according to the U.S. Census Bureau. Three companies that have unquestionably benefited from this trend, and look to continue doing so, are Amazon.com (AMZN +3.47%), Etsy (ETSY 1.09%), and Home Depot (HD 1.25%). Let's take a closer look at all three to see why these make such great investments today.
Data shows e-commerce sales continue to grow faster than traditional retail. Image source: Getty Images.
Amazon: a Prime candidate for your portfolio
In 1994, Jeff Bezos founded Amazon as an online bookseller. Four years later, the company said it would begin to explore selling products beyond books, soon rightfully earning the nickname "The Everything Store." Amazon Prime's membership model revolutionized the way we shop online, eliminating (or, more accurately, concealing) some of the things about e-commerce that consumers hate the most, such as paying more for shipping.
In 2017, the giant online retailer accounted for 44% of all e-commerce in the U.S., which equated to about 4% of all domestic retail sales. Most of these sales came from commission-paying third-party sellers, using Amazon's platform and infrastructure to sell their products to a huge customer base. A much smaller, but growing, percentage of sales originated from its selection of private brands. In 2017, AmazonBasics, its private label offering everything from office supplies and bedding to batteries, produced $400 million in sales, or about 85% of its total private-label sales, according to OneClickRetail.
The key to Amazon's e-commerce success is its strategic framework it refers to as the flywheel effect. In Brad Stone's The Everything Store, he explains how the company applies this strategy to its operations:
[L]ower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop.
With Bezos in charge, the company has never wavered from this plan -- a relentless focus on pleasing the customer at all costs, even putting customer satisfaction above profits and margins.
Check out the latest earnings call transcripts for Amazon, Etsy, and Home Depot.
Etsy: adding a human touch in a digital age
Etsy provides a marketplace where third-party sellers can come to sell their handmade products to the company's massive customer base. Don't mistake the DIY wares for homemade tech, however. Behind the company's folksy exterior lies some serious tech infrastructure, and the combination is making Etsy into a heavyweight e-commerce player.
In Etsy's 2018 "Impact Letter," CEO Josh Silverman stated his company's mission beautifully:
At the very heart of Etsy is our mission: Keep Commerce Human. This mission is rooted in our belief that, although automation and mass production are parts of modern life, creativity can't be automated and human connection can't be commoditized. This is what makes Etsy and our marketplace distinct from mass retailers. We exist as a business in order to Keep Commerce Human.
Silverman continues, stating that the first pillar to guide this approach is "Making creative entrepreneurship a path to economic security and personal empowerment by ensuring opportunities for our sellers." In other words, in an age when digital and machine automation is increasingly displacing workers from jobs and careers, Etsy is providing both a creative output and a financial lifeline to a rapidly increasing number of creative sellers.
In Etsy's 2015 first-quarter report, the first time it reported earnings after going public, the company had 1.43 million sellers on its platform. That number is now 2.12 million, a 48.3% increase. Of course, the more sellers on the platform, the more buyers it will attract. Over the same time period, the number of buyers increased from 20.8 million to 39.5 million. Of course, the more buyers on the platform, the more sellers it will attract -- and on and on this beautiful cycle goes for shareholders, creating a network effect. In a digital age where everything from social interactions to shopping is taking place across virtual platforms, I don't think this consumer appetite for products with distinctive human touches will subside anytime soon.
The "One" Home Depot shopping experience
Home Depot makes this list for two reasons: It possibly understands the omnichannel concept better than any other traditional brick-and-mortar retailer, and it has invested billions of dollars to handle the unique delivery needs its customers require.
Home Depot dubbed the integration of its physical retail side with its online capabilities as "One Home Depot" -- as in, whether customers experience Home Depot through physical or digital channels, there is still only one company. In the company's 2017 investor and analyst conference, transcribed by S&P Global Market Intelligence, CEO Craig Menear stated:
The front door of our store is no longer at the front door of our stores. It's in the customer's pocket. It's on the job site. It's in their home. Developing the One Home Depot experience by bringing the physical and digital worlds together, with ability to handle the scale of Home Depot, required us to complete a replatform of our website. This replatform gives us the ability to create differentiated experiences for the customers going forward.
In addition to its omnichannel efforts, Home Depot announced in the summer of 2018 that it would be investing $1.2 billion into its already robust supply chain. Over the next several years, this money will add more than 170 company distribution centers across the country, giving 90% of the U.S. population same- or next-day delivery options.
Three ways to profit from e-commerce
These three companies range greatly in size and business models but have all taken advantage of the internet in innovative ways to sell products in ways that delight consumers. All three have invested heavily to ensure that their respective online sales platforms stay ahead of competitors. All three also look like excellent ways to invest in e-commerce and beat the market.
