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Your Money > Investing Comment Articles > E tail therapy...
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By Richard Hunter, Hargreaves Lansdown
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness." Dickens was not referring to the irrational exuberance of the turn of this century and the dot.com bubble, but the observation fits. With the Internet this month celebrating its 20th birthday, the ride in investment terms has certainly not been a smooth one. There was, of course, a time when technology stocks become the "next big thing", when ten of the FTSE100 constituents were technology related, and when business plans were famously written on the back of a postage stamp while investors steamed into shares which actually had no proven business record. Then came the fallout - a number of technology stocks were rumbled and joined the "90% club", losing that much of their stock market value. So how do things look, some nine years on? Without question, there remains much to be said for the "online" model, whilst software continues to be vital to the engine of many companies. Interestingly, in a recent FTSE100 reshuffle of its constituents, Autonomy clawed its way back into blue chip territory after several years in the investment wilderness. The main difference now is that the online presence does not need to stand alone - and the market has developed into three broad categories. First of all, there are those whose strategy has become pure Internet. There are a number of examples of smaller, more specialised companies who have grown from the low barriers to entry from which an Internet start-up can benefit. The likes of ASOS, for example, the specialist online retailer of high fashion items, has been a particular success over recent years. Probably the most obvious category is the second, whose constituents offer a mix of internet and physical delivery. The "Clicks and Mortar" approach and the early adopters have been piling the pressure on their rivals. The likes of Tesco, whose online arm last announced further online sales growth of 30% (even back in 2006, sales exceeded £1 billion), and Argos (Home Retail Group), whose "click and collect" scheme is a current favourite of consumers are topical examples. The "click and collect" scheme allows customers to buy goods online and then physically collect them in store. Argos' internet orders continue to grow exponentially. Even HSBC was able to report a 30% increase in online accounts recently. The third category, oddly enough, are those companies who do not have an Internet capability at all. A 2007 Microsoft survey revealed that only 56 of the 100 largest UK retailers have a website which enables the online purchase of their goods. One can only assume that these (largely unreported) findings could yet have a large impact on the inexorable growth of online shopping. New "dot.coms" (such as moneysupermarket.com) benefit from low barriers to entry and must now prove that they have the kind of sustainable business model which was not previously asked for. They do, nonetheless, remain welded to the fortunes of the wider economy and, as such, potential investors need to crunch the numbers and conduct their own research before deciding to buy the shares. Another recent piece of research from the online retail research group, IMRG Capgemini, reported that online sales were up by 13% in February compared to the previous year. Even though this figure was actually a drop from the previous month (where continuing post-Christmas sales had inflated those figures), the research concluded that "year on year growth for e-retail continues in stark contrast to the high street. Consumers are still turning to the internet to make their purchase decisions and ensure their disposable income goes further." So, the online model continues to grow apace, with its accessibility, security, speed and (often) cheaper products all major positives. By the same token, the current winners have on the whole tended to be those which do not rely solely on the internet as a place to do business, rather it is seen simply as another delivery channel which leaves the choice of how to do business with the consumer. The success of this new business model has turned out to be a good example of letting the market decide, rather than irrational exuberance resulting in a bubble which painfully popped to the detriment of many investors at that time. Richard J Hunter is Head of UK Equities at Hargreaves Lansdown Stockbrokers Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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