E-commerce: A return to the structural growth trajectory

E-commerce is a favourite topic of the Nordea Thematics team, with the latest Nordea On Your Mind being the fourth issue devoted to the theme. Why the apparent obsession? By disrupting business models, e-commerce can be a potentially existential issue for many corporates, particularly retailers.

Back in 2021, the NOYM team investigated how the Covid-19 pandemic had affected shopping behaviour and the online penetration of retail sales. We expected much of the Covid-19 boost to online migration of retail sales to be permanent. Now, in the latest issue, we revisit that effect and use Nordea’s proprietary data to model the changes going forward. Our conclusion? A lower-than-expected permanent Covid-19 boost. We see the potential for today’s online share to more than double by 2027.

Finding the new normal

Using our proprietary aggregated and anonymised Nordea card transaction data from our ~10 million retail customers (out of a Nordic population of ~27 million), we have a uniquely accurate gauge of the online share of Nordic retail sales.

This online share of Nordic retail sales roughly doubled to 10-13% between 2015 and 2021. At the high points during the pandemic, it reached 20% but has since dissipated. It now stands at some 14%, we believe permanently boosted by around 1 pp by pandemic-induced behavioural changes, which is less than we had expected in our previous e-com NOYM report 18 months ago.

Changing consumer behaviour should be the key online growth driver

Online migration of retail sales has historically been driven heavily by rising internet, broadband and smartphone penetration, all of which are now saturated in the Nordic region. Consumers are no longer “forced” online by a pandemic, but have, in many cases, become used to and like shopping there, suggesting a lasting catalyst for higher online penetration. We still believe demographical changes, with younger consumers already spending more time online and gradually representing a greater share of total consumer spending, will strongly push the online share higher in the coming years.

Tug-of-war between structural rise in online penetration and macro storm clouds

Time will tell the net impact from the lasting boost to online retail prompted by changed habits during COVID-19, ongoing structural online migration and concerns over inflation and the brewing cost-of-living crisis. The latter is already taking a toll in the form of retailers moderating the explosive growth in investment seen during the pandemic. Using fresh data, we again model a scenario for the Nordic online retail penetration based on developments in the UK, which has historically been five years ahead. We see a potential for the online share to rise from today's ~14% to 30% by 2027.

Consumer demand concerns perhaps overshadow prospects for growing online retail share

The massive outperformance and valuation premia of online retailers over traditional retailers during the pandemic have reversed. Capital markets understandably try to allow for private consumption headwinds from the soaring cost of living, but have penalised online retailers more, with consensus 12-month forward EBITDA growth of zero (lower than incumbents), an EV/EBITDA premium at one-third of pre-pandemic levels and EV/Sales on a par with incumbents. There may well be scale challenges for e-tailers from slower growth, but it seems likely to us that dramatic deflation in 2022 of the previous tech and COVID hype may underestimate how much more the online share of retail could grow.

Insights from experts

In this report's interviews, leading electronics retailer Elkjøp Nordic's CEO Erik Sønsterud shares how the COVID-19 pandemic required a major step-up in the company's online offering, and how this has brought lasting changes to the business model.

“There is a pretty strong case, both from the South Korean experience during SARS as well as early post-COVID evidence, which suggests that we can expect a short-term bounce-back favouring physical retail, followed by continued medium- and long-term online migration to a new saturation level,” Sønsterud says.

PostNord's CEO Annemarie Gardshol gives an e-commerce fulfilment perspective from the point of view of a logistics provider.

“We are constantly becoming more flexible, and today we are even more capable than before COVID-19,” she says.

From Nordea, Harald Ström draws on his long and international experience as a corporate finance adviser to retailers, and Daniel Ovin from Equity Research elaborates on investors' views on online retail over time.

Orvin notes that, at the moment, investors are generally avoiding e-commerce companies, as rising interest rates hamper growth-driven companies and high inflation dampens consumer confidence. While he expects the trend to continue into 2023, inflation will likely fade and interest rates stabilise in the not-too-distant future, he says, adding:

“We believe this is likely to turn investors' attention back to high-growth online retail companies.”