Ecommerce: A Play in Multiple Acts - INVESTMENT STRATEGY
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Ecommerce: A Play in Multiple Acts INVESTMENT STRATEGY
Ecommerce: A Play in Multiple Acts
Ecommerce is powerful and evolving rapidly. Many leaders in this field are transforming themselves by moving
into adjacent businesses that we think give them potential for second and third “acts” that lengthen and
expand their runways for growth. The increasing role of digitalization is broadening the sources of innovative
technology beyond the usual suspects. This phenomenon is suggested by the successes of companies like
DoorDash, Sea, and MercadoLibre, each of which is well into its second, if not its third or fourth act.
May 2021
In early December, investors got a chance to buy a will need not only to survive this pandemic but to
piece of DoorDash, one of the breakout businesses of prosper when life returns to normal. By extending
2020. Throughout the year, the company became a new services and products to an existing client base
household name and established itself as the market- and repurposing existing infrastructure, DoorDash
share leader in the U.S. food delivery market. Its annual was able to create a secondary driver of growth, or
gross order volume (GOV) grew 207 percent in 2020 second act. In our view, businesses that can succeed
as the spread of the coronavirus pandemic curtailed in creating these new drivers of growth are best
restaurant activity and fueled the rise in takeout, with positioned for market leadership and future growth.
delivery evolving into the main connection between
Beyond Big Tech
restaurants and their consumers.
Digitalization is creating new ways of doing things in
DoorDash was able to expand its restaurant options
ecommerce, finance, life sciences, and education and
and improve its local logistics experience, which
enabling some companies to grow at a much faster
we have found to be the most expensive and time-
pace. We believe that this explosion of innovative
consuming part of the food delivery process but the
technologies will power the next wave of exponential
key to customer satisfaction. In 2020, the company
growth, and subsequent wealth creation, once
leaned into this competitive advantage, reporting
generated by the big U.S. and Chinese companies
deliveries of more than 800 million orders, 23 percent
of the technology industry. Companies, such as
faster than its average 2017 delivery time.
DoorDash, that can drive and/or take advantage of the
DoorDash has become one of the success stories disruptive forces that are transforming businesses and
of the pandemic era. From its early days as a private society, in our view, are best positioned for this kind
company, we placed a premium on DoorDash’s ability of exponential growth. But to figure out how to thrive
to tackle last-mile delivery. When the pandemic hit, post-pandemic and gain a leading position in this
the company was able to use these local logistics fast-changing world, we believe businesses are going
skills to take market share from its competitors by to have to envision the future. In our view, tomorrow’s
offering access to a greater number of restaurants and ecommerce leaders will need to conceive of and
faster and more reliable delivery than its competitors. produce products and services that today’s consumer
Once it achieved this market-share leadership status, and businesses have yet to consider.
DoorDash pivoted to its second act. It added grocery
Adaptation
and convenience-store delivery, quickly attaining
the top market-share position in convenience, a Ecommerce has been one of the main beneficiaries
critical consumer preference, whose value we believe of the changed behavior adopted as consumers and
was underappreciated by the market as well as businesses reordered their personal and professional
competitors, based on our research into consensus lives during the pandemic. Our research has shown
estimates. that in many cases businesses that can deliver
groceries, entertainment, takeout, office supplies,
We believe DoorDash presents an example of the kind
prescriptions, pet food, and exercise equipment have
of flexibility, durability, and adaptability companies
seen their orders soar.
2 · S A N D S C A P I TA L M A N AG E M E N T, L LC · I N V E S T M E N T S T R AT E GY · M AY 2 0 2 1DOORDASH DELIVERY MODEL IMPROVES UNIT ECONOMICS OVER TIME
CONTRIBUTION PROFIT AS A PERCENTAGE OF MARKETPLACE GROSS ORDER VOLUME (GOV), BY COHORT
10%
8% 8%
5%
5%
0%
-5%
-10%
Year 1 Year 2 Year 3 Year 4
2016 Cohort 2017 Cohort 2018 Cohort
S o u r c e : C o m p a n y f i l i n g s , d a t a a s o f 9/ 3 0/ 2 0 . C o n t r i b u t i o n p r o f i t r e p r e s e n t s t h e i n c r e m e n t a l p r o f i t g e n e r a t e d f o r e a c h p r o d u c t /u n i t s o l d a f t e r d e d u c t i n g t h e
variable por tion of the firm's costs.
