Taking a closer look at the retail sector, we see the transformation happening via the Department of Commerce’s Monthly Retail Sales report. Figure 1 summarizes the key retail segments focused on consumer goods. This view does not include the automobile, auto parts, gas station, convenience store, or food services retail segments. The most visible effect is on the department store segment, which now has revenues declining 0.4% per month on average for the past 72 months. In contrast, the non-store retailers are growing 0.9% per month on average in the same period.
Figure 2 puts the non-store retailing (ecommerce) transformation in context of the overall Retail sector. The main finding is the ecommerce transformation is still very early in the adoption curve. To put this in context, the Department of Commerce estimates the $145bn ecommerce trend is 11% of the $1.38tn Retail sector in Q3 of 2019. Amazon.com had $69.9bn of revenue in that same quarter. Walmart had $127bn. That made Amazon 48% of the ecommerce sales and 5% of total Retail Sales. Walmart was 9% of Retail sales.
Since 1995, Amazon has been a consistent platform for growing third party sellers. In 2018, third party sellers comprised 57% of the company’s retail revenues. The number of small and medium-sized businesses (SMB) that brought in over $100,000 through Amazon reached nearly 200,000 after just 140,000 did so in 2017, and 25,000 SMBs broke $1 million in sales after about 20,000 reached the milestone in 2017.[i] There is also competition from Walmart who is enlisting third part sellers and Shopify, which just announced it had recruiting one million merchants to its platform.[ii] The transition of consumer and business goods to ecommerce is a growth sector.
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However, there is a misalignment between the debt underwriting rules/norms of banks, private equity, and merchant banks following the financial crisis of 2008-09. First, the lenders have bought into the popular narrative that having a concentrated business on Amazon.com is a down-side. We think this is a misplaced fear and ill-informed. It is not in Amazon’s interest to destroy its third party marketplace. In fact, it is in their best interest to grow it. The risk of defining a product niche, undertaking R&D to define the product, the sourcing process, the start-up financing is entirely on the seller.
The second perceived risk is lack of assets for collateral. These businesses are very asset light. They generally have outsourced virtually all aspects of their business from sales/marketing, manufacturing, distribution, customer service, to the back office. The nature of products on Amazon.com, Walmart, eBay, and Shopify are also generally less than $500 of cost per unit. In running small, scalable supply chains they do not have significant inventory assets.
The third reason traditional lenders are staying away from funding these acquisitions is because of the government regulations that they are subject to, especially Small Business Investment Companies (SBIC). The US Small Business Administration backed lending/financing schemes for business start-up and growth come with employment requirements. Many of our target ecommerce businesses use virtual staffing strategies or domicile outside the US. For example, there is a broad trend in using virtual assistants from the Philippines due to their strong use of English and their much lower wage expectations.
Small, green shoots ecommerce companies have great products. Their operational excellence and financials are superb. The businesses are also scaling quickly from a customer and revenue standpoint, but their businesses are incomplete in many ways as they are undercapitalized. For example, they run lean on being able to expand into other geographic marketplaces in Europe, Canada, or Mexico.
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