Many investors and online buyers are concerned that this move will curb the sharp growth in online retail sales. I think the potential ramifications might not be as severe. Let’s examine the recent developments in online retail and see why an added tax won’t hold down leading e-commerce companies.
E-commerce sales on the rise
The e-commerce (opens pdf) market continues to augment its market share of out of the total retail business: e-commerce sales grew from $194 billion in 2011 to more than $225 billion 2012 – an increase of 15.8% (year-over-year). In 2011, the growth was 15.2%. Moreover, in the last quarter of 2012, e-commerce sales grew by nearly 16% (y-o-y).
In comparison, total retail sales grew by only 4%. Thus, the market share of e-commerce out of total retail grew from 4.9% in the third quarter of 2012 to 6.2% in the fourth quarter of 2012. I think this trend will continue as more people shift their retail purchases to online stores.
Sales of total retail continue to rise this year: retail sales rose in the first quarter of 2013 by 2.7% (compared to the same quarter in 2012) – retail sales rose from $1 trillion in Q1 2012 to $1.1 trillion in Q1 2013.
Investors have demonstrated confidence in retail of late, as the ETF that follows retail – the SPDR S&P Retail (ETF) (NYSEMKT:XRT) – rose during 2013 (up to date) by more than 14.7%. Part of the reason for the rally is the growth of online shopping.
The share of Internet retail rose in this ETF from 7.6% as of June 2012 to 9.2% as of April 2013. The ETF is attempting to replicate as closely as possible, before expenses, the total return performance of the S&P Retail Select Industry index.
The index follows 97 retail companies, including names such as Rite Aid Corporation (NYSE:RAD), Netflix, Inc. (NASDAQ:NFLX) and SUPERVALU INC. (NYSE:SVU). Rite Aid has the highest share at 1.5% while Fred’s has the lowest at approximately 0.6%. Nonetheless, I think that if an investor wishes to invest in retail, he or she might as well consider a specific retailer that has higher growth (such as the two companies listed below), or at least pays dividend.
Let’s turn to analyze two leading e-commerce companies, their growth in sales, and the potential effect of the tax on online shopping will have on these companies’ revenue and earnings.
Amazon.com, Inc. (NASDAQ:AMZN)
If the new imposed taxes come into effect, they will (obviously) only affect a company’s sales in the U.S. As of the first quarter of 2013, Amazon.com, Inc. (NASDAQ:AMZN)’s North American sales account for 58% of its total sales. This percentage has risen moderately by roughly 1% to 2% every year. Nonetheless, this also means that the international segment accounts for 42%. So, if a tax is imposed, it will affect at best slightly more than half the company’s operations.
But will imposed taxes curb the company’s growth in sales? Since buyers already pay state taxes when they visit a store, the imposed tax on online retail might make certain products more expensive than they are in retail stores. Nonetheless, I still think many products will still remain cheaper.
Moreover, several products that Amazon.com, Inc. (NASDAQ:AMZN) sells, such as e-books, are growing not only because of the low price but also due to a change in preferences of many buyers. For example, according to a recent survey, nearly 21% of Americans have read an e-book. Those who shifted to e-books read 24 books a year, compared to 15 books for non-e-book readers.
If this trend should continue, then Amazon.com, Inc. (NASDAQ:AMZN) will show ongoing growth sales in e-books – the company’s core business. The rise in e-book readers and the high number of e-books read indicate demand for e-books is rising not only because of product price but due to other factors.
The comfort and speed of buying an e-book and other products are likely to remain the strong points of purchasing online, and are likely to maintain the growth in e-commerce sales even with a sales tax.
eBay Inc (NASDAQ:EBAY)
eBay Inc (NASDAQ:EBAY)’s international business segment accounts for a high portion of its gross merchant volume: in 2012, the company’s U.S segment accounted for 39% of its total volume; this means the international segment has a much higher share in the total volume (of 61%). On the other hand, the growth in volume was much higher in the U.S (16%) during 2012 (y-o-y) than in the international segment (only 10%).
Furthermore, in terms of net revenue, the U.S and international segments are roughly the same. But the growth rate is higher in the U.S than it is internationally. So, the U.S segment accounts for roughly half the company’s revenue, which mean the taxation legislation will only affect at best half the company’s revenue.
But even so, I think the taxation will have a smaller effect than many might consider. eBay Inc (NASDAQ:EBAY) is basically a place for bargain hunting. A tax might make products less of a bargain, but since the alternative (going shopping in a store) will remain more expensive and already include taxes then the demand will only be marginally affected by it. This is true only in case of across-the-board imposed tax on all states and not for a single state’s tax hike.
A recent study (opens pdf) showed that eBay Inc (NASDAQ:EBAY) buyers are sensitive to a tax bump when it comes to a rise in state tax (a single state): a state’s increase in sales tax by 1% could cut state retailers sales by 3% to 4%. The study didn’t consider across-the-board tax increase in all states. I suspect the price elasticity in this case will be much smaller.
I don’t think the decision to raise taxes will be good for the online retailers, but the concerns might be a bit overblown. The leading companies don’t only rely on the U.S and have very strong international segments. The effect of taxes on online purchases might eventually have a small adverse effect on leading online companies.
The article Will Taxing Online Retailers Curb Their Rally? originally appeared on Fool.com and is written by Lior Cohen.
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