Ecommerce’s share of retail spending has been that we believe are poised to become leaders in the
growing about by 1 percentage point each year marketplace of the future. While many understand
since 2000. At the beginning of 2020, that share was the pandemic’s effect on ecommerce adoption, we
at 16 percent and by April 2020, it had soared to 27 believe this secondary, ecosystem-driven growth, or
percent.1 That’s a decade’s worth of growth in less second-act ability, demonstrated by companies, such
than one year. While we don’t expect penetration as DoorDash, remains underappreciated by many. In
will remain at this level, we also don’t expect it to other words, we believe in many cases the market
fall back to 16 percent; our research shows that the has undervalued companies because they have not
pandemic cemented new consumer habits, and factored the growth potential for second acts into
that many expect to continue to shop online and do future valuation expectations.
so more frequently even after the pandemic ends.
These so-called second acts make a company more
More importantly, as consumers make more and
durable and provide it a longer runway for growth.
more purchases online, we believe that ecommerce
We have seen how important durability, adaptability,
companies that are able to extend into adjacent
and flexibility can be during a crisis. Companies that
businesses, leveraging consumer mindshare,
can harness synergies—such as by repurposing
technological know-how, and data we believe will be
existing infrastructure to start a new and different
best positioned to become the next great internet
business or layering a food delivery network on
franchises, leveraging multiple engines of growth. In
top of a ride-sharing business—can drive new
other words, in our view, the pandemic acted as an
growth without additional overhead or customer
accelerant, enabling faster growth and solidifying
acquisition costs.
market leadership positions for the businesses
that will lead the next phase of innovation and, for Sea’s First Pivot
investors, wealth creation.
We were an early investor in Singapore-based Sea.
Through our long history of investing in ecommerce We initially bought the company for our Emerging
businesses, our domain knowledge has enabled us Markets Growth strategy at its 2017 public offering
to find earlier-stage companies, such as DoorDash, and have since purchased it in many of our portfolios.2
3 · S A N D S C A P I TA L M A N AG E M E N T, L LC · I N V E S T M E N T S T R AT E GY · M AY 2 0 2 1EXPECTED GROWTH IN SOUTHEAST ASIA’S ECOMMERCE MARKET
$300 $283 35%
31% 30%
30%
$250
26%
24% 24% 23%
22% 25%
$200 21%
20%
$150 $130
15%
$100 $82 $80
10%
$42
$50 5%
$21 $18 $23 $12 $11
$5 $5 $3 $2 $7 $3
$0 0%
Indonesia Thailand Vietnam Philippines Singapore Taiwan Malaysia TOTAL
2019 2025 CAGR
S o u r c e : D e l i b e r a t e C a p i t a l , C o r b i n a n d G r ay d e n , N o v e m b e r 2 0 2 0 .
The company, now a leading emerging markets create a powerful network effect, connecting buyers
internet company, used its early success in its and sellers in a virtuous circle of scale begets scale.
gaming business, Garena, to fund its ecommerce Of course, once at scale, we find that network effect
(Shopee) and digital payments (Sea Money) businesses, such as Sea, are often able to defy the
platforms. traditional laws of mean reversion for much longer
than a non-platform business because the value of the
Sea’s founder and chief executive, Forrest Li, realized
network grows as each user is added, while the cost of
early on that if the company were going to serve
acquiring each additional user declines.
the evolving digital needs of the Southeast Asian
consumer, it would have to expand into new digital Shopee has now emerged as the clear ecommerce
businesses outside of gaming. However, in the time leader in terms of market share in Southeast Asia, was
before and after the company went public, the most downloaded shopping app in the region, and
market was largely focused on Garena’s gaming was among the top three downloaded apps worldwide,
business but in our view did not factor the potential according to App Annie.3
of the company’s growing ecommerce platform
Necessity: The Mother of Invention
Shopee into expectations for future value.
MercadoLibre’s story is a bit different. Founded in
For us, our key insight was the opportunity we saw
1999, the Argentine company is now the largest, in
in Sea’s second act—ecommerce (and beyond).
terms of market share, ecommerce and financial
Because of low internet penetration and ecommerce
technology company in Latin America. As in Southeast
adoption rates in the region, we believed Shopee’s
Asia, ecommerce adoption rates in Latin America
prospects were immense. However, what really
are still low, leaving a significant growth potential. In
powered its growth in ecommerce and gave the
Latin America, the lack of an established logistics
company early success in this second act was
infrastructure is one of the main barriers to the spread
familiarity with Southeast Asian markets, their
of ecommerce. This means current shipping costs can
demographics, and their emerging technology
be high—as much as $8 per package—and delivery
needs. This familiarity, combined with on-the-
time is long with packages sometimes taking several
ground execution and cash flows from gaming, all
weeks to arrive.
