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Three technology titans reshaping retail FRANKLIN TEMPLETON THINKSTM EQUITY MARKETS FEBRUARY 2019 How three disruptors are digitizing retail markets across the globe STEPHEN DOVER, CFA PURAV A, JHAVERI, CFA, FRM DAN SEARLE, CFA MARY KILLIAN TEK KHOAN ONG, CFA KATHERINE S. OWEN, CFA
In this issue
Three powerful retailing disrupters—Alibaba, Amazon Key viewpoints
• Our Growth and Value teams have
and MercadoLibre—are reshaping expectations about different takes on Amazon. The US
Growth team feels confident
shopping and shipping by digitizing retail markets
in Amazon’s path toward rising
across the globe. New conveniences such as ordering profit margins, while our Value
analysts think the market is
groceries with a simple voice command are upending
underestimating Kroger’s ability to
the old world order. Each firm uses technology to successfully push into online
groceries, despite Amazon.
improve customer experiences—making it easier to
browse, buy and receive goods—and increase sales by • Our Emerging Markets analysts
in Singapore point out that Alibaba’s
analyzing big data to anticipate customer preferences. profits outshine Amazon and
think Amazon’s Whole Foods may
mirror Alibaba’s approach to
To compare how each firm tailors technology to fit
“new retail.”
local customs, lifestyles and payment abilities, we asked
• Our Global Growth team thinks
senior equity analysts across our Growth, Value MercadoLibre can remain the domi-
and Emerging Markets teams to get their views. nant e-commerce player in South
America, partly by replicating
Each team approaches equities with a different invest- Alibaba’s approach to payment
services and consumer loans.
ment lens, but all three ground their analysis in
modeling future cash flows to estimate a company’s • Each firm is integrating all aspects
of retailing—from inventory to
value. In the following discussion, our analysts highlight distribution and payments—into a
some key assumptions in their cash-flow models, seamless continuum, though
using different business models.
demonstrating that multiple lenses can reveal different
investment opportunities.
Reshaping retail on the Alibaba and MercadoLibre didn’t need party sellers, which list their
to because they didn’t own inventory. products directly alongside Amazon’s
global stage
Both firms initially had more in common own warehouse inventory.
To say that Amazon has shaken up
with eBay, allowing merchants to
US retailing is almost cliché at this Contrasting these evolving retail
sell goods on their online marketplaces.
point. Looking globally, we see equally approaches, we start our discussion by
powerful retailing earthquakes Over time, these distinctions have diving deeper into the mechanics of
emanating from Alibaba in China and blurred. Alibaba and MercadoLibre Amazon. This sets the stage for a some-
MercadoLibre in South America. These have been investing in logistics infra- what narrower overview of Alibaba,
firms, however, aren’t cookie-cutter structure to help ensure deliveries and finally MercadoLibre. With each
versions of Amazon. Whereas Amazon reach customers on time. Meanwhile, company, we focus on just a handful
spent years building state-of-the-art over half of Amazon’s online sales of divisions and innovations our analysts
warehouses and logistics infrastructure, now come from higher margin third- believe are strategically important to
2 Equity Markets / Three technology titans reshaping retail
generating future cash flows, or for a profitable disruptor. That change higher rate than Google ads.1 That
causing disruptions. One common has been driven, in part, by becoming means Amazon can make more money
thread across all three is a culture of a powerhouse in online advertising. per ad. We expect Amazon will
innovation and bold experimentation. generate advertising revenues of US$10
We conclude with a brief discussion of At the core of Amazon’s advertising billion for 2018, placing it in the
current operating margins and the services is a rich pool of data it keeps number three position behind Google
balancing act of spending to build future on the shopping habits of its estimated and Facebook in terms of digital ad
growth versus generating higher near- 410 million active users globally. revenues. Going forward, our US Growth
term profits. Amazon knows what customers browse team believes Amazon’s ad revenues
for and buy and what they are willing will remain a significant profit stream.
to pay, giving them an information
Amazon—an advertising advantage over platforms that don’t Bezos’ innovation ethos
powerhouse facilitate transactions themselves. Amazon hasn’t had a straight line to
Amazon is big, and its disruptive impacts And because Amazon visitors are success since going public in 1997.
