E-Commerce Is Still Alive And Well

By John San Marco, CFA

E-commerce valuations ebbed as cooped-up consumers craved real-world experiences – but a closer look at the data suggests online shopping is unlikely to retreat.

A casual observer of the U.S. retail sector might think the best days for online commerce are behind us. Since the height of the COVID-19 pandemic, e-commerce’s share of total retail sales has fallen to 14.5% from 16.4%. Valuations of e-commerce companies have tumbled too.

Beneath the surface, however, data suggests the retail industry is likely experiencing some temporary indigestion.

Four underlying considerations may help explain why – as Mr. Twain might have put it – the premature death of e-commerce may be grossly exaggerated and the online share-of-wallet misleading:

• Total retail sales include many hyper-inflationary goods and services mostly sold offline. One example is gasoline, which represents roughly 11.2% of total retail sales in 2022, up from 9.5% in 2019. Gasoline is only sold offline – so the percentage of retail sales conducted online falls as fuel prices rise.
• As the world has reopened, brick-and-mortar retail has roared back. This also can increase the denominator (total retail sales) in the market share equation, with minimal offsets to increase to the numerator (online sales).
• Total retail activity also has grown dramatically as consumers have put large nominal wage gains and balance sheets to work. As a consequence, although e-commerce has sustained compelling growth – up about 8% over the last twelve months – overall spending has grown even more.
• Consumers who get a flavor for e-commerce often stick with it. Data from our proprietary analysis of 3 million credit cards suggests that once consumers engage with e-commerce – as more have in the past decade – they have tended to increase their online purchases over time. According to the US Census Bureau, trailing-12-month e-commerce sales grew 87% between the second quarter of 2019 and the second quarter of 2022.

The devil, as is so often the case, is in the data – and the deeper we dig, the healthier the e-commerce sector appears to be.

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