became key factors that allowed the company to
4 · S A N D S C A P I TA L M A N AG E M E N T, L LC · I N V E S T M E N T S T R AT E GY · M AY 2 0 2 1To reduce the cost of shipping to merchants, Shopee Powered by SeaMoney
MercadoLibre launched its MercadoEnvios service
in 2013 through which it negotiated a volume-based Sea has launched a similar financial business,
discount directly with the postal carriers and passed SeaMoney, which is the digital payments arm of
on the savings to merchants. To increase the speed Shopee. Sea faced many of the same challenges
of shipping, in 2017 MercadoLibre launched its as MercadoLibre as it sought to create a fast and
own managed network services to directly handle convenient payments system for more than 140
warehousing and shipping using technology. Thanks million people throughout the region who don’t have
to its ability to deliver products to consumers access to traditional banking services, let alone more
fast and cheaply, MercadoLibre became a main modern digital payments systems. While SeaMoney’s
beneficiary when the spread of the coronavirus value currently lies in payments for Shopee, it provides
forced the accelerated adoption of ecommerce in the infrastructure for Sea’s future growth into other
Latin America. As a result, MercadoLibre’s gross financial ventures. In the fourth quarter of 2020, Sea’s
market value (GMV) consistently grew more than mobile wallet services had some 23.2 million users
100 percent on a year on year basis for last three and total payment volumes exceeded $2.9 billion. The
quarters of 2020. Southeast Asian digital payments market is expected
to reach $1 trillion by 2025, accounting for half of all
MercadoLibre’s second act was one born of payments in the region.4 Against this backdrop, we
necessity. In Latin and South America, as in many believe SeaMoney has the potential to be a significant
developing markets, cash is still the chosen medium business on its own.
of exchange. Fraud is rampant, and there is little
trust in traditional banking systems. If its ecommerce Sea further extended its fintech reach when it
business was to be successful, MercadoLibre had secured a digital banking license in Singapore, which
to create an electronic payments system that would will enable it to make further inroads into financial
be accessible to the region’s large population of services by making loans and taking deposits. It also
unbanked and underbanked. To do so, MercadoLibre launched Sea Capital, after acquiring a Hong Kong-
followed the lead of U.S. ecommerce pioneers, based investment manager, Composite Capital. Sea
who made online shopping possible for customers Capital will be a platform to manage Sea’s overall
without credit cards. It launched Mercado Pago in investment efforts and support the broader Sea
2003 to process online payments. In subsequent ecosystem.
years, this payments business has spawned Fast Forward
numerous systems that support buy now/pay later
programs as well as consumer and merchant loans. For MercadoLibre’s ecommerce division, grocery
remains the next frontier. Thanks to the lockdowns
Over time, we expect the network effects to take necessitated by the pandemic, ecommerce companies
hold and the financial applications to sprawl in have finally begun to make inroads into this lucrative
line with the buyers and sellers of the ecommerce space that is fraught with logistical challenges. Online
platform. The original ecommerce business is commerce started with standardized and harder to
expected to get stronger and the financial offshoots find products and has systematically moved down the
can provide numerous new runways for growth, value chain, targeting the market segments, such as
while still bolstering the core ecommerce business. groceries, that will move necessities online and draw in
While the payments business is still in its early greater number of people with less disposable income.
phase, the company is working to expand next- In most markets, consumers spend 30 percent to
generation services, such as cardless payments, 40 percent of their retail budget on groceries. In
credit, asset management, and insurance. We emerging markets, that percentage is even higher.
expect that use rates should improve as the features If MercadoLibre can succeed in grocery sales, we
become more developed. Over time, we believe believe its total addressable market will increase
MercadoLibre has the potential to become the meaningfully.
largest financial institution in Latin America.
5 · S A N D S C A P I TA L M A N AG E M E N T, L LC · I N V E S T M E N T S T R AT E GY · M AY 2 0 2 1DoorDash, while it has taken a wildly different path, Along with convenience and cost, we expect
has also moved toward delivery for groceries as personalization will also be critical to ecommerce
well as convenience stores, which we expect will success. As companies succeed in getting everything
account for about 15 percent of DoorDash’s GOV in online, the shopping experience, with so much
2021. Sea’s Shopee unit, on the other hand, is taking choice, can become overwhelming. We see this as
a more global approach, launching its app in Brazil an opportunity for ecommerce companies to move
and Mexico. toward more personalization with an increasing aim
at individual curation. We saw early examples of this
It has also established an artificial intelligence unit,
when books first went online, as the seller would
Sea AI Labs, to focus on computer vision, machine
suggest other titles based on preferences. We should
learning, and multimedia analysis. The initiative should
expect to see such suggestive marketing increase as
strengthen Sea’s innovation and research capabilities
ecommerce companies adopt various forms of artificial
to drive further development in the digital economy.
intelligence to see what customers and consumers
Finding the Future with similar profiles have purchased and browsed.
