While data indicates that sales of online stores both in US and China market have grown strongly, it seems that the growth in China market is faster than US market probably due to demand for online shopping is stronger in China than in US and/or because it is less competitive in China than in US.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Data indicates that there is an intensive competition, in terms of concentration of market shares, in this online e-commerce sector in US market. Relatively, in another important market –China market, competition is less intensive due to reasons such as fast increasing demand and concentration of market shares.
• Direct sales have increased quickly for most of companies in this sector in US market in the past several years. However, due to competition the increase seems to be at cost of lower price/shipping price and thus companies created less profits from direct sales. Major companies make profits mainly by revenue from service, such as marketplace for third-party sellers or value –added technology service. Therefore, it may be tough time for smaller companies without significant revenue from such services.
• It seems the direct sales for some of companies have increased even faster in China market benefiting from probably stronger demand or less competition/less competitors. Major companies in that market seem to be already able to gain in both sales and profits only from their direct sales. Therefore, as sales continue to grow economy scales finally help some of companies make positive profits.
• Growth in revenue from providing marketplace service and value-added service such as shipping have been very strong in both major markets in the past several years benefiting from increased online traffic. The changes in PRC tax policy on imported beauty products have made a significantly impact on smaller sellers who depend on public marketplace and thus on the companies who provide such services.

Causes behind the trend

The reasons why the traffic goes to online stores should be the same reasons why the traffic goes away from physic stores. Demographic changes may be the major driver behind the changes in shopping pattern/selling pattern, which provide conveniences for shoppers. Online stores are also be able to provide relatively cheaper products due to lower operating expense with some certain economy scales and due to more intensive competition resulted from more sellers and larger availability of products.

Industry Future

In US market, the increasing competition will continue to worsen companies’ profits and may cause more consolidation among the smaller players due to their limited ability to make profits from marketplace and technology service.

In China, the current players will be facing increasing competition as the market scale grows and their market shares may be further diluted and cause lower profitability

General Financial Performance of Companies In the Sector

Almost all companies in this sector in our analysis have experienced fast growth in terms of direct products sales between 2015 and first half of 2017 (double digits growth rate) as reflected from the increased sales volumes. This can be attributed to the lower purchasing costs (price/shipping) in North America or strong natural demands in China. Correspondingly, the service revenue of some of companies where apply increased as well as the sales of third-party seller who use their marketplace increased quickly.

Products sales of most companies in this sector grew slowly or decreased in 2017 in US market and some rebounded back on the track of 2015/16 in 2018. The slowing growth of 2017 in direct products sales of many companies in China market seems to be continuing after entering 2018 and presents a more clearly downward growth trend since 2015for those China-based companies probably due to increasing pressure on price resulted from competition.

Direct sales gross margins (merchandise margin) of companies that focus on US market decreased significantly probably due to the lower price and shipping costs. Benefiting from economy scales and getting better of retail market and from leverage of other expenses such as fulfillment as a result of fast increase in revenue from service, some of US companies have been seeing the improved operating margin and cash flow. However, in China market, due to increasingly intensive competition, most of companies experienced shrinking margins and decrease in cash flow as compared with 2016.

The current average gross margin (direct sales gross margin) is about 15% with a range in 5-28% down from about 17% three years ago. The current average gross margin (products and service) is about 23% with a range in 7-36% up from about 17% three years ago(fulfillment expenses included). At the same time, as companies continued to increase investments in selling& marketing and technology innovation when facing intensive competition since 2017, the average SG&A as percentage of sales (currently average 18.5% with a range 6-32%) and average technology& content as percentage of sales (currently average 5% with a range of 2-13%) got worse in 2018. Therefore, under the help from improved gross margin, the average operating margin firstly went up above 0% from -3% in 2017 (12 months trailing data) and down back to -1% in 2018.

According to our analysis, the current companies’ enterprise price/EBI ratios vary from 100 to 200 and enterprise price/sales ratios vary between 0.4 and 4.5.

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