are far-reaching—just as its name primarily there to make a purchase, And that’s perfectly fine with Jeff
implies. But it has only recently become Amazon ads convert to sales at 3.5x Bezos, chief executive officer (CEO) and
THREE RETAILING DISRUPTORS—AT A SINGLE GLANCE
Amazon Alibaba MercadoLibre
Business summary Amazon is one of the highest- Alibaba is the world’s largest MercadoLibre operates online
grossing online retailers globally. online and mobile commerce marketplaces in over a dozen
Dominating North America, company measured by annual Latin American countries, with
Amazon built its brand on compet- gross merchandise volume. >90% of revenues coming from
itive pricing, unparalleled It operates China’s most-visited Brazil, Argentina and Mexico.
logistics with same-day shipping, online marketplaces: Taobao By combining its online payment
and customer service. By wowing (consumer-to-consumer) and division (MercadoPago) with
customers with its media, Tmall (business-to-consumer). integrated shipping and customer
digital devices and Alexa-enabled Leveraging a deep pool of loyalty promotions, MercadoLibre
products, Amazon deploys consumer data, Alibaba’s remains the dominant online
innovative customer acquisition ecosystem now includes “new marketplace in South America.
and retention tools. retail” brick-and-mortar stores—
a precursor to Amazon’s likely
strategy with Whole Foods.
Founder Jeff Bezos Jack Ma Marcos Galperin
Active users in 2018 410 million globally 636 million in China 249 million across Latin America
Gross merchandise volume US$390 billion US$850 billion US$13 billion
Areas of dominance • North American online retail • China online marketplaces • Latin America online
• Cloud computing (AWS) • China online payments (Alipay) marketplaces
• Cloud computing in China • Online payments (MercadoPago)
Key differentiators • Shipping and logistics • Digital-centric ecosystem • Robust technological
• Digital devices (Alexa) • Chinese consumer data infrastructure
• Cloud services (AWS) • Expanding into brick-and- • Strong payment services
mortar retail division
• Local knowledge of trends
Risks International expansion efforts Expansion outside China has had Main risks are macro-economic
face headwinds from local incum- limited success, except Lazada. uncertainties stemming from high
bents and foreign regulations. Could drain resources from its inflation and political turmoil.
core China ecosystem.
Sources: Active users—company financial statements 2018. Gross Merchandise Volume—Amazon FactSet consensus estimate 2018, Alibaba financial statement calendar 2018,
MercadoLibre FactSet consensus estimate 2018. For illustrative purposes.
1. Source: Varma N. “Amazon Versus Google Search: Who is Winning the Battle and How?” Marketing Technology Insights July 2018.
Equity Markets / Three technology titans reshaping retail 3
founder of Amazon. In his view, being Until then AWS was more or less hidden prefer using Microsoft’s cloud services
a game changer requires experimenta- inside an “other” category for North instead of Amazon, but our US Growth
tion, a willingness to fail, and a American sales. team thinks AWS can remain competi-
long-term orientation that means capital tive by reinvesting in more capacity and
investments can take five to seven First launched as a service in 2004, new innovations.
years to bear fruit.2 This approach has AWS gives companies like NASA,
led to some surprising breakthroughs, Netflix and online rival MercadoLibre Amazon’s Achilles’ heel
like Amazon’s Echo smart speakers, access to Amazon’s cloud storage Waiting for Amazon innovations to
powered by Alexa, the cloud-based and database infrastructure. With global deliver more profits is one thing. But
voice assistant. But it’s also produced market share estimated between patience for the company gaining
disappointments that unnerved 34–52%, AWS generates over half of a profitable foothold in China was
shareholders, like the Fire Phone, and Amazon’s total operating profits, running thin for our Global Growth team
mounting losses from failed efforts to with a US$27 billion annual revenue run as far back as 2014. Today Amazon
compete in China. rate as of last year’s third quarter.3 remains far behind Alibaba and JD.com
If some digital innovations take a few in Asia and faces similar challenges
On the heels of several failed launches more years to bear profitable fruit, in South America from MercadoLibre.
and little progress in China, Amazon AWS can pick up the slack. See Exhibit 2.
announced in early 2015 that it
would break out the results of Amazon Can AWS maintain its global market Amazon isn’t alone in its global aspira-
Web Services (AWS) for the first share, as shown in Exhibit 1? Large tions. Alibaba has pushed aggressively
time in its financial statements. US retailers such as Walmart and Gap into the Asia-Pacific region with multiple
AMAZON MAINTAINS LEAD IN CLOUD SERVICES
Exhibit 1: Worldwide market share Q2 2018
Annual Growth Rate %
Alibaba
100%
Microsoft
Google
Gaining market share;
but a long way to go.
