With interest rates at record lows, many people are looking at other ways to invest their money. Traditional options, such as savings accounts in banks are paying almost no returns. Other forms of savings, like ISAs and pension funds have limits, which means that after investing a certain amount, people can no longer invest in them or the funds lack the tax incentive to continue.
For that reason, many people are looking at less traditional ways of investing money, one being in online first and online only businesses. Let’s take a look at some of the ways online first businesses are disrupting the more traditional methods and what sorts of opportunities there are for investing.
Industries that use the online first businesses model
Online first and online only business models have changed the face of several major industries and had a big impact on the success of traditional brick and mortar businesses. With advantages like lower running costs and increasing customer engagement through channels like mobile apps, it’s easy to see why these businesses have become so successful. Let’s take a closer look at the way these models are impacting different industries.
Book Stores and Online Book Sellers
Of all the traditional business models disrupted by the online boom, booksellers have been one of the most affected. The beginning of this demise can be pinpointed on the rise of Amazon. While Amazon is now one of the world’s largest tech companies and allows users to purchase just about anything, it started out as an online book retailer. Amazon offers millions of books which can be delivered in less than 24 hours, a service that the bricks and mortar businesses simply can't match.
Amazon was founded in 1995 and at that time there were nearly 1900 independent bookstores in the UK. Since then, the amount has plummeted by around 1000 to approximately 850. While bookstores still exist, they are now a niche as opposed to the go-to option they were before the internet.
Of course, the big question is whether there are opportunities for investors for this niche in the future. Looking at the current share price of Amazon, which stands at about $1700 at the time of writing, Amazon is probably only for the big players. However, for those that can afford it, Amazon stock has the potential to be a profitable investment.
Plenty has been made of how high street fashion retailers have suffered in recent years. However, while many brick and mortar stores have seen a decline in profits, online first and online only retailers like ASOS and Boohoo have grown in recent years. Just as Amazon disrupted book selling, sites like ASOS allow customers to purchase items from a huge range of clothing options and have items delivered within a day.
Of course, there are brands that don’t follow this trend. For example, Primark is one of the few high street retailers that doesn’t have an online presence, but continues to flourish due to its unique low-cost fashion offering. this is the exception rather than the rule, however, and generally online first and online businesses are now dominating much of the fashion industry.
Despite the boom in online fashion over the last decade, the past year hasn’t been the best for online first brands. ASOS had a tough 2019, with profits plunging 68% due to technical issues. ASOS and other fashion retailers are also suffering in part due to the model of convenience on which they’ve succeeded, as a result of the high volume of returns they’re receiving.
However, that doesn’t necessarily mean it’s a bad time to invest in online first fashion companies. Sharers in ASOS recently saw a sharp increase as investors bet that it will grow again following its attempts to resolve recent issues, including an incoming change to its return system.
There are also potential benefits of investing in other online fashion retailers such as Boohoo, with certain analysts predicting that the brand’s profits will continue to grow in 2020 as it continues to win market share. This means that investing in online first fashion businesses has the potential to unlock profit next year.
Travel Agents and Travel Websites
One of the biggest travel news stories of 2019 has been the collapse of Thomas Cook, the world’s oldest travel agent. While the collapse was generally put down to a failure of management rather than from the effects of online businesses, traditional brick and mortar travel agents are struggling in the current climate.
In 2017, nearly 700 travel agents went out of business, with over 80% of travellers booking their holidays online. This is largely due to flight and hotel comparison sites like SkyScanner and Expedia that have made it easier than ever to arrange cheap travel. Online first firms like Airbnb have also opened up new ways of booking affordable accommodation around the world.
The good news for investors is that the boom in online first travel businesses means there are plenty of opportunities to potentially generate profit. For example, Expedia is of interest to many investors because of its high return on investment and high cash flow per share, so there is definitely the chance to unlock growth in the travel industry.
Of course, it’s important to consider the pros and cons of investing in different businesses. Following Airbnb’s announcement that it plans to go public in 2020, around 4,0000 investors registered their interest in the shares. However, there are major hurdles to overcome, including regulation and crackdowns and recent losses, so there are several factors to weigh up.
Ultimately, the potential profitability of investing in the online travel industry varies from company to company. While the likes of Airbnb are facing challenges, other companies are experiencing lots of growth. However, there’s no doubt that online travel will continue to grow, so there are definitely investment opportunities out there.
Gambling is another industry that has seen huge change due to the use of online first business models. While gambling traditionally took place in land-based casinos and betting shops, now the majority of gambling takes place online.
Casinos still thrive due to the fact that they are seen as a social activity, Las Vegas being the prime example, but high street bookies have definitely suffered. Nowadays, people can choose from hundreds of online gambling sites and sign up and bet within minutes. Online sites also offer perks like bonuses which you don’t get on the high street.
Many of the traditional bookies still have thriving online businesses, but there is now much more competition. The last couple of decades have seen many online first and online only gambling operators crop up and attract customers. Meanwhile, the number of betting shops in the UK saw a 1.5% decrease in 2018, which meant over 100 bookies disappeared from the high street.
Although the pace of new casino launches has slowed down in the UK, the industry is still one that is growing and, generally speaking, is going from strength to strength. However, it’s not just the UK online gambling market that is promising for investors.
The US online gambling market has opened up significantly in recent times, thanks to the repeal of the Professional and Amateur Sports Protection Act (PASPA) in 2018. This resulted in the legalisation of sports betting across the country, but also changed many states’ perception of online gambling, providing US customers with a wider choice of regulated online gambling options. The US gambling market is growing at an unprecedented rate, meaning UK public companies, such as GVC Holdings and Flutter Entertainment, are exploring business opportunities in those newly regulated and fast-expanding markets.
This means that investment in such companies has the potential to unlock real profit in coming years.
Is It Worth Investing in Online Only or Online First Businesses?
You only need to look at the high street to get an idea of how the real world is being affected by the continuous development of online business models. The fact of the matter is that booksellers, bookmakers and travel agencies have been significantly affected by online businesses, while businesses continue to grow due to the advantages they have over the brick and mortar model.
To summarise, if you are comparing investing in traditional brick-and-mortar businesses and online only or online first businesses, there are definitely many opportunities for investment in the online world. Of course, this doesn’t mean that every one of these businesses presents opportunities to unlock growth, but there are certainly plenty that do.
The online first and online business models become more and more prevalent each year, so it’s reasonable to assume that investing in online businesses could unlock profit growth in 2020. Finally, because of the risk, either perceived or actual, returns on investments in online businesses will almost certainly be better than investments in more traditional businesses.