Australian Retailers Beware: Amazon Is Coming

The expansion of online retailer Amazon [NASDAQ:AMZN] into Australia is fast approaching. In September, Amazon will begin operating brick and mortar distribution and retail centres in all states across Australia.

As the online retailing giant prepares its assault on high street Aussie merchants, we can’t help but wonder: What effect will Amazon have on Australia’s $220 billion retail sector?

Leaving a trail of destruction

If Amazon’s recent track record is anything to go by, its arrival in Australia won’t be pretty. For consumers, yes. But for traditional retailers, threats don’t come bigger than this. Just look at the recent fallout in the US in the wake of Amazon’s rampant expansion.

Macy’s, the largest department chain in the US, announced that it would cut 10,000 jobs, closing some 100 stores. And Sears Holdings, which owns Sears and Kmart, announced that it would close 150 outlets. The growing dominance of online retail played a significant role in both outcomes. During the US holiday season, Amazon accounted for a staggering 38% of online retail sales.

But it’s not so much the threat of online sales that is hurting these retail chains. It’s the fact that Amazon is marrying its economies of scale in the online space with brick and mortar distribution centres. These centres allow for quicker, and cheaper, delivery of items to customers. And in a world where ‘cheaper’ and ‘quicker’ tend to be synonymous with increased sales, it’s not hard to see why Amazon is forcing retailers to double-down on cost cutting.

Of course, Aussie consumers are no strangers to Amazon.

Australians already spend between $500 million and $700 million annually shopping online with Amazon. However, that figure represents just 3% of the entire Australian retail market. Though keep in mind that Amazon has been hampered by its ability to compete with delivery times against domestic retailers with local distribution networks. That will soon change, though.

Where high street retailers had the advantage of allowing customers to try and buy, that advantage will be a thing of the past. At the very least, traditional retailers will have to combat the dual threat that Amazon will represent. And considering the economies of scale Amazon can rely on, that’s a nightmarish scenario for Aussie retailers, big or small.

Wesfarmers managing director Richard Goyder believes it could take some $4 billion in sales from Harvey Norman and JB Hi-Fi alone. And before you assume this only applies to electronics, think again. Last year, Amazon became the largest apparel seller in the US. What’s more, its share of overall (online and retail) sales was at 8.9% in the US in 2016. By 2020, that’s expected to balloon out to 18.8%.

Amazon distribution and retail centres coming this September

That a one-time exclusively online retailer is moving into the physical goods space will be in every PowerPoint presentation’s SWOT analysis at board meetings across Australia this year.

First up, let’s look at Amazon’s distribution centres.

Interestingly, the so-called ‘fulfilment centres’ will be rolled out largely in regional Australia. From what we know, these centres will distribute goods purchased on Amazon from third parties in regional areas where order fulfilments are more difficult. This will place significant pressure on the viability of smaller retailers in regional Australia. But these threats will eventually make their way into the capital cities, too. Not only from these distribution centres, but from Amazon’s foray into high street retail as well (more on this later).

None of this is to say that traditional retailers are standing still.

Whether it’s Myer Holdings [ASX:MYR] or JB Hi-Fi [ASX:JBH], retailer attempts to grow their market share online have paid dividends. But this has been a migration of necessity, not of convenience. Brick and mortar retailers attempting to play Amazon at their own game have seen in-store traffic decline. So there’s a clear trade-off there. And it’s not immediately obvious whether they can match Amazon in the double act of online and brick and mortar retail in the long run.

Either way, never before have they had to compete against Amazon on delivery times. And, certainly, never before have they had to compete for foot traffic, either. Now Aussie retailers will need to compete on both fronts.

In the former case, Amazon is using distribution centres to reduce time and cost. In the latter case, Prime Now and Amazon Go will both be used as battering rams.

Prime Now allows buyers to receive certain products within an hour of ordering them. While the service is only targeting specific cities around the world at the moment, mostly in the US, you can expect to see Amazon expand this into Australia in the future.

But it’s Amazon Go that could be an even bigger game changer.

Amazon to take the fight to Coles and Woolworths?

Aussie consumers are hotly anticipating the eventual rollout of Amazon Go stores across Australia in September. The ‘Go’ stores are your brick and mortar retail outlets, which we may one day find on every street corner, in the same way as you might find a 7-11.

These stores will compete with retailers in the food retail space.

The idea behind Amazon Go is that it will act as your typical, everyday supermarket, but with a twist. There’ll be no checkout. No cashier. Not even self-service machines. (Yes, even self-service machines might become obsolete soon.)

Rather, you’ll be able to walk in by swiping your smart phone. From there, you can pick up whatever you want. And then…you just walk out. That’s it. No fuss, and no hassle.

And what about bagging the $150 worth of items you’ve bought? Based on what Amazon has advertised, Amazon Go won’t be a true competitor to larger supermarkets like Coles and Woolworths. It will serve as more of a convenience store than anything. But, clearly, the scope for going bigger is there. And Amazon is a company that thinks big.

But here’s the real fizzer: Amazon might not even have any interest in competing against food retailers. There are suggestions that Amazon is merely using its Go stores as a way to introduce a method of shopping. One that bigger retailers, like Woolies, could employ in their own stores, with Amazon skimming profits off other chains using Amazon’s proprietary technology. In this case, it’d be Amazon’s ‘seamless shopping’ technology, which Coles and Woolies could both employ to cut costs and boost margins.

Whichever way Amazon goes with this, it’s probably on a winner.

Ultimately, Amazon’s strategic incursion into the brick and mortar marketplace is going to be disruptive. That’s been the case in the US, and it’s not likely to be any different here in Australia. What’s more, there is no branding barrier Amazon needs to overcome, either.

So who will benefit from it? Amazon? For sure. Consumers? We hope. Retailer workers? The future is less clear. Either way, the automation of the retail sector is an unstoppable trend, with or without Amazon.

Other than that, smaller shopping malls across Australia may become redundant. And commercial real estate valuations are likely to decline, too, as a result of this.

Just beware the promise of lower prices. Competition is always good for prices. At least in marketplaces where oligopolies exist. Fewer cogs in the distribution chain should also lead to lower costs, in theory. In reality, things don’t always work out that way. There is no guarantee that Amazon’s entry into brick and mortar operations in Australia will force down prices any more than would otherwise be the case. Once Amazon competes with traditional retailers on delivery times, the price factor might take on less importance.

Despite the promise of even lower prices, the allure of higher margins is often too hard to resist. Amazon has grand plans for revolutionising the retail space, but we can’t forget that it’s still run by humans. Still, similar prices and shorter delivery times? We suspect Aussie consumers will be more than happy with that.

Mat Spasic,

Contributor, Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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