Overall Market Growth Rate Amazon
IBM
Rackspace
Salesforce
In a league of its own
Strong niche players
Oracle
0%
0% 35%
Worldwide Market Share
Source: Synergy Research Group. For illustrative purposes.
2. Source: “Jeff Bezos: I’ve made billions of dollars of failures at Amazon” The Guardian December 2014.
3. Source: Synergy Research Group July 2018.
4 Equity Markets / Three technology titans reshaping retail
AMAZON ACHIEVES RECORD OPERATING PROFITS OF US$3.8 BILLION experimentation and his concept of an
Exhibit 2: Quarterly operating income in US$ billions interdependent “ecosystem.” From its
From Q1 2015 to December 31, 2018 start in Ma’s apartment, Alibaba
US$ Billions embodied the energy of a scrappy
$5 Silicon Valley start-up. Each new busi-
ness Alibaba launches retains the
$4
autonomy Ma’s original start-up did,
$3 while also producing synergies that
Alibaba’s other businesses can leverage.
$2 Case in point is Alipay, Alibaba’s online
Amazon Web Services drives half of Amazon’s operating profit
payments service launched one year
$1 after Taobao.
$0 Alibaba knew early on that Taobao
needed something more than a colorful
$-1 website tailored to Chinese aesthetics to
Amazon’s international operations continue to lose money
help merchants make a sale. Most
$-2
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 shoppers in China didn’t own credit
2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 cards, and many were suspicious that
Total Operating Income Amazon Web Services (AWS) North America International online products might arrive as some-
Source: Bloomberg. For illustrative purposes. thing less than advertised. Alibaba
developed Alipay to resolve both issues.
It creates an escrow service in which
acquisitions, including Singapore-based Alibaba’s retailing ecosystem cash received for a sale isn’t released
Lazada in 2016. In response, Amazon Two years after Amazon went public in until the product arrives in satisfactory
has refocused its efforts on India, 1997, China’s Alibaba launched a condition. Alipay was quite lucrative
whose e-commerce industry is still rela- business-to-business (B2B) website for as a standalone business, but it also
tively small. So too has Walmart, small manufacturers looking to export gave Taobao a leg up over e-Bay, which
paying US$16 billion for a majority overseas. Alibaba’s birth as an online didn’t offer an Alipay-like service.
stake in Indian e-commerce company retailing giant, however, didn’t really Today, Alipay processes 80% of all
Flipkart. We think Walmart’s chess happen until four years later in 2003, transactions across Alibaba’s ecosystem
move was a smart one. When it comes the year eBay acquired China’s of online marketplaces and 60%
to emerging markets, merely trans- Eachnet.com. Countering eBay’s move, of China’s total mobile transactions.6
planting a US-centric business strategy Alibaba quickly launched an online
without local knowledge and expertise marketplace called Taobao, connecting Consumer data drives profits
can produce lackluster results. Both fledgling merchants and small Taobao’s rapid growth and ability to
firms, however, received a big blow entrepreneurs with Chinese shoppers. outmaneuver eBay were extraordinary by
in late December. The Indian govern- In just two years Taobao’s share any yardstick, and it became hugely
ment revised rules that essentially of China’s market of small businesses profitable. Like eBay, Taobao didn’t own
prohibit foreign firms like Amazon and selling to consumers—confusingly or hold inventory in expensive ware-
Walmart from selling goods through referred to as consumer-to-consumer houses. Taobao’s strong operating
Indian companies in which they have a (C2C)—approached 60%, forcing e-Bay margins come from consumer data, and
stake.4 If this rule goes unchanged, to close down Eachnet.com in 2006.5 the advertising services it sells to
it could significantly derail the opportu- merchants eager to stand out from
nities both firms originally saw in India. Alibaba’s ability to rapidly pivot and the online crowd. Advertising revenues
launch Taobao came largely from also helped support Alibaba’s
founder Jack Ma’s belief in
4. Source: Singh M. “Amazon and Flipkart face uncertainty as India readies new rules for foreign ecommerce companies” Venture Beat January 2018.
