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Companies that are not targeting for better than 30% of sales to come from e-commerce risk the consumer resetting that benchmark closer to zero. Retailers need to evolve faster than consumers, not vice versa.

Industry wide e-commerce penetration has grown drastically over the past decade which we estimate now accounts for ~5% of total sales from just 1% in 2000. Despite the widespread growth trajectory of the channel as a whole, there remains a notable bifurcation between companies who have truly laid the groundwork to lead the omni channel drive relative to those who remain squarely in catch-up mode.  

Most companies are currently aiming for MSD-HSD penetration in online sales as a percent of total revenues. But these are baby steps. The companies looking to grow via baby steps will get steamrolled. The retail landscape needs to move faster than the consumer, not vice/versa.

Some companies however, like URBN are thinking long term, targeting half of its sales online as early as 2017 with penetration currently sitting at an already industry high of ~20%. Interestingly, industry data suggests URBN is one of the most exposed to the younger spending demographic with ~53% of online sales from consumers 34 and younger which lends well to the e-commerce opportunity long term. URBN is still far from the highest penetrated in the growing e-commerce channel with WSM e-commerce sales accounting for ~38% of revenues (44% including catalog) and the office superstores (which is driven largely by small business commodity-product order fulfillment) exceeding 40%.

Alternatively, there remains substantial opportunity for several retailers that currently operate a largely wholesale model like NKE, RL & VFC. It’s amazing to see that Nike’s e-commerce penetration is a third of UA and LULU. It has a much larger installed base of revenue, but it will begin to rapidly close this gap (while the others continue to grow – as they are winners as well).

Ultimately, we like companies like URBN that are targeting 50% penetration…maybe they fall short, but they’ll get close. Anyone simply targeting 10-15% has risk of getting bypassed by the consumer and having that ratio ultimately going to 0%.  (i.e. BBBY.)

HedgeyeRetail Visual: Evolve or Perish - E Commerce COTD