Snapshot - Managers' views

The power of disruption and what it means for Asia

The massive disruption seen in US retail is a useful reminder to Asian investors of what the future may hold.

04/06/2019

Matthew Dobbs

Matthew Dobbs

Fund Manager, Asian Equities & Head of Global Small Cap

When it comes to the pain felt by bricks and mortar retailers over the past twelve years, few markets are as illustrative as that of the US retail sector. Many companies with a large store presence have suffered in recent years, losing market share to online-only competitors. The table below highlights how consumer spending habits in the US have changed as online purchases have grown as a share of overall retail sales.

Contrasting the market values of the leading US retailers in 2006 with their market values in 2018 shows a stark decline for the majority of companies. Amazon is the standout winner, with its market value rising by over 4,437%. Other major retailers (with the notable exception of Walmart) have seen their market values fall between 30% and 98% - and in the case of Sears shareholders have lost almost everything.

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Source: Factset, Data as of December 31 2006 and December 31 2018.

Scope for disruption in Asia remains considerable

Of course, these trends and the disruptive forces behind them are not unique to the US. In Asia, similar changes can be seen, but the scope for further disruption and change remains considerable.

In China for example, the retail sector is seeing similar factors play out as technological uptake increases. Domestic department stores with a store network are being pressured by the continued growth of new online retailers which are rapidly increasing market share. These changes can result in big winners. In China’s case, companies such as Alibaba and Tencent have been the winners.   

Alibaba began as a business-2-business online marketplace back in 1999 and quickly grew to become one of the leading players in e-commerce in China. Through its subsidiaries it has since expanded into an array of sectors including cloud computing, online payments, fintech and entertainment. Its financial services company, known as Ant Financial, has one of the largest money market funds in the world, peaking at close to $250 billion in size. 

Tencent initially started as an instant messaging business in 1998 and is one of the largest social networking platforms in China. Through its WeChat/Weixin messaging platform it now has over one billion monthly users. The company successfully entered the online gaming market and has subsequently invested heavily in developing its e-commerce business through its strategic cooperation with online retailer JD.com, with which it shares its online payment system PaiPai. Tencent, through its subsidiaries, is also now present across a range of sectors including music, film and finance.

Not just in China…

In India too, the potential for technological disruption remains enormous. Of the country’s 560 million internet users, a figure itself which continues to rise, only 120 million shop online, providing headroom for huge growth. Meanwhile Indonesian based Go-Jek, a digital transportation and logistics company with operations across South East Asia, was valued at $9.5 billion following a funding round in February this year.

What is also notable is the comparatively low numbers of people now required to grow a company capable of taking market share and dominating peers. The contrast between Walmart and Amazon in the US is marked; Amazon has a market value of close to $738 billion but just 647,500 employees, while Walmart has a market value of $270 billion and 2.3 million employees. In an Asia context, Go-Jek reflects a similar story; it has just 3,000 direct employees.

Disruption here to stay

For Asia in general, these disruptive factors are fanned by the young mass market which is increasingly open to new ideas and quick to adopt new products and services. There is therefore plenty of scope for what might referred to as traditional or old companies to be disrupted.

From an investor’s perspective, these forces result in a combination of opportunities and challenges. Identifying these trends as they develop, understanding businesses and their operating models will be key to picking the winners and avoiding the losers. Doing so will in our view require investors to take an active approach.

 

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