5. Source: Analysys International August 2007.
6. Sources: “China 3rd Party Mobile Payment Report.” iResearch 2017.
Equity Markets / Three technology titans reshaping retail 5
business-to-consumer (B2C) market- and collect more detailed consumer
place called Tmall, launched in 2008. data. The ability to follow and analyze Ant Financial
By tapping into Alibaba’s vast trove of vast quantities of product and consumer In 2011, Alibaba made the
Chinese consumer data, western brands data helps Alibaba eliminate inefficien- controversial decision to
like Apple and Nike can better target cies with smart logistics, digital transfer ownership of Alipay to
China’s rapidly growing consumer class, inventory management, anticipating a new entity under Jack Ma’s
while also paying commissions to Tmall. evolving consumer trends and personal-
sole control. Now called
ized shopper experiences.
Fast forward to the present, and Ant Financial, and 33%
Alibaba’s constellation of online market- We think Alibaba’s Hema stores offer owned by Alibaba, the
places generated gross merchandise a likely blueprint for Amazon to trans- company expanded beyond
volume of CNY4.8 trillion (US$768 form its Whole Foods grocery chain. mobile payments to issue
billion) for its 2018 fiscal year ending Launched in 2015, Hema stores serve a loans to consumers and small
last March. That represents 75% of dual purpose as distribution hubs businesses. Alipay users,
China’s CNY5.7 trillion online shopping for local online deliveries, and offline for example, can get revolving
industry, and more than Amazon and platforms where shoppers can experi- credit lines for spare cash,
eBay combined.7 ence new brands, pick fresh produce, and earn interest on unused
and enjoy in-store dining. Chefs are cash balances from the
Digitizing brick-and-mortar retail on hand to prepare meals with the world’s largest money market
Alibaba set a new record in 2018, ingredients shoppers just purchased. fund, Yu’eBao. Today, Ant
generating US$30.8 billion in sales on Hema customers use an app to shop in Financial has issued US$95
Singles Day—an online shopping extrav- stores, which logs their purchases billion in consumer loans,
aganza that Alibaba created in 2009. and preferences, lists product ingredi- more than China’s second-
That’s more than the two biggest US ents and places of origin, and lets
shopping holidays—Black Friday and
largest bank.9 Ant Financial
them buy with Alipay or facial recogni- is expected to go public,
Cyber Monday—combined. To celebrate tion technology. Revenue per square
Singles Day last year, Alibaba threw a though recent trade tensions
foot at Hema is 5x other grocery stores
gala with celebrity Mariah Carey and between the United States
in China, according to Alibaba. Online
showcased its “new retail” expansion and China have delayed the
shoppers within two miles can have
into brick-and-mortar stores. initial public offering (IPO).
deliveries at their doorstep within 30
Long before Amazon bought Whole minutes. About 60% of Hema’s sales
Foods, Alibaba was investing in retail currently come through online delivery,
but Hema’s founder Hou Yi is aiming Our Global Growth team sees two key
chains, including a Costco-like market
to push that to 80% or higher.8 ingredients to MercadoLibre’s early
called Sun Art, department-store
success: 1) a heavy emphasis on
operator Intime, electronics retailer
advanced technological infrastructure
Suning, and its own home grown MercadoLibre’s evolution and, 2) tailoring its websites and
grocery chain named Hema Xiansheng. from eBay to Amazon payments services to fit South America.