This also presents marketplaces that have already
Companies, such as DoorDash, are opening the way
built audiences of consumers with the opportunity
to the marketplace of the future in which consumers
to charge merchants to pay-for-placement, an
and businesses increasingly demand convenience,
additional—and high-margin—revenue stream.
speed, selection, and safety. In the first stage of
ecommerce, the challenge was getting everything Whether in ecommerce or digital payments, we expect
online and reducing friction in terms of price and that the businesses that succeed in repurposing their
selection. While these challenges are far from met, underlying technology stack or their direct relationship
moving forward we expect that companies will with their customers to ride these second and third
place an even greater emphasis on convenience. Of waves will be more likely to profoundly transform
course, the definition of convenience has evolved the customer experience and create the enduring
throughout the history of the retail industry. The businesses of the future.
original supermarkets brought vendors together,
so consumers could get their meat, dairy, produce,
and baked goods in one place. The large box stores
added grocery to their mix of discounted hardware,
linens, clothing, cosmetics, and electronics. As retail
has evolved, the winners have been those that offer
consumers more variety at lower prices and in the
most convenient way possible. Convenience and low
cost are sometimes opposing forces, but companies
that can offer both will have a competitive advantage.
1
Galloway, Scott, Post Corona: From Crisis to Opportunity. Page xvii, Bank of America, U.S. Department of Commerce, Shawspring Research.
2
We first invested in Sea for our Emerging Markets Growth (EMG) strategy on December 18, 2017. See the Emerging Markets Quarterly Report for purchase dates for all holdings.
3
App Annie July 1, 2020; https://www.appannie.com/en/insights/mobile-minute/mobile-ecommerce-marketplaces-expand-covid19/
4
Google, Temasek, Bain &Company, e-Conomy SEA 2020; https://www.bain.com/insights/e-conomy-sea-2020/
Disclosures:
The companies identified represent a subset of current holdings in Sands Capital portfolios to illustrate examples of highly innovative ecommerce platform businesses that have
created new drivers of growth through the creation of vertical businesses. They were selected based on addition to portfolios within the past 24 months, early Sands investment
in the business, weight of positions held at the time of publication (April 8, 2021), to reflect our high conviction in the businesses, and geography to comprise different cultures
and trajectories of ecommerce penetration. Sands Capital Management is the second largest institutional owner of Sea, eighth largest of MercadoLibre and fifth largest of Door-
Dash as of December 31, 2020. DoorDash is held in Select Growth and Global Growth. MercadoLibre is held in Emerging Markets Growth and Global Growth. Sea is held in Select
Growth, Emerging Markets Growth, Global Growth, and Global Leaders.
The views expressed are the opinion of Sands Capital Management and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer
to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change. This material may contain forward-looking statements, which
are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no
guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that
its share price will increase. The specific securities
identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. There is no assurance that any securities discussed will
remain in the portfolio or that securities sold have not been repurchased. You should not assume that any investment is or will be profitable. GIPS® reports and additional disclo-
sures for the related composites may be found at Sands Capital Disclosure Presentation. (https://sandscapital.com/media/Sands_Capital_Annual_Disclosure_Presentation.pdf)PT
20210048
6 · S A N D S C A P I TA L M A N AG E M E N T, L LC · I N V E S T M E N T S T R AT E GY · M AY 2 0 2 1At Sands Capital, We are active, long-term investors in leading innovative growth
businesses, globally. Our approach combines rigorous fundamental analysis with
inspired thinking to seek innovative, high-quality businesses that are creating the
future. By enabling our clients to participate in the growth of these businesses, our
mission is to add value and enhance their wealth with prudence over time.
ALL-IN CULTURE INSIGHT- DRIVEN
We are one team dedicated to one mission and one Businesses that can build a sustainable advantage
philosophy. As a fully independent and staff-owned are few and far between. To seek them, we apply six
firm, we attract and retain strong talent, focus on criteria to separate signal from noise, identify what
long-term outcomes, and are highly aligned with our matters most, and construct differentiated views on
clients’ interests. tomorrow’s businesses, today.
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LOCAL UNDERSTANDING FOR HIGH IMPACT
Innovation-driven growth knows no geographic All our strategies concentrate investments in only our
boundaries. Neither does our research team. We are best ideas and avoid mediocrity. With the intent to own
hands on, on-the-ground, deeply immersed in the businesses for five years or longer, we seek to create
ecosystems in which our businesses operate. value for clients through the compounding of business
growth over time.
Sands Capital Management, LLC
1000 Wilson Boulevard, Suite 3000
Arlington, VA 22209, USA
703.562.4000
www.sandscapital.com
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