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Robert Stephens discusses why these retailers could be well-placed to capitalise on changing customer tastes.
The increasing popularity of online shopping has been highly destructive for a wide range of longstanding retailers. High street stalwarts such as House of Fraser, Debenhams and Marks & Spencer have experienced severe financial challenges due in part to their failure to successfully adapt to a changing retail environment.
By contrast, growth in online shopping has catalysed the financial performances of online-only retailers such as Boohoo (LON:BOO), ASOS (LON:ASC) and Ocado (LON:OCDO). Their share prices have surged higher over the last decade, with them having the potential to generate growing returns in future.
A persistent trend
Thirteen years ago, online shopping accounted for 2.8% of total UK retail sales. In November 2018, that figure reached 21.5%, with it showing little sign of slowing. Improving technology, as well as faster and more reliable delivery options, look set to hasten the trend of shoppers moving towards online channels.
In addition, millennials appear to favour the use of mobile devices to conduct a wide range of their day-to-day interactions. For instance, interacting with friends via social media is now the norm, while purchasing items of clothing from retailers such as Boohoo and ASOS having seen online influencers wearing them is likely to become increasingly popular. Both companies have enjoyed significant success in influencer-led marketing following major investment, and are likely to maintain this trend over the medium term.
Having an online-only presence reduces overall costs. Not only could it mean lower business rates, since out-of-town warehouses are likely to be far less valuable than prime retail locations, staff costs may be reduced as running a website and an automated warehouse may not require significant amounts of labour.
This could provide Ocado, for instance, with a competitive advantage versus its grocery peers at a time when margins across the sector have been under pressure. Although many of its rivals have online operations, in most cases they also have expensive stores that are becoming less popular as consumers switch towards online grocery delivery.
While Ocado has not yet been able to turn a consistent net profit, the investment it has made in new technology is being used to create partnerships with a range of retailers across the world. This reduces its reliance on the UK at a time when consumer confidence is weak, and political risk is heightened. Alongside ASOS and Boohoo, Ocado is becoming an increasingly internationally diverse business which may reduce its overall risk versus retail sector peers.
Clearly, investing in the growth potential within online retail is not a new idea. The lofty valuations of all three stocks suggest that investors are anticipating high earnings growth over the next few years. However, the scale of their growth opportunities could mean that there is further scope for capital growth.
While not immune from weak consumer confidence, this could be offset by the growing trend towards purchasing clothing and groceries online. This may produce high shareholder returns for companies such as ASOS, Boohoo and Ocado, albeit with heightened levels of volatility along the way.