By integrating offline and online Ten years ago when investors called Understanding Latin America’s specific
retail, Alibaba wants to deliver products MercadoLibre the eBay of South local context was key to avoiding
to shoppers by whatever route they America, they were halfway correct. the missteps eBay and Amazon made
prefer—ordered online and delivered CEO Marcos Galperin started the in China.
home, pre-sorted for in-store pick company in eBay’s image with his
up, or neatly displayed so consumers Stanford business school classmates in In its early days, MercadoLibre gave
can touch and experience new brands 1999. They’ve since transformed merchants the option of listing products
in person. the company from an internet auction at fixed or auction prices. It quickly
site into Latin America’s leading online discovered the majority preferred fixed
Behind the scenes, Alibaba’s new retail
marketplace on par with Amazon. prices. MercadoLibre also changed the
strategy aims to digitize the entire
way merchants interacted with buyers.
supply chain, both online and offline,
7. Source: iResearch March 2018.
8. Source: Jacobs H. Zheng A. “Alibaba’s futuristic supermarket in China.” Business Insider May 2018.
9. Source: Kwan A. “Ant Financial Consumer Lending Reaches $95 Billion.” Bloomberg News March 2018.
6 Equity Markets / Three technology titans reshaping retail
Shoppers couldn’t interact directly with from MercadoLibre merchants. Interest- from growth and value perspectives,
sellers the way eBay allowed, because free loans offer tremendous value as shown in Exhibit 3. What struck
MercadoLibre rightly understood to shoppers, given high interest rates in us right away was the impact Amazon’s
that would likely cut it out of the trans- Latin America. This ease of doing capital-intensive business model
action entirely. Instead, it developed business also increases customer has long had on its profit margins.
Q&A message boards, which buyers loyalty, reducing the chances of shop- Compared with Alibaba, Amazon looks
found helpful. pers migrating to rival sites like Amazon. anemic. Also noticeable are Alibaba’s
declining margins and recent negative
Over time, to attract more merchants These new approaches to financial margins for MercadoLibre. Given these
to its busiest online marketplaces in services are one of the reasons our diverging trajectories, we asked our
Argentina, Brazil and Mexico, Global Growth team thinks MercadoLibre analysts to explain their views and
MercadoLibre developed logistical offers an efficient way to gain exposure reasons for remaining confident about
shipping solutions through its to online retailing in South America. future cash flows.
MercadoEnvios division, helping ensure As more internet users migrate to online
merchant deliveries arrived on time and mobile commerce in Latin America, Amazon’s profits gain momentum
for a better shopping experience. we believe MercadoLibre has the Since going public, Amazon’s heavy
It also generated powerful synergies opportunity to capture a majority of investments in technology, logistics
through MercadoPago, a payment these shoppers. and new products have long dampened
services division. Much like Alibaba’s its operating income. Bezos must
Alipay, MercadoPago offers an escrow Pathways to sustainable constantly balance between deploying
service for shoppers who need to fund capital to build future growth and
cash flows
their accounts with cash. Today, holding back to boost near-term profits.
Across our equity teams, we evaluated
MercadoPago facilitates roughly 90% of It’s for this reason our US Growth
recent company operating margins
the transactions across MercadoLibre’s analysts think traditional valuation
side-by-side so we could compare and
online platforms.10 metrics like price-to-earnings and enter-
contrast each firm’s accomplishments
prise value/EBITDA aren’t good
New financial technology
It’s MercadoLibre’s push into new finan-
cial technologies that holds significant OPERATING MARGINS VARY WIDELY ACROSS THREE RETAILING TITANS
promise in our Global Growth team’s Exhibit 3: Amazon’s capital intensive business model stands out from its peers
eyes. Half of Latin America’s population From September 30, 2013 to December 31, 2018
remains without bank accounts (or Operating Margin %
credit cards), and its economies are still 60%
largely cash-based. One side effect
50%
for cash-based entrepreneurs is that
banks won’t issue working capital 40%
without a history of verified bank trans-
actions. MercadoLibre, on the other 30%
hand, has the data to determine credit-
worthiness by tapping into its online 20%
sales history and customer reviews.
10%
Spurned by banks, more merchants are
turning to MercadoLibre for loans.
0%
For shoppers, MercadoLibre just -10%
launched a digital wallet that lets users Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Dec
earn interest on unused cash, as well 2013 2014 2014 2014 2015 2015 2015 2016 2016 2016 2017 2017 2017 2018 2018 2018 2018
as interest-free loans to buy products Alibaba Amazon MercadoLibre
Source: FactSet. For illustrative purposes.
