Artisan Canvas

The Spread of E-Commerce Accelerates in the Pandemic

Featured Author: Jessica Lin
Jessica Lin is an analyst on the Artisan Partners Sustainable Emerging Markets Team.

E-commerce was growing markedly faster than overall retail sales before COVID-19, especially in EM. But the global response to COVID-19—drastic containment measures and cautious economic reopenings—led to a surge in online shopping fueled largely by millions of consumers shopping online for the first time. China’s Alibaba reported an increase of 28 million mobile active users in Q2, while Latin American e-commerce company MercadoLibre reported 16 million new active users during the quarter. In Brazil, e-commerce penetration went from 4% at the start of 2020 to 11% by the end of Q2.

While we aren’t extrapolating from this year’s pandemic-driven step change to a new lasting trajectory, we do believe most consumers will end up more or less permanently shifting their shopping habits. Overall penetration will remain higher as more people and businesses experience first-hand the convenience and timeliness of e-commerce and see that shopping online is trustworthy. As a result, e-commerce development—including capital investment, industry consolidation and consumer finance innovation—is set to accelerate.

Early evidence supports our outlook. As the COVID-19 pandemic’s epicenter, China was first to lock down large swaths of its economy and among the earliest to reopen—Wuhan’s lockdown was lifted in early April. With China’s economy near fully reopen, overall retail sales in August were up 0.5% from a year ago—but online retail sales were up 13.3%. Cumulatively through August, total retail sales are down 8.6%—online sales are up 15.8%.

Given China’s highly developed e-commerce industry, it understandably gets a lot of investor attention. And we do see some compelling developments. One example is localized, on-demand grocery networks which utilize location-based technology, fulfill orders through existing independent merchants or small neighborhood warehouses, and complete deliveries within an hour. Another area is social commerce—in particular, live video streaming has been taking off as a tool within social commerce to increase reach, visibility, influence and customer conversion. The marketing tool got an additional boost during the pandemic as merchants tried to stay connected with consumers.

Outside China, we are equally, if not more, excited by the acceleration of e-commerce activity across EM during the pandemic. Since e-commerce in the rest of EM is generally earlier in its development than China, the opportunities are tremendous and the challenges are different. We see two common challenges: logistics and infrastructure, and digital payments.

The process of building an internal infrastructure and logistics system takes multiple years and depresses margins. MercadoLibre, for example, went from an upward profitability trajectory to net losses, which initially caused a period of investor concern. While MercadoLibre is still heavily investing, the company is already seeing a payoff: It has handled the pandemic-related demand surge rather smoothly, while some competitors suffered order-fulfillment problems with their outsourced logistics providers.

Owning the logistics and infrastructure provides greater control, shortens shipping times, lowers the average cost per order and improves service levels. Operational efficiency is vital as consumer penetration increases. New customers typically buy less than existing customers, lowering overall average revenue per user. Plus, EM consumers are generally more price-sensitive than DM consumers, so e-commerce companies must be able to keep costs down.

The competitive advantage from logistics and infrastructure ownership can increase over time as it provides more complete information on consumers, products and suppliers. An e-commerce company will have a better understanding of market trends, which can lead to smarter investment decisions and inventory management, artificial intelligence (AI) tools development and more successful expansion into new segments. 

Improving the e-commerce experience and getting consumers to spend more online will also require wider adoption of digital payments technology, such as e-wallets, by consumers and merchants. While cash is still used for a significant share of EM online and in-store purchases, widespread adoption of mobile phones and devices in EM is accelerating e-wallet technology adoption. Technology is pulling in millions of consumers without bank accounts and providing a large opportunity for nonbank entities, such as e-commerce companies.

Some companies are ahead of the game in developing and converting customers to digital payments, including market leaders in Southeast Asia, India and Latin America. Not only can consumers use their mobile devices to shop online, but they can also pay bills and complete touchless transactions at a growing number of physical stores—a particularly attractive feature amid the pandemic. But payments solutions may be only a starting point—these companies are also encroaching on banking activities, such as micro-lending and financial services. Several companies have already received are in the process of obtaining digital bank or financial services license.

Once again, e-commerce companies that own the services and infrastructure gain a competitive advantage from access to more data, which can provide greater insight into behaviors and trends as well as feed into future technologies like AI.