How Can Small-Cap Investors Benefit From The Growth In e-Commerce?

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Portfolio Manager Steven McBoyle explains how some small-cap businesses are benefiting from the changes wrought by e-commerce.

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There are many business models that are direct beneficiaries to this e-commerce trend. There are aggregation models, there are data-rich models, there are models that benefit by way of introducing price transparency to a market place where you’re, in effect, linking buyers and sellers.

This, in particular is an area where we have a number of holdings that effectively provide scale and transparency to a market place, again, benefitting from one of the more powerful competitive advantages being the network effect, where the more sellers you introduce to a market place, the more buyers follow. And it becomes a virtuous cycle.

Can you give an example?

And so, we have a classic example of that right now, within a large holding in Premier, where we have the core business that is a physical marketplace auction site linking buyers and sellers, addressing the heavy equipment industry within North America predominantly, that has had to make the important transformation into the online model.

And so, this is a transformation that is going to take time, but yet it is the appropriate decision at the appropriate point in time in light of the marketplace that they are addressing, a large and growing addressable market.

How is e-commerce affecting your company analysis?

Today we don’t assess any company and not consider what are the opportunities, the challenges, the pitfalls of e-commerce.

Again, it introduces a group of questions that are perhaps new but critical. Is the industry beholden to high sku intensity? Is broad parts availability important? Is next-day delivery important? Is price the overarching governor at the consumer point?

What’s the basket size, both in terms of ASP, as well as volume and weight? It’s a fascinating dynamic, it comes with a lot of change, but therein lies the opportunity.

Article by The Royce Funds

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