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Australia bracing for the Amazon effect

Posted In Business - By Techtiplib on Thursday, July 20th, 2017 With No Comments »

In the months since Amazon confirmed its 2018 arrival in Australia, the nation’s retail industry has been beset with speculation. The potential impact of the internet juggernaut having a foothold down under is eliciting crisis talks, consternation, and calming commentary  in equal measure, with two schools of thought emerging.

The first paints a doomsday scenario for the retail industry, which will face the death of the shopping mall mirroring America’s bricks and mortar demise.

The second sees Australia ready and able to compete with internet retail, with Amazon unaware of the challenges the nation’s small population and vast distances present.

So how does the Amazon debate play out and what do retailers need to know?

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Amazon arrival

In April this year Amazon ended months of speculation, confirming it would commence operations in Australia from a 100,000 square metre fufilment centre that is rumoured to be in Sydney.

What will line the shelves of that centre, no-one knows, but Amazon has long been an innovator in the retail realm, revolutionising e-commerce and taking mobile Point of Sale to a whole new sphere. According to the Sydney Morning Herald (SMH), Amazon will launch (in order) physical media, electronics, then apparel.

This news alone was enough to put major electronics retailers like Myer, JB Hi-Fi and Harvey Norman on high alert, with the SMH noting the impact on these three and the “ the industry in general, would be large”.

Then discussion turned to Australia’s two major retail players, Wesfarmers and Woolworths, on the back of news Amazon may also offer grocery delivery and had now expanded into bricks and mortar with the purchase of US-based Whole Foods on June 19.

Woolworths bore the brunt of shareholder unease, dropping 4% in late June, but Wesfarmers remained relatively unscathed.

These two entities not only own the country’s largest supermarkets Coles and Woolworths, but Wesfarmers also has department store Target, and budget store Kmart, while Woolworths owns Big W.

And according to a report by Morgan Stanley on the Amazon Effect, the Australian stock market has misjudged the repercussions.

“Amazon’s entry in Australia will have a profound impact on the Australian retailing industry, in our view, as it has had on most markets.”

Doomsday for Australian retail

On June 1, stock market analysts Morgan Stanley downgraded a series of Australian publicly listed companies, including Wesfarmers, after detailed analysis into the impact of Amazon, with Business Insider noting: “The global investment bank estimates Amazon will generate $12 billion of sales by 2026 with five distribution centres established across Sydney, Melbourne and Brisbane”.

“We have downgraded our Industry view to cautious (from In-line) because we believe the Amazon impact will be broad-based,” the Morgan Stanley analysts maintained.

Wesfarmers was downgraded to underweight from equal-weight and the price target reduced to $36 from $41, due to the fact Morgan Stanley believed the market had overlooked the impact on the retail giant.

“What strikes us is that the stock of the largest non-food retailer in the Australian market — Wesfarmers, which generates $22 billion in sales and $2 billion in profits from non-food retailing — has barely moved,” the analysts said.

“We think that this market reaction implies that WES (Wesfarmers) will be relatively unaffected by Amazon’s entry — we would argue to the contrary.”

They continued Wesfarmers’ Kmart arguably had the most to lose due to its low average sale value, and the direct competition of online purchasing once Amazon arrives.

The analysts also noted department stores like Myer were exposed to risk, while eBay looked likely to be another major loser.

Business Insider explained Morgan Stanley believes Australia is overbuilt with department stores.

…the long store leases mean they can’t close stores as they become unprofitable, their online offer is weak and they generate a large percentage of sales from clothing, a category where Amazon is successful.”

But others with an already established online presence may fare better, they note. Among these is JB Hi-Fi who was first flagged as being in Amazon’s firing line.

It’s not over until the fat retailer sings

Amidst all the hand wringing, stock speculation and nervousness, there is a light at the end of the tunnel, according to the Sydney Morning Herald and Bank of America Merrill Lynch. And it comes in the form of Australia’s low population and vast distances.

On June 29, Bank of America Merrill Lynch analyst David Errington told the SMH doomsday predictions and stock sell-downs were unwarranted.

He noted many Australian shoppers had migrated online, they could already buy from Amazon, and low population density, coupled with large distances may leave Amazon unable to fulfil speedy delivery services.

Meanwhile, he maintained: “there is as much to gain for all retailers across the market as there is for a new entrant”.

Mr Errington noted Canada’s experience with Amazon as a prime example. Amazon first opened a distribution centre there in 2012, but then lost ground over the next five years, falling from 19 per cent to 10 per cent, as other retailers became more competitive. 

“Amazon would also struggle to match delivery speeds offered in other markets, where some subscription customers receive orders within an hour, because of Australia’s comparatively expensive and inefficient logistics infrastructure, Mr Errington warned.”

The SMH continued many Australians had already discovered online grocery shopping, Coles and Woolworths had a significant foothold, and Amazon’s recent acquisition of Whole Foods was an admission a bricks and mortar shopfront was required.

Meanwhile, Colliers International research manager Sass J-Balah told Fairfax, with over 64 per cent of the total NSW population currently concentrated within the Sydney Metropolitan region: “Amazon may struggle to find facilities which will allow them to adhere to their 1-2 hour delivery time within this area”.    

The final word

Whether retail is ready or not, whether it’s doomsday or opportunity, Amazon’s arrival is shaking up the Australian retail sphere.

The scale of their impact remains to be seen, or in the words of the Morgan Stanley report: “Assessing the impact of Amazon on the Australian retailers is a little fraught at this early stage.

“That’s because pricing, ranging, and the Prime offer — all significant drivers of its success in offshore markets — aren’t yet known.

“But given the success Amazon has had in other markets, we think it’s fair to assume that when it arrives in Australia, the offer will be very competitive.”

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