In a few short years, Black Friday and Cyber Monday have been ingrained in the European retail calendar with outlets publicising their deals days or even weeks in advance. Gone are the days of hordes of consumers queuing outside shopping centres at 4am in a desperate bid to have their first pick of the sales with only a quarter of all Black Friday spending expected to take place in stores1. The queues have instead moved online, swapping the fresh air and elbowing for a comfortable chair, broadband connection and a few clicks of a mouse. With fears of oversaturation, Chi Chan, European Equities Portfolio Manager, asks whether the online market is still in its prime and identifies three companies involved in the online revolution.
While the stock markets have experienced a bumpy ride of late, it’s important not to mistake this for consumer weakness, especially when it comes to online retailing which has consistently grown comfortably above 20% pa globally2. Even so, online as a percentage of total retail sales is still less than 12%3 so there is still a long runway of growth ahead.
As consumers can now order everything from a crate of satsumas to a motorbike for home delivery, this presents a packaging challenge for shippers dealing with sustained volume growth. Added to this, environmental awareness is mainstream and growing numbers of consumers are demanding a decrease in the use of plastic packaging. Whilst not an environmental panacea, distributors are utilising cardboard and paper solutions in packaging – over 80% of European corrugated cardboard is now made from recycled material4.
Switching from plastic to paper reduces the amount of non-biodegradable landfill, but it does still have an environmental impact as its production is resource-intensive. Two companies we feel are best placed to meet the packaging challenges are Smurfit Kappa and DS Smith – two of the world’s leading suppliers of paper-based packaging. Irish company, Smurfit Kappa, reported a 7% increase in third-quarter underlying revenue5 and already uses 75% recycled fibre in its products with ambitions to take all avoidable waste out of the production system and contribute to a circular economy.
Europe’s second-largest boxmaker is British company DS Smith, which listed on the London Stock Exchange in 1986, the year before ‘Living in a box’ was a hit, announced last year that it had achieved its 2020 carbon target three years early. In an indication of the growth of the business, earlier this year it announced a takeover of Europac, a Spanish-listed packaging business for £1.7 billion. It has also set itself an ambitious target of manufacturing 100% reusable or recyclable packaging by 20256.
The behind-the-scenes logistics systems have evolved considerably to meet the ever-increasing demands of consumers. German company, KION provides automated warehousing systems and forklift technologies and supports automated warehouses operating 24-hours a day, a crucial capability when customers are promised delivery times as short as twelve hours or even less.
Stocks with exposure to online retailing generally trade on lofty P/Es because of the structural tailwind. DS Smith and Smurfit Kappa are both on less than 9x forward P/E and Kion is on less than 12x.
Whilst many investors will be looking at retail names this Black Friday, we will be looking beyond this to the opportunities that we believe lie with the companies that support them.