Why the Baby Amazons should continue to outperform
- EM e-commerce players (Baby Amazons) – Jumia, SEA, Flipkart and Ozon have outperformed Amazon ytd – driven by Covid-19
- The pandemic will continue to boost the revenues and valuations of the Baby Amazons to a greater degree than Amazon
- Unlike in developing markets, e-commerce is the first step for millions of emerging market consumers to access retailing
The Baby Amazons have outperformed Amazon by an average of 63% in 2020. Covid-19 has been kind to the Western e-commerce giants, but even kinder to the Baby Amazons.
Baby Amazons have even greater potential than Amazon in the post-Covid-19 world. EM e-commerce players are replicating the success of Amazon at a faster pace. EM e-commerce revenue grew by an estimated 18% CAGR in 2014-19, but rose by an average of 28% yoy in H1 20 alone. The Baby Amazons’ gross merchandise value (GMV) increased by 30% yoy in the same time period. Some EM e-commerce players outperformed Amazon in yoy revenue growth in 1H20.
The drivers of EM e-commerce have become stronger in Covid-19. Internet penetration in the EM world has leapt forward, powered by cheap data. In India, Jio has cut data costs by c97% in 2020. Moreover, smartphones have increasingly become the main way of accessing e-commerce.
The revenue and valuation gap could narrow in five years. Although EM e-commerce firms have just one-tenth of Amazon’s US$335bn GMV, we think the ratio could narrow to one-fifth in just five years’ time. The combined value of EM e-commerce firms is currently just 37% of Amazon’s US$1.6tn market cap – the market is still undervaluing the Baby Amazons.
The Baby Amazons’ cash flow situation is less worrying given the low interest environment. EM e-commerce companies have high costs of goods, opex and capex. Hence, they are negative CFO and FCF. However, risk-free rates have fallen by 60% in the main emerging markets, easing the cash burden.
Covid-19 has widened the e-commerce canvas
The traditional drivers of EM e-commerce have been threefold:
Internet penetration has galloped forwards in the EM world, powered by cheap data;
Smartphones have become the principal means of e-commerce, as cheaper accessible models have flooded the market; and
Unlike in developing markets, e-commerce is the first step for millions of emerging market consumers to access retailing.
However, with Covid-19, a new set of drivers have emerged, further boosting the sector:
E-commerce adoption has been much broader in the large EMs, like India, Indonesia, Brazil and Nigeria, than expected. Groceries and health-care items have moved online at a much faster pace than expected.
Smartphones adoption has accelerated; and
E-commerce has become more prevalent among the old age categories in emerging markets.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...