10. Source: MercadoLibre November 2018.
Equity Markets / Three technology titans reshaping retail 7The Amazon effect
Amazon grabbed the spotlight in 2017 when it bought Safeway in 2015. But with US$12 billion in debt, Cerberus’
Whole Foods—nicknamed “whole paycheck” for its pricey plans to unload Albertsons through an IPO have stalled.
organic produce and ethically sourced proteins. In one fell
swoop, Amazon pivoted into the brick-and-mortar grocery It turns out that scale alone is not enough to succeed, as
business that its Amazon Fresh delivery service was struggling Kroger’s push into online grocery proves. We believe
to disrupt. The market noticed. In recent years, publicly investments in technology are necessary to amplify economies
listed grocery chains, drugstores and healthcare insurance of scale and offer more digital conveniences consumers
providers all saw their share prices plummet when the media are looking for these days. Kroger is taking these steps
reported Amazon was approaching, as shown in Exhibit 4. through ambitious acquisitions and partnerships. Last May,
Clearly, the market takes Amazon’s disruptive retailing power Kroger bought a minority stake in the UK online grocer
quite seriously. Ocado, striking an exclusive deal to build 20 robotic ware-
houses in the United States to service its online traffic.
Of course, Amazon isn’t the only disrupter. Performing an Using robots to pick and pack grocery orders should enable
autopsy on a decade of brick-and-mortar bankruptcies, Kroger to shave off labor costs and improve margins.
we note many struggled with large debt burdens as privately Kroger’s customers won’t ever interact with its warehouse
owned companies. Using leveraged buyouts to gobble up robots, but its online shoppers in Scottsdale, Arizona, are
a floundering business certainly has merits in a steady state already receiving their orders from Kroger’s fleet of self-driving
environment. But in today’s rapidly evolving world of digitized cars. Kroger is testing driverless deliveries to gauge customer
retailing, servicing too much debt can be damaging if you experiences before expanding to more stores.
aren’t also investing in new technology.
Our Value team put Kroger under the microscope just after
That’s been the case with US grocer Albertsons. A creature Amazon’s Whole Foods announcement, sensing a potential
of leveraged buyouts, Albertsons’ private equity parent bargain. They think Amazon’s disruptive impact may create
Cerberus rightly thought economies of scale were critical for better share prices for some viable companies—whereas
survival in the age of Walmart. Since 2014, dozens of Amazon’s own growth story doesn’t make sense to them from
smaller US regional grocery chains have filed for bankruptcy, a valuation perspective. In their eyes, Kroger is a survivor and
including Southeastern Grocers’ Winn-Dixie and Bi-Lo potential thriver despite the Amazon threat, largely because
chains. To avoid a similar fate, Albertsons became the second of its scale and strategic investments in new technology.
largest traditional grocer behind Kroger after merging with
THE AMAZON EFFECT—SPANNING GROCERY, DRUGSTORE AND INSURANCE INDUSTRIES
Exhibit 4: Share price declines following market-moving Amazon announcements
Chart shows stock price history for some of the affected companies from date of announcement to 1 month post announcement date. Prices are normalized to 100 on date
before announcement.
US$ Date: 06/16/17 Date: 01/31/18 Date: 06/28/18
$105 Announcement: Amazon to buy Announcement: Amazon to join JP Morgan Announcement: Amazon to buy online
Whole Foods Markets. and Berkshire Hathaway to reduce health pharmacy Pillpack.
care costs in US.
$100
$95
$90
$85
$80
15 19 21 23 27 29 3 5 7 11 13 29 31 2 6 8 12 14 16 20 22 27 29 3 5 9 11 13 17 19 23 23 27
Jun 2017 Jul Jan 2018 Feb Jun 2018 Jul
Kroger Walmart Target MetLife United Express CVS Walgreens
Health Scripts
Source: Bloomberg. Historical stock prices are shown one month following an Amazon announcement. Prices normalized to 100 on day of announcement. For illustrative purposes.
