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April 20, 2020

MRP Adds a New Retail Pair Trade to List of Themes: Clicks vs Bricks 2.0

Summary: The nationwide lockdowns that have kept people out of shopping malls, restaurants and bars have also tilted consumer shopping habits more deeply towards ecommerce. The unprecedented windfall for online retailers will only accelerate the divergence between the clicks and the bricks going forward.

MRP Adds a New Retail Pair Trade to List of Themes: Clicks vs Bricks 2.0

With large swathes of the country under lockdown, Americans cut retail spending by a record amount in March 2020, causing retail sales to plunge by a seasonally-adjusted 8.7%. It was the biggest month-over-month decline for retail sales on record. Year-on-year, retail sales fell 6.2%.

But what’s turning out to be an annus horribilis for most retailers is proving to be quite the opposite for others. The same containment measures that have kept people out of shopping malls, restaurants and bars have generated an unexpected windfall for online retail, as evidenced below.

Surging Online Grocery Sales

Online grocery stores are experiencing unprecedented global demand, much of it from first-time consumers. This is as much true in China, -- where the largest tech companies had struggled to prove that online groceries can be a viable business -- as it is true in Russia, France, Italy, and in the United States. During this period, online comprises 90% of overall sales for some independent US grocers, a paradigm shift from normal operations. Analysts believe that many of these first-time customers will remain active even after the epidemic burns itself out.

Surging Online Alcohol Sales

While the temporary closure of the hospitality industry has weighed on the sale of alcoholic beverages, online sales is picking up some of the slack. As reported by MRP in our April 9 DIBs report, U.S. online alcohol sales rose a whopping 243% YoY in the week ending March 21. One Manhattan-based merchant that claims to be America’s oldest wine store says their walk-in traffic shifted immediately to online, once the lockdown began. The store’s owner says online sales surged 300% in March while overall sales were actually up 20%.

Surging Online Home Decor and Furniture Sales

Online furniture company Wayfair says business is booming, as people furnish their home offices or decorate while they are shut in during the coronavirus pandemic. Wayfair said in a press release that when it entered March, gross revenue growth was just under 20%, similar to trends during January and February. But by the end of the March, growth more than doubled and has remained that way through April. Wayfair’s sales surge is the result of people adjusting their homes for telework arrangements.

Digitization of Offline Retail

Offline retailers have had to quickly find ways to digitize their business to survive in the current environment. Some have listed their products on third-party seller marketplaces run by Amazon, Etsy, and Walmart. Others have set up their standalone online stores built on the ecommerce infrastructure of technology firms like Shopify, Magento, BigCommerce, and Squarespace, to name just a few. Many brick-and-mortar businesses have also converted their physical stores into so-called dark stores, closed to the public and used to fulfill online orders or call-in orders.

The fact that the same patterns are emerging around the world, including in markets as far flung as Russia emphasizes just how much more consumers are embracing ecommerce in the COVID-19 era.

Ecommerce Acceleration to Outlast COVID-19

The big takeaway here is that, over just a few weeks, lockdowns to curb the spread of the novel coronavirus have tilted global consumer shopping habits even more towards ecommerce, forcing both online and offline sellers to adjust rapidly. Even an ecommerce veteran such as Amazon was caught off-guard by the huge demand surge, and has now embarked on a massive hiring spree of some 100,000 people to boost its logistics and customer service operations.


New MRP Theme: Bricks vs Clicks 2.0

MRP believes the decades-long shift from physical retail to e-commerce will pick up pace henceforth, benefitting companies that conduct or facilitate online sales while hurting department stores and apparel retailers that are especially reliant on in-store sales to pay their bills and cover rent. Ecommerce represented just 11% of total retail sales in 2019 in the U.S., according to the U.S. Department of Commerce, so that proportion has considerable upside.

Based on the views expressed above, we are adding a pair trade that’s Long Online Retail / Short Brick-and-Mortar Retail to our list of active themes. We will monitor the theme via the ProShares Long Online/Short Stores ETF (CLIX).

The underlying index is built from two sub-indexes, one long and one short. To be included in the longs, a company must draw none of its revenue from physical stores and must be listed on a US exchange, though it is not required to be a US company. For the shorts, in-store sales need to account for at least 75% of revenue, with the same US exchange requirements as the longs. 

Long Online / Short Stores (CLIX) vs S&P 500 (SPY)