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The power of disruption and what it means for Asia

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

When it comes to the pain felt by bricks-and-mortar retailers over the past 12 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 most companies. Amazon is the standout winner, with its market value rising by more than 4,437%. Other major retailers – with the notable exception of Walmart – have seen their market values fall between 30% and 98%. In the case of Sears, shareholders have lost almost everything.

How the value of companies has changed over the last 12 years

Company

Market Value 2006 (US$bn)

Market Value 2018 (US$bn)

% change

Sears

28.8

0.0

-100

JCPenney

17.4

0.3

-98

Nordstrom

12.7

7.8

-39

Kohl's

22.4

11.0

-51

Macy's

20.0

9.2

-54

Best Buy

23.6

14.3

-40

Target

49.0

34.5

-30

Walmart

192.5

270.6

+41

Amazon

16.3

737.5

+4,437

Source: Factset, Data as of 31 December 2006 and 31 December 2018. Past Performance is not a guide to future performance and may not be repeated. Securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

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, retail 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 are notable examples.

Alibaba began as a business-to-business online marketplace 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 (£194 billion) in size. 

initially started as an instant messaging business in 1998 and is one of the largest social networking platforms in China. Through its Weichat/Weixin messaging platform, it now has more than a 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 is immense. Of the country’s 560 million internet users, a figure itself that continues to rise, only 120 million shop online, providing headroom for substantial growth. Meanwhile Indonesian-based Go-Jek, a digital transportation and logistics company with operations across South East Asia, was valued at $9.5 billion (£7 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 (£573 billion) but just 647,500 employees; Walmart has a market value of $270 billion (£210 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 increasingly open to new ideas and quick to adopt new products and services. It means there is plenty of scope for what might be 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 investment approach.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Any references to securities are for illustrative purposes only and not a recommendation to buy and/or sell.

Schroders

Schroders has been managing investment trusts since 1924 and has established a strong reputation. Our specialist teams draw on Schroders’ extensive investment resources, combining global insights with local market knowledge.

We offer a range of investment trusts that focus on three specific markets – the UK, Asia and real estate. With clearly defined investment strategies, they help investors meet different financial objectives.

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