Looking for Profits in Retail? Ignore the U.S.

Matthew Carr
by Matthew Carr, Emerging Trends Strategist, The Oxford Club Investment Wisdom Investment Wisdom
retail-industry

For investors, retail has been a tough arena.

Over the past year, the Consumer Staples Select Sector SPDR ETF (NYSE: XLP) and Consumer Discretionary Select Sector SPDR ETF (NYSE: XLY) have trailed the Dow Jones Industrials, S&P 500 and Nasdaq... and by a significant margin.

I’ve written this here before, but U.S. brick-and-mortar retail is dying.

American retailers are closing stores at the fastest pace ever.

Roughly 10% of mall retail space - or 1 billion square feet - is on the verge of being closed, having rents slashed or transformed into something else. And in March, retailers cut 30,000 jobs, the same as in February.

It was the worst two-month span of job cuts for the sector since 2009 - during the depths of the Great Recession! 

This year, as many as 8,640 total stores may close - which would outpace the 6,200 closed in 2008.

And as I’ve pointed out for years, it’s because the companies failed to adapt. They were slow to recognize the changing tides and are now being destroyed by a single company...

Amazon (Nasdaq: AMZN).

A mammoth no one can seem to beat... at least not in the U.S. But as you’ll see, others have had success elsewhere.

The fact of the matter is that e-commerce and mobile commerce (m-commerce) are quickly becoming more and more important to retail. And these avenues are essential to growth. Because not only is Amazon the biggest player here, it controls more of e-commerce sales growth than all other U.S. retailers combined.

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Let’s be honest... Amazon won the U.S. e-commerce and mobile markets. Wal-Mart (NYSE: WMT) is so far behind, Warren Buffett liquidated his stake in the company.

But the U.S. is just one jewel Amazon wants in its crown. It’s looking to dominate internationally.

But that’s easier said than done.

We’ve seen that, outside the U.S., Amazon can be beaten. (And U.S. retailers should take note.)

The Hungry Dragon

Outside the U.S., investors should understand retail is attractive. Especially online retail.

And China tops both lists. That’s because of not only size (with China’s population four times that of the U.S.), but also the tremendous growth.

In the first quarter, China’s GDP grew faster than expected, increasing 6.9%. The days of China’s economy growing at double-digit rates seem to be over. Regardless, it’s still a blistering pace.

Now, China has already surpassed the U.S. as the largest retail market. And it happened two years earlier than expected. China also is the world’s largest e-commerce market, representing $672 billion last year, with an annual growth rate of 35%.

Think of it this way... what Amazon is to the U.S. e-commerce market, that’s what China is to the world.

Nearly half of all e-commerce spending worldwide takes place in China. It also accounts for 55% of all m-commerce worldwide.

The online retail numbers border on ridiculous. By 2019, e-commerce sales in China will top $1 trillion. Total retail sales in the U.S. last year were $5.4 trillion. And by 2020, China will represent 68% of all m-commerce sales globally.

China is far and away the largest e-commerce market in the world...

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But at the same time, consumers in China love e-commerce and m-commerce. The percentage of total retail sales from e-commerce is 15.9%. That’s also far and away the largest percentage in the world.

So not only is China’s e-commerce market twice that of the U.S., the percentage of e-commerce within total retail sales is double that of the U.S. (7.5%).

Where Wal-Mart Is Beating Amazon

We’ve seen that, outside the U.S., Amazon can be beaten.

In the world’s largest e-commerce market - China - Amazon is so far behind, it’s inconsequential. Amazon accounts for less than 1% of the market.

The U.S. e-comm giant bought China’s largest online bookseller, Joyo, in 2004. This was rebranded as Amazon China in 2011. And Amazon Prime was launched in China last year.

But it hasn’t been able to make any headway.

Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD) are Nos. 1 and 2 here. Alibaba’s Taobao, Alibaba.com and Tmall give it a powerful presence. Tmall alone represented 56.6% of all e-commerce in China in 2016. Meanwhile, JD.com (which Wal-Mart owns 12% of) accounted for 24.7%.

Because of China’s e-commerce market size, the companies that control the market are outsized.

For example, Alibaba’s gross merchandise volume is more than that of Amazon and eBay (Nasdaq: EBAY) combined. Plus, Alibaba’s online sales and profits are more than that of all U.S. retailers combined... That includes Amazon.

China has the advantage, but investors must remember that online retailers are king.

Alibaba’s revenue is expected to grow 54% this year to $22.6 billion. And grow another 31.5% next year to $29.8 billion.

JD.com’s revenue is expected to grow 33% this year to $50.3 billion and increase another 25.7% to $63.2 billion next year.

Amazon’s revenue is expected to grow 21.5% in 2017, increasing to $165.3 billion and growing another 20.7% in 2018 to $199.5 billion.

So these are large companies growing at 20%-plus rates. That’s a pace that would be enviable for small cap retailers. And these are double-digit growth rates, while brick-and-mortars are shutting stores and laying off workers at a record pace.

So traditional U.S. retail may be dying, but that doesn’t mean there aren’t great opportunities in the sector. You just have to look far beyond the local mall.

Good investing,

Matthew

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