24 May 2018
Since 2017, we have been witnessing a perfect example of "economic Darwinism" in the retail sector. Over the years, the online retail platforms have grown to a level where they are directly challenging traditional firms. In order to adapt to the new consumption habits, we have redesigned the tools we use to monitor investments in this sector.
In 2017, Europe’s retail sector underperformed the Stoxx Europe 600 by more than 13%. The diverging stock market performances shown below chiefly stem from growing investor concern over the ability of traditional players to maintain their margins and generate sufficient cash flow. For example, the operating margin of H&M has fallen from 18% in 2012 to a projected 9% this year.
Traditional retailers are caught between:
1) Maintaining the profitability of their bricks and mortar stores despite the ongoing drop in footfall.
2) Trying to grow their online market share while controlling their distribution (by minimising the use of external partners such as Amazon, Zalando and Asos).
At present, the traditional players are not managing to reassure investors of their ability to reverse this trend. However, some US retailers, such as Walmart, have decided to take on Amazon in the online space.
The tyranny of platforms
The arrival of internet platforms in a number of sectors has often led to the emergence of quasi monopolies, which offer the best choice of products and attract the biggest number of customers. We are investing in these platforms, as we think they will continue to win market share. They may also be the target of multinationals seeking to gain an online presence. For example, luxury group Richemont recently acquired Yoox – Net à Porter in order to develop its e-commerce channel.
We will nonetheless keep a very close eye on their valuations, which can reach stratospheric levels very quickly. In Europe, we are positive on online fashion retailers Asos and Zalando and food ordering website Just Eat.
The way we shop has changed
Online and mobile are now fully integrated into the shopping process. Consumers get ideas, find information and compare prices online before buying something in a store. This applies in the widest sense to all sectors, from retail, through telecoms and media, to travel and leisure.
A number of luxury players have confirmed to us that more than 80% of their customers making an in store purchase have previously researched the products concerned online. On this basis, we have developed expertise using data analysis tools that produce traffic estimates and other indicators. This helps us to project sales trends for the various brands.