Good News – Bad News
Somewhere in the long languid months of summer global investors rediscovered risk, worry and the fundamentally unknown nature of the future. Unfortunately, for asset prices and those who want/need/rely on asset price appreciation, assets have been dragged along for a rough and downward ride. Led down by a long and brutal slide in commodity prices and rising indication of growth deceleration in China, we are now into global correction or bear territory. Major sectorial and national indexes being down 10% or more, correction, or 20% or more and thus in bear market territory.
The Bureau of Labor Statistics (BLS) released the latest data on productivity, labor costs, employment and work compensation. The information, while precious and informative, is unlikely to turn the difficult market tides. Additionally, the latest data comes at the tail end of earnings season in which any disappointments of earnings, revenue, and guidance were met with swift and decisive overreaction and share price pummelling. All of this comes as, still expensive stocks, reset to lower multiples and often announce harder earnings terrain ahead.
The above chart has a lot going on. What we can clearly see is that productivity has been strongly growing during much of the recent recovery. This has been driven by new technologies, cost cutting and a persistently weak labor market. The good news is that long overdue and much needed strength has returned to wage trends. This is particularly important as labor force participation has remained very weak. Fewer folks earning reported incomes and officially in the labor force, means wages are supporting more folks than in the recent past. Rising productivity helped rebuild profits and investable funds. More worrisome is that the recent downdraft in productivity growth and rising wage pressure suggests we will see a reduction in economic growth and pressure on profits.
The long and strong productivity run has been materially aided by breakthroughs pouring out of tech start-ups. It is well known and often celebrated that it is faster and easier to build a start-up now than in the past. It is also well known that a part of the reason for this is the success achieved and on the horizon for many enterprise web 2.0 companies. Start-ups successes beget start-up successes. Slack has aided communication, Zero has aided book-keeping, Swipe enables payments, and Cloudera and Nutanix have delivered power and efficiencies to smaller firms. Firms in our area have both contributed mightily too, and benefitted substantially from, private tech company innovation. This has propelled forward productivity numbers and contributed to national and global growth.
The flip side of all the recent productivity growth has been a large structural increase in the percentage of the society that is outside of the labor force. Rapid technological change, an aging population and great geographical and education level differences in performance contribute. The relative power of employees to bargain, the rise of the gig economy, and sharing economy opportunities, have led to stagnant wages. Stagnant wages have slowed the demand recovery and raised political temperatures for years. There is now growing evidence that the recent structural balances have gotten too large and a period of consolidation is imminent and needed.
As the above chart and recent reports suggest, wages are rising and productivity growth is well below where it has been. We will see profit rate pressures and a period of consolidation. The next period must and will be about making many of our new technologies potent and operational. Incremental adoption, not disruptive change, will be the order of the day. This generally aligns with our belief that technology itself, investment and the macro economy, are setting up to create a period, the next 18 months, that will be all about operationalizing and cost savings. The rising wage data and slowing productivity reports of the last weeks support this thesis.
Survey Says…Flipkart is #1
That the ecommerce market in India is flourishing has been well established. That the e-tail market in India is expected to reach $220 billion by 2030 from $7 billion currently has also been well telegraphed (Goldman Sachs estimate). Given the market opportunity, the stakes are high for the three dominant players – Flipkart, Amazon India and Snapdeal – to capture market share and mind share.
Against this backdrop we conducted a proprietary on-the- ground survey in India to get a first-hand view of the competitive landscape, and who is leading the market. The survey was conducted by Findyr. [Findyr is an offline search engine that enables users to make real-time information requests to collectors in over 120+ countries and gather local data, perform surveys, take photos or capture videos at any location].
Key Takeaway – Flipkart Leads in Most Categories; Amazon India & Snapdeal are Highly Competitive
The e-tailing market in India is still nascent but growing exponentially. It is a period of land grab for the key players and competing on price, service and the breadth of offerings are key determining factors. Overall, one theme stood out in the survey: Flipkart has leveraged its incumbency to maintain its market leadership in most of the important categories, with Amazon India and Snapdeal nipping away at its heels. That said, the competitive landscape is heating up by the day, and none of these three companies can afford to take their eyes off the ball – particularly Flipkart given that Amazon India has made it clear that it intends to invest aggressively in India. [Please see Page 4: Amazon just acquired a payments company in India].
Findyr conducted on the ground market research in India. The survey sample comprised “young urban, middle-class professionals” residing in Mumbai, a major magnet city.
The survey questions were designed to understand the following key attributes of the nascent etailing market: The changing attitudes among young Indian professionals towards e- commerce versus brick-and-mortar retail as well as their preferences with respect to each of the three major e-commerce companies.
The survey participants were asked to rank the companies in various categories. Additionally, they were polled about their preferences between local retail and e-commerce, how they are currently spending their retail rupees, how they plan to spend their retail rupees, and how they perceive each of the e- commerce retailers. The poll was equally split between professional men and women between 18 and 35 years of age.
The vast majority of respondents have used all three e-commerce retailers.
Rankings of E-commerce Players – by Category
Front-end user experience: 66% rated Flipkart good or very good while 62% for Amazon India and 62% for Snapdeal;
Product Selection: 63% rated both Amazon India and Flipkart good or very good and 57% for Snapdeal;
Pricing Competitiveness: 67% named both Flipkart and Snapdeal good to very good and 64% for Amazon India.