Disruptive Commerce: Upending Ecosystems and Unlocking Innovation

Franklin Equity Group’s Matt Moberg and his team explore the ‘Cambrian-like’ explosion of new businesses and business models—and investment opportunities— in the e-commerce “ecosystem”.

    Matthew Moberg, CPA,

    Matthew Moberg, CPA, Senior Vice President, Portfolio Manager, Franklin Equity Group

    Joyce Lin, CFA,

    Joyce Lin, CFA, Vice President, Analyst/Portfolio Manager, Franklin Equity Group

    Will Holding, Research Associate, Franklin Equity Group

    LETTER TO Investor

    We have been investing in innovation for over a half century here in Silicon Valley. Over this time, our philosophy has been that innovation creates wealth in the economy, and therefore we should focus our investment on innovation to outperform the market over the long term. Within this philosophy there are three core tenets that we have found to be foundational; innovation in the economy is accelerating, investing in innovation demands active management, and innovation is everywhere.

    As it pertains to the last point—innovation is everywhere—we have highlighted five platforms we see developing concurrently in the economy: disruptive commerce, genomic advancements, intelligent machines, new finance and exponential data. These five platforms are not intended to be an exhaustive list nor are they static; rather, they are an attempt to distill, explain and categorize many of the changes occurring around us. We expect that over the next several decades, different platforms based on new innovations and advancements will emerge just as some of the current platforms will fade. As growth investors, a flexible mindset is critical.

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    This paper focuses on one of these platforms, disruptive commerce. It is a topic that is deceptively broad and deep. Disruptive commerce refers to the ecosystems of companies and industries that have been impacted by the global shift to digitalized commerce, or e-commerce. Any discussion about e-commerce today starts with retail, and e-commerce will continue to disrupt retailing as it moves into increasing number of verticals. Although consumers purchase books, office supplies, toys and travel predominately online, there are still large, untouched profit pools. Autos, real estate, health care, and groceries, just to name a few, are only starting to develop online. Many of these new verticals will benefit from technological advancements we have seen over the past 20 years that have led to a Cambrian explosion of new business models and creativity. The sharing economy, fun social group buying, website development, checkout lending, micro influencers, location-based recommendations and even virtual dressing rooms push technology forward and allow us to purchase and sell products and services more conveniently than ever before. Furthermore, disruptive commerce is not only a story about the retail sector, it has massive ramifications on industries such as finance and payments, media, cyber security and even transport. The innovations in commerce have been disruptive to many businesses, but they have also created a tremendous amount of value, globally.

    This paper has been a joy to produce. As avid readers of history, we enjoy studying how and why we are at this juncture in e-commerce. We hope the paper highlights the value and perspective a generalist can bring to a topic. We also hope it conveys how the simple idea of driving additional convenience and price transparency for consumers can catalyze broad-reaching implications in many different sectors of the economy, including: finance, transportation, communications, media and technology. As investors, we are excited to see whether our hypotheses of how this platform will evolve will come to pass. The unprecedented changes in consumer behavior we are experiencing within the COVID-19 world makes it the perfect time and place to discuss changes we see in the economy.

    Matthew Moberg, CPA
    Vice President,
    Portfolio Manager Franklin Equity Group

    KEY TAKEAWAYS:

    • Global e-commerce is an area of tremendous opportunity, as the disruption we see is only just beginning.
    • Industry vertical adoption of e-commerce varies significantly. While some industries have seen meaningful e-commerce penetration, others have barely scratched the surface. Real estate, autos, furniture, and health care are examples of underpenetrated verticals.
    • The explosive growth of e-commerce has created entirely unforeseen business models, such as those built around sharing economies, auctions, artisanal products and social influence marketing.
    • Technological advancements will continue to unlock new business models, new retail verticals, and new methods of interaction that we have never seen before. In many cases, e-commerce will be the economic driver of technological advancements.
    • COVID-19 has been an accelerant of the changes outlined in this paper. For the first time in history, we saw an acceleration in e-commerce adoption despite gross domestic product declining globally. The pandemic is creating some of the greatest retail, payment and distribution challenges in our lifetime, and e-commerce is responding with agility, speed and continuous innovation.
    • As a team, we study, discuss, monitor and invest in a broad range of industries that reach far beyond traditional retailing as we see e-commerce’s effects in almost every facet of the economy. We believe this provides us with a broad and differentiated view of e-commerce that allows us to invest more effectively and holistically in this disruption.


    WHAT ARE THE RISKS?

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    Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommen¬dation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.