Why the Baby Amazons should continue to outperform

EM e-commerce players (Baby Amazons) — Jumia, SEA, Flipkart and Ozon have outperformed Amazon ytd — driven by Covid-19

Unlike in developing markets, e-commerce is the first step for millions of emerging market consumers to access retailing.

The Baby Amazons have outperformed Amazon by an average of 63% in 2020. Covid-19 has been kind to the Western e-commerce giants, but even kinder to the Baby Amazons.

Baby Amazons have even greater potential than Amazon in the post-Covid-19 world. EM e-commerce players are replicating the success of Amazon at a faster pace. EM e-commerce revenue grew by an estimated 18% CAGR in 2014–19, but rose by an average of 28% yoy in H1 20 alone. The Baby Amazons’ gross merchandise value (GMV) increased by 30% yoy in the same time period. Some EM e-commerce players outperformed Amazon in yoy revenue growth in 1H20.

The drivers of EM e-commerce have become stronger in Covid-19. Internet penetration in the EM world has leapt forward, powered by cheap data. In India, Jio has cut data costs by c97% in 2020. Moreover, smartphones have increasingly become the main way of accessing e-commerce.

The revenue and valuation gap could narrow in five years. Although EM e-commerce firms have just one-tenth of Amazon’s US$335bn GMV, we think the ratio could narrow to one-fifth in just five years’ time. The combined value of EM e-commerce firms is currently just 37% of Amazon’s US$1.6tn market cap — the market is still undervaluing the Baby Amazons.

The Baby Amazons’ cash flow situation is less worrying given the low interest environment. EM e-commerce companies have high costs of goods, opex and capex. Hence, they are negative CFO and FCF. However, risk-free rates have fallen by 60% in the main emerging markets, easing the cash burden.

Covid-19 has widened the e-commerce canvas

The traditional drivers of EM e-commerce have been threefold:

1. Internet penetration has galloped forwards in the EM world, powered by cheap data;
2. Smartphones have become the principal means of e-commerce, as cheaper accessible models have flooded the market; and
3. Unlike in developing markets, e-commerce is the first step for millions of emerging market consumers to access retailing.

However, with Covid-19, a new set of drivers have emerged, further boosting the sector:

1. E-commerce adoption has been much broader in the large EMs, like India, Indonesia, Brazil and Nigeria, than expected. Groceries and health-care items have moved online at a much faster pace than expected.
2. Smartphones adoption has accelerated; and
3. E-commerce has become more prevalent among the old age categories in emerging markets.

This article first appeared on Tellimer.com. To read more about how Covid-19 is impacting technology in emerging markets, go here.