"Flash Selling" Winners and the Future of E-Commerce

The future of commerce may very well lie in cyberspace. Not only that, but the fastest growing trend within the world of e-commerce happens to be a variation of one of the eldest retail tricks in the book - deals of the day. This sales tactic, also known as "flash-selling", has taken both markets by storm with unparalleled year-over-year growth. As we look at the rise of flash-selling companies like Zulily  and Vipshop Holdings  versus traditional e-commerce juggernauts such as Amazon.com  and JD.com , can we identify the best investment?

Unquestioned growth but margins remain a problem
According to eMarketer , worldwide e-commerce sales will increase 20.1% this year to $1.5 trillion and 56% to $2.35 trillion by 2017.


Amazon and JD.com have very similar business models and between them have $100 billion in gross merchandise volume on their sites. In other words, both companies have shown unquestionable growth.

 

Amazon

JD.com

2014 Revenue Outlook

$90.8 billion 

$17.7 billion 

2014 Revenue Growth Expectations

22%

54%

Source: Yahoo! Finance

The problem for both Amazon and JD.com is not growth, but rather infrastructure and high costs. Both have to maintain high inventories and make large investments in fulfillment centers to handle high order volumes.

JD.com is even responsible for shipping 70% of its own products out from 1,620 delivery stations and 214 pick-up locations, while Amazon uses shipping carriers. As a result, operating margins are poor for both companies at less than 1% and negative 5.6% for Amazon and JD.com, respectively.

Flash-selling answers the margin problem
Unlike traditional e-commerce companies that sell many products and have to maintain massive loads of inventory, a flash-selling company sells certain products in bulk at specific times. The company acquires these goods at a discount, sells them at a low price, and then ships them out in bulk. It sees higher margins as a result.

 

Vipshop 

Zulily 

2014 Revenue Outlook

$3.64 billion

$1.2 billion

2014 Revenue Growth Expectations

104%

72.6%

Operating Margin

3.68%

1.45%

Source: Yahoo! Finance

You can see that Zulily and Vipshop are more profitable than their larger peers. This is impressive given the need for infrastructure spending at smaller e-commerce companies; both Vipshop and Zulily have increased their spending on fulfillment centers. The key is that flash-selling allows more pricing power and does not require as much inventory. Yet consumers use it because they get lower prices for select deals.

Where's the best investment?
It may be unknown if the flash-selling business model can ever generate $50 billion in annual revenue, but we do know that there is a place for the service within e-commerce. However, Vipshop and Zulily are smaller than their respective peers and are growing faster and are more profitable, so both look like good long-term investments.

Source: eMarketer

The distinguishing difference between these two companies comes down to China versus the U.S. Research firm eMarketer expects U.S. e-commerce sales to grow just 11.8% this year versus 63.8% in China. As we look further ahead, the firm expects China's growth to remain above 30% for the next several years while the U.S. market struggles to maintain double-digit growth.

Therefore, in using these estimates, Vipshop looks to have the most to gain, which means that even with a 3,200% stock price gain since its 2012 IPO its rise may be far from over.

Foolish thoughts
Amazon and Zulily will continue to grow, but with the U.S. market tightening both will have to spend aggressively, which will further cut into their margins. As for JD.com and Vipshop, both could grow at a compound annual rate of 35% for the next four years without gaining any new market share.

At 38 times next year's estimated earnings Vipshop is not too expensive given this growth, and when compared to peers like JD.com the separating factor is definitely margins, which makes it a superior investment.

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The article "Flash Selling" Winners and the Future of E-Commerce originally appeared on Fool.com.

Brian Nichols owns shares of ZULILY, INC. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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