Why Australia Has Misjudged Amazon

Unless you’ve been living under a rock, you’d know that Amazon.com, Inc. [NASDAQ:AMZN] is setting up shop in Australia.

Of course, like all hyped-up matters, no one actually knows when Amazon will have its Australian side of the business up and running.

Will it be in time for the Christmas trading period? Or will the American online behemoth wait until the new year before kicking off?

Either way, we know that Amazon won’t have to advertise to let you know when they’re operational. The mainstream media is literally providing all the free advertising Amazon needs.

Most of the information around Amazon centres on how it’s going to crush the Australian retail industry. And how it’ll supposedly leave Aussie retailers reeling in their wake.

But I don’t think that’s going to happen. In fact, I reckon we’ve misjudged Amazon’s intentions all along.

Yes, chances are they are going to dominate Australian business. But it won’t necessarily result in the retail-sector annihilation many are trumpeting.

Perhaps Amazon’s international expansion is only for the sake of international expansion.

Take Amazon’s expansion into China. The Middle Kingdom has been quick to adopt online shopping. However, Amazon has barely been able to get more than 3% of the country’s total e-commerce market. It just can’t beat local players like Alibaba Group Holding Ltd [NYSE:BABA] and JD.Com, Inc. [NASDAQ:JD], with a 47% and 20% e-commerce market share respectively.

Then there’s Amazon’s recent play for the Mexican market. Retail sales in Mexico amounted to roughly AU$678 billion for 2016. Yet, in the US, Amazon only shipped a total of AU$315 million in orders from across the border.

Amazon setting up in Mexico is surprising when you consider that only 3% of the country shops online, compared to 10% in the US. Mexicans are overly worried about online fraud, and a large part of the population doesn’t even own a credit card.

Then there’s the Aussie retail market.

If the Enhanced Media Metrics Australia (EMMA) retail analysis is anything to go by, Aussies enjoying shopping online. The key demographic for retail consumption in Australia — women aged 25–35 — are far more likely to turn any money spending requirements into a social activity.

Furthermore, EMMA found that shoppers who spent money in-store were 50% more likely to buy online.

Surely that suggests people are likely to wander around web-malls in the future?

Not so, if recent data from American Express is any indicator. The credit card company says that 60% of Australian shoppers rarely visit more than 10 different physical and online retail shops.

Anthill Online, an Australian community for innovators and entrepreneurs, says that even 64% of tech-savvy millennials would rather shop in-store than online. Instead of just buying more stuff online for no reason, they are seeking an ‘in-store experience’ to help them buy more stuff for no reason.

Australia is tiny, even in comparison to the Mexican market. Last year, retail turnover was $243 billion and — while growing — barely more than 10% of Aussies shop online. That means Amazon is fighting over a $20-billion-odd chunk of the Aussie online market.

The point is, Amazon isn’t coming to sink Aussie retail. Consumers have already done a decent enough job of that themselves.

I have no doubt that Amazon’s presence will drastically shake up the logistics chain however. The Aussie experience with online shopping is clunky at best. In fact, Amazon could be the best thing for the retail industry. As Sam Volkering pointed out in his most recent issue of Australian Small-Cap Investigator, there’s one Aussie-listed tech stock that’s helping Amazon with aerial-mapping technology. The bet is that Amazon can make drone deliveries an acceptable practice in Australia.

That’s certainly something to look forward to.

Who should really be afraid of Amazon

I don’t believe Amazon will greatly impact retail in Australia. I suspect that Amazon’s international expansion is about brand awareness more than any immediate monetisation. The tech company already runs on thin margins. It’s not here to make money from buying shoes. It’s here to establish dominance through volume business.

That was a similar attitude many tech companies had during the dotcom bubble. Worry about profits later, but create the presence first so that customers will know where to find you.

But Amazon’s arrival in Australia could be more to do with growing an integral part of the company’s business that people often overlook.

In my view, rather than retailers, it’s cloud-computing companies that should be afraid of Amazon’s arrival.

Rather than allowing cloud computing to be an infrastructure cost for the company, Amazon are taking steps to operate cloud computing as if it were a utility bill, through its Amazon Web Services (AWS) business.

The cloud-computing industry in Australia already turns over $6.5 billion per year. And AWS is primed to dominate this business locally.

Already, AWS has snapped up 10,000 Australian and New Zealand clients seeking cloud-computing services. And Amazon is keen to exert their influence in this area, not just in Australia but around the world.

Third-quarter data from Amazon showed the company turned over AU$3.99 billion of AWS sales. Much higher than the AU$2.5 billion in the corresponding quarter of the previous year. In the year to date, AWS is now contributing AU$15.2 billion in revenue for Amazon.

Salesforce.com, Inc. [NYSE:CRM], the world’s largest software as a service (SaaS) company, has declared AWS as their preferred ‘public cloud’. That sort of recommendation is hard to beat.

Already Amazon’s cloud-computing business has secured a contract with the Australian Tax Office (ATO).

In 2013, antivirus software company VMware chief executive Pat Gelsinger said: ‘If a workload goes to Amazon, you lose and we have lost forever.

Last year, Gelsinger stood by AWS CEO Andy Jess side and announced a strategic partnership where VMware’s complete software-defined data centre would run on the AWS public cloud.

Aussie retailers don’t need to fear Amazon, but small cloud-computing companies should.

Regards,

Shae Russell,
Editor, Markets & Money


Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.


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