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Beyond the FAANGs: Digital Platforms

October 24, 2017

U.S. equity market returns over the last several years have been driven by the performance of a select group of large cap information technology and Internet stocks that have come to be known as the FAANGs, for Facebook, Amazon.com, Apple, Netflix and Google (now known as Alphabet). Our investment teams have shared concerns about the crowding effect that the outlier performance of this group has created. While these companies possess unique business models and maintain strong long-term growth potential, we believe attractive current opportunities may also be found in looking beyond the FAANGs to other areas of technology, such as digital platforms that empower consumer buying.

Web Enablement Firms Help Businesses Engage the Connected Customer

The rise of the Internet and democratization of technology have dramatically changed the way goods and services are considered, purchased, and experienced. We see a number of innovative public companies helping businesses, both small and large, adapt to this new paradigm. This creates opportunity for not only the businesses themselves, but also those technology companies which are empowering them.

As a result of the expanding number of touchpoints influencing purchasing decisions, as well as increasing time spent online by shoppers, the business-to-consumer (B2C) relationship has become significantly more complex. In 2009, McKinsey coined the term “consumer decision journey” to shed light on this phenomenon and help businesses better appeal to a more informed and engaged consumer. Years later, McKinsey expanded their recommendation, advising that businesses also leverage technology, not only to attract but also service their customers. While the key tenets of the decision path remain largely the same – with consumers migrating through the phases of consideration/evaluation, purchase, and post purchase/loyalty – technology is now ever present on both sides of the B2C exchange and increasingly important in driving new and repeat purchase activity.

A consumer’s decision about a product or service generally begins with discovery and consideration of a particular offering. After awareness is built, consumers often evaluate their potential purchase, in many cases against other available alternatives. This entails research which is increasingly conducted online as each newer generation emerges (see Exhibit 1). While search engines, social networks and consumer reviews may have an impact on a consumer during this stage of the decision-making process, a business’s website carries significant influence. This makes a sophisticated web presence critical for businesses of all sizes.

 

 

Exhibit 1: How Customers Research Purchases by Generation

Source: BigCommerce 2017.

 

While this may seem like a long-standing trend, a recent survey from Capital One suggests that a staggering 44% of small businesses still lack a company website.  In addition, there are a number of business websites which contain stale information or lack key feature/functionality (e.g. experiences are not optimized for mobile).  The reason is web development historically required significant financial and human capital resources.  Namely, corporate websites were expensive to create and required professionally trained programmers to update.  However, in recent years, innovative web development companies, like Wix.com, have helped to lower the cost and expertise required to build and maintain a sophisticated website.  Wix’s easy-to-use, web-based “drag and drop” editor enables non-tech savvy individuals to create and manage a professional desktop and mobile presence.  Recently the company also released new software which embeds artificial intelligence to help further streamline the design process, shortening the development time required.  These tools allow businesses to take control of their digital footprint, better positioning them to positively influence those evaluating their product or service, even across newer channels like mobile.

The hard work, however, does not stop once a consumer determines that he/she would like to make a purchase.  Customers increasingly want to be able to transact when and where they are ready, whether in-store, online (either on their retailers' websites or retailers like Amazon.com), on social media, or even via a messaging platform (see Exhibit 2).  Regardless of this choice, it’s important for companies to make the experience consistent and seamless for customers to transact across all channels.  This creates a challenge for businesses that need to coordinate brand image, payments, and fulfillment, as well as sync inventory and other data sets across numerous silos of the organization.

 

Exhibit 2: Channels Used to Generate Sales

Source: PWC and SAP Retailer Survey 2017. Note: Survey asked which of the following channels does your organization use to generate sales? Respondents asked to select ALL that apply.

 

eCommerce platforms like Shopify address this problem by offering a single, unified platform to enable businesses to control and manage all of their commerce activity from one central place.  This helps to avoid potential pitfalls (such as selling an out of stock item) that may otherwise result from increased channel complexity.  Shopify also offers reliable and scalable solutions, for payments and shipping for example, which help to remove unnecessary hurdles and excess costs from the buying/receiving process.  This increases the likelihood that consumers have a positive purchase experience, no matter the channel.  Businesses, meanwhile, are able to remain focused on what matters most: their product or service. 

This is especially important because the quality of a business’s offering is a key factor influencing a consumer’s impression and affinity towards the associated brand.  That said, as McKinsey discovered, businesses can also leverage technology, such as automation and personalization, to promote repeat purchase activity, deliver better value to customers, and ultimately cultivate positive word of mouth.

For this reason, MindBody, a software provider to businesses in the wellness industry, enables yoga and fitness studios to offer automated payments for recurring appointments. This not only drives improved client conversion but also carries over to the user experience where customers can leverage the information stored in their profile to effortlessly enroll in classes via the website or app. Likewise, food ordering platform Grubhub enables restaurants to recommend food items to hungry online diners based on past orders. Leveraging their data on consumer preferences to tailor their offering to each customer, these restaurants are able to increase not only the chance of a repeat order but also diner satisfaction.  By optimizing the path to repurchase and/or personalizing the experience, the use of technology can help businesses foster greater brand loyalty.

Whether helping to better engage customers during their consideration of a product or service, streamlining the purchase itself, and/or delivering a better overall experience, a number of companies are empowering businesses to take advantage of the opportunities that a more connected consumer and technology-enriched business afford.  We see these innovators as well positioned for continued growth in this dynamic marketplace.

Amanda Tedesco, CFA

Sr. Analyst - Media & Internet
11 Years experience
4 Years at ClearBridge

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  • Bold indicates stocks held in ClearBridge strategies as of October 24, 2017. 

  • All opinions and data included in this commentary are as of October 24, 2017 and are subject to change. The opinions and views expressed herein are of Amanda Tedesco and may differ from other analysts, or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments nor its information providers are responsible for any damages or losses arising from any use of this information.

     

  • Past performance is no guarantee of future results.