In our increasingly connected world, few industries have enjoyed more impressive growth than that of e-commerce. If you've ever purchased anything online, you've directly participated in that growth. But the e-commerce industry also isn't quite as simple as all those user-friendly interfaces make it seem. Here are some points to consider if you're interested in investing in the space.
What is e-commerce?
E-commerce is short for "electronic commerce" and, in a broad sense, describes business models which rely -- at least in part -- on the practice of trading goods over an electronic network.
That practice can technically utilize any electronic medium including phone, fax, and email. However, modern e-commerce typically involves the purchase of products using a virtual storefront or marketplace on the Internet. This also usually encompasses the processing of electronic payments and subsequent delivery of the purchased products -- though that's also not always the case: If the product is a physical item, it might be ordered through an e-commerce platform for pickup and payment at one of the seller's brick-and-mortar locations.
How big is the e-commerce industry?
E-commerce isn't just for everyday retail consumers, either -- businesses are also rapidly adopting e-commerce solutions for their own purchases. In fact, in terms of dollar sales in the U.S. in 2013, Forrester Research estimates online revenue from business-to-business, or B2B, transactions was around $559 billion, compared to "just" $252 billion in online sales in the business-to-consumer, or B2C, segment.
However, penetration of B2B solutions outside the U.S. is much lower, so B2C transactions are currently leading what appears to be the early stages of growth on a worldwide scale. According to online research firm eMarketer, Global B2C e-commerce sales are expected to increase by nearly 20% year over year in 2014, to around $1.47 trillion.
How does the e-commerce industry work?
Some e-commerce businesses, like Amazon.com (NASDAQ:AMZN), have shunned a physical store presence, opting instead to rely on streamlined warehouses and computing infrastructure to significantly reduce selling, general, and administrative expenses. By minimizing these overhead costs and striving for greater operational efficiency, e-commerce businesses like Amazon are able to grab market share by offering lower prices than many brick-and-mortar competitors.
And that's not the only way e-commerce has grown. Take eBay (NASDAQ:EBAY), for example, which has found success by focusing on auction-style marketplaces. And more recently, companies like Groupon (NASDAQ:GRPN) have burst onto the scene to attract large numbers of consumers by offering attractive daily coupons. Groupon, for its part, has since shifted its strategy to not only offer physical goods sales and Amazon-esque extended deals, but also a local e-commerce platform aimed at smaller merchants.
This also highlights several disadvantages of the e-commerce industry. First, shopping through e-commerce often means sacrificing personalized customer service. In addition, e-commerce customers typically aren't able to physically see and touch the products they'd like to buy. And when they do buy, it often means waiting for the item to be shipped instead of taking it home right away.
E-commerce has also become an important tool to drive incremental sales for traditional retailers. According to analysts at A.T. Kearney, a full 90% of all retail sales are still transacted in stores, and 95% of all retail sales last year in the U.S. were captured by companies that also have a physical store presence.
What's more, A.T. Kearney says, two-thirds of consumers who purchased online used the store before or after the transaction, which demonstrates a continued reliance on the complementary sensory experience physical stores can provide when combined with an effective e-commerce solution.
What drives the e-commerce industry?
At the same time, the fact that e-commerce pure plays still command such a small slice of the overall retail market also means big potential for future growth. So what drives the e-commerce industry?
First and foremost is a shift in consumer preferences toward convenience and lower product prices. E-commerce platforms are open 24/7, which means virtually any product can be purchased with relative ease at any time, and from virtually anywhere with an Internet connection.
At the same time, central to that convenience is the advancement of the technology behind e-commerce. This includes everything from more immersive user interfaces to streamlined payment options, and -- more recently -- e-commerce platforms built especially for today's ever more capable mobile devices like smartphones and tablets.
Many businesses are also investing capital to build technology to address the key obstacles holding back e-commerce. While Amazon.com already offers same-day shipping in many areas, for example, it's simultaneously exploring ways to reduce shipment times. Among the methods it's considering are the possible use of anonymous drones to deliver small packages, and even advanced algorithms for anticipatory shipping of items before you've placed your order.
Whether any or all of those technological advancements come to fruition remains unclear. But one thing is certain: However it evolves, e-commerce is here to stay. For investors who can identify the best companies in the space, e-commerce stocks can drive impressive returns for your portfolio.