8 Equity Markets / Three technology titans reshaping retailyardsticks for Amazon.11 Simply put, So how does Alibaba steer margins Nevertheless, our Global Growth team
these metrics aren’t a reliable snapshot back in an expanding direction? Our is confident these investments can pay
of Amazon’s long-term profit potential, Emerging Markets team sees a couple off by improving the customer experi-
in our analysts’ views. of avenues, starting with growing ence and by attracting more merchants.
its cloud computing business in China.
Case in point are Amazon’s growing Alibaba also aims to help more The retail revolution is accelerating
profit margins over the past year. brick-and-mortar retailers digitize their The reality of today’s digitized market-
Operating profits were a record US$3.8 own back office supply chains through place means that not only has shopping
billion in last year’s fourth quarter— smart logistics, and by boosting changed dramatically in just a decade,
the fifth consecutive quarter that front-end traffic by tapping into the rate of change continues to accel-
Amazon topped $1 billion of net income Alibaba’s deep pool of consumer data erate. It’s now easier for shoppers to get
since 2017’s fourth quarter. Our US and cloud analytics. We see Alibaba tailored items and access products
Growth analysts think Amazon’s margin less as a collection of e-commerce more quickly and conveniently than ever
expansion story is finally taking root, marketplaces and offline retail hubs, before. Technology pioneers like
thanks to strong advertising revenues, and more as a data-centric ecosystem Amazon, Alibaba and MercadoLibre
AWS profit margins and selling more that drives profits through digitization are largely responsible for setting new
high-margin third-party merchandise. and technology, while generating better standards in the world’s biggest
customer experiences. markets—continually improving
Alibaba’s data-centric ecosystem customer experiences by anticipating
Unlike Amazon’s recent positive profit Building warehouses to stay on top their preferences, lowering prices
momentum, Alibaba’s operating MercadoLibre is investing in shipping and delivering items faster. Plowing vast
profits have faced headwinds from logistics and consumer incentives amounts of capital into new innovations
spending on businesses outside its core to shore up its commanding lead over (sometimes to the detriment of near-
China retail marketplace, including competitors like Amazon. Taking a term profits), these companies are
logistics infrastructure, local food page out of Amazon’s playbook, raising the bar for everyone by reshaping
delivery services where it competes with MercadoLibre is building new ware- customer expectations. We believe
a Tencent-backed rival, and Lazada houses to serve as cross-docking each company bears close watching to
in Asia. Profits from its “new retail” locations. It receives products from understand where the retail landscape
stores will likely take years to materi- merchants at one end and then is heading next.
alize. Agile competitors with deep turns around and delivers orders more
pockets mean Alibaba needs to spend efficiently to customers at the other
to keep existing customers happy and end. Yet costs to build these fulfillment
to lure new ones. centers, plus free shipping incentives,
have taken a noticeable bite out of
profit margins in the past year.
11. Price-to-earnings is a ratio for valuing a company that measures its current share price relative to its per-share earnings. Enterprise value is a measure of a company‘s total
value, often used as a more comprehensive alternative to equity market capitalization. EBITDA, or earnings before interest, taxes, depreciation and amortization, is a measure
of a company‘s overall financial performance and is used as an alternative to simple earnings or net income in some circumstances.
Equity Markets / Three technology titans reshaping retail 9Franklin Templeton Thinks: Equity Markets highlights the global views our equity invest-
ment teams have across developed and emerging economies, sectors and individual
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Primary contributors to this issue
Stephen H. Dover, Purav A, Jhaveri, Dan H. Searle, Mary Killian Tek Khoan Ong, Katherine S. Owen,
CFA CFA, FRM CFA CFA CFA
Research Analyst
Head of Equities Investment Strategy / Research Analyst Director of Research Portfolio Manager /
Franklin Equity Group
Portfolio Manager Research Analyst
Franklin Templeton Franklin Equity Group Franklin Templeton
Investments Franklin Templeton Emerging Markets Templeton Global
Investments Equity Equity Group
10 Equity Markets / Three technology titans reshaping retailWHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically,
due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are
associated with foreign investing, including currency fluctuations, economic instability and political developments. Invest-
ments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these
markets’ smaller size and lesser liquidity. Investments in fast-growing industries like the technology sector (which historically
has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product
change and development and changes in government regulation of companies emphasizing scientific or technological
advancement or regulatory approval for new drugs and medical instruments.
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