Ecommerce model proves difficult to drive

“Well, in those days, one had to telephone a room inside a building and hope that, at the very same moment, the person with whom one wished to converse might be found therein.”

As British comedian Eddie Izzard once observed — if not in those exact words — the concept of landline telephony must sound ridiculous to the youth of today.

But, as many households will have discovered over the holiday season, the 21st century concept of ecommerce is barely any more intelligent. While it may be increasingly app driven on mobile devices, it still involves goods being driven in delivery vans — in the vague hope that, in an unknowable number of days, they will arrive at a building at the very moment when one may be found therein.

Even some of the solutions to these challenges appear daft. Earlier this year, Volvo, the carmaker, announced an initiative to avoid the “first-time delivery failures” that cost companies “an estimated €1bn”: it will arrange for an operative to drive to where one’s Volvo is parked and place purchased goods therein. Anywhere. Even a shopping centre car park.

However, with a global value of €172bn — according to the dubiously named Transport Intelligence — ecommerce delivery is not a business that investors can ignore.

It offers revenue growth: analysts at Transport Intelligence forecast a rate of 9.8 per cent a year until 2017. It offers cash flows: Ofcom estimates that Britons pump £1,968 per person through ecommerce channels every year, followed by US consumers who spend £1,171 each. It offers more predictability: research group ComScore says online sales growth on Cyber Monday, after Thanksgiving, has slowed because consumers now spread out their purchases.

Delivery companies, though, seem stuck at the wrong end of the value chain. In the UK, private equity-owned delivery business City Link went into administration on Christmas Eve, claiming it was unable to handle any more parcels because of the “continued substantial losses it would incur”. Earlier this year, the privatised Royal Mail reported a 21 per cent drop in first-half operating profits, from £353m to £279m, in the face of greater competition. In the same period, UK Mail’s margins were such that it made just £4.9m of pre-tax profit on revenues of £241.4m. 

In the US, FedEx and UPS have at times found the ecommerce model more costly than lucrative. UPS warned on profit in early 2014 after a failure to deliver thousands of parcels cut quarterly earnings by 14 per cent.

Far from proving the telecoms-like income plays that their activities suggest, all these companies’ shares look low yield and expensive. FedEx offers a dividend yield of 0.5 per cent, and trades on 19.7 2015 earnings — well ahead of the S&P 500. UPS shares yield 2.39 per cent but trade on 19.9 times forward earnings. Not exactly a utility.

Royal Mail currently yields more than 4 per cent but also trades on an earnings multiple closer to higher margin FTSE 100 companies.

Where, then, is the value? Ironically, some of the most attractive yields in ecommerce now come from bricks and mortar. According to IPD, the European warehouses from whence all those vans set off yielded 8 per cent in the 12 months to end September. As one fund manager told the Financial Times last week: “It’s a very defensive asset class to invest in.” He believes ecommerce property is not just for Christmas — rather like those missing parcels you might receive in coming days.

Source: http://www.ft.com/intl/cms/s/0/9718e448-8b7a-11e4-be89-00144feabdc0.html