How Amazon's Australia launch could disrupt local retailers

Amazon's impending Aussie entrance is forecast to cost local retailers up to $12 billion – the amount analysts believe the mega online retailer will bite out of our market within the next decade1. Already on course this year to outstrip Macy’s as the leading clothing and shoe seller in the US2 – the country whose consumerism reputation is built on the shopping mall – Amazon has also proposed to buy grocer Whole Foods, strengthening their case to enter our $102.8 billion grocery market3. However, while the impact of Amazon on retailers is hard to predict, we believe that their imminent arrival in Australia signals a broader trend of established industry players being disrupted by new entrants.

Three reasons why Australia is attractive for an Amazon arrival

  1. There’s been significant shift in our retail landscape over the last decade
    Traditionally, Woolworths, Coles, David Jones and Myer have dominated, wielding market power and supplier clout to marginalise smaller players and deflect prospective newcomers. More recently, Costco and Aldi successfully disrupted established structures and US discount department store chain TJ Maxx recently launched with a similar objective.
  2. We’re a nation of shoppers with widespread access to high speed internet
    We boast a growing high-income population that’s particularly dense in Sydney and Melbourne. And we love shopping online. In 2016, just over 8.7 million Aussies bought one or more products via the internet in any given four-week period4. Food, clothing, toys and books are all popular – playing into Amazon’s core repertoire.
  3. We’re actively seeking new brands, bargains and exercising our power of choice
    We’re more than willing to shop around – 77 per cent of grocery shoppers visit two or more major outlets a month5. Aldi and Costco have shown how global networks with vast resources can compete here, and just like shoppers in the UK, Mexico, Netherlands, Canada and India, we too appear ready and willing to embrace the Amazon brand. Founder Jeff Bezos is often-quoted as saying: “Your margin is my opportunity” and our supermarkets boast some of the world’s highest profit margins6 – a clear bullseye. As such, we expect some previously thriving retailers may fold – brand loyalty alone is an unlikely remedy for losing market share.

The resources, networks and capabilities of Amazon are deep and far reaching

Since humble beginnings selling books, Amazon has spent two decades expanding products and services through facilitating third-party vendor transactions, storage and delivery. In the US, Amazon accounts for 50 cents in every dollar spent online7 and ignite over half of all shopping searches8. Their web services and warehousing businesses also afford Amazon the luxury of long timeframes and ability to run consecutive losses on new expansion projects.

With substantial experience establishing efficient transit networks and delivery services, it’s likely they’ll initially concentrate presence in Sydney, Melbourne and possibly Brisbane. Nielsen recently learned 45 per cent of Australians would pay for Amazon’s Prime Now (premium delivery) service9 – something we expect at launch along with Amazon Fresh (groceries) and Amazon Go (bricks and mortar stores).

And Aussie retailers are taking the arrival of Amazon very seriously

In preparation, Woolworths established an ‘Amazon response unit’ to proactively combat the incoming threat. Margins may also compress as retailers undertake more aggressive promotional activity to defend market share – great news for shoppers – margins on high-end goods could erode almost immediately with suggestions Amazon could undercut electronics by up to 15 per cent10 and reports Wesfarmers could lose $400 million annually to Amazon by 2026 due to Kmart and Target’s competition vulnerability11.

Amazon’s ultimate impact on Australia is difficult to predict

We can look to Canada whose population density is more aligned with Australia – Amazon take just one per cent of their retail sales (it’s five per cent in the US)12 suggesting the impact may not be as detrimental as forecast. We believe the greater immediate and future earnings growth threat for Aussie retailers are softer than expected retail conditions, slower wages growth and anticipated higher household savings rates.

The flow-on effect could also strike retail landlords like Stockland, Scentre Group and Vicinity Centres as margins and market share shrink (returns are generally underpinned by tenant rental growth). But while the US has significant shopping centre oversupply (many dominated by major department stores) our saturation is far lower – boasting a greater range of speciality stores, food and experiences that may help offset foot traffic impact.

If you’re considering investing in this sector, it’s prudent to take a measured approach to screening and acquiring select assets. Even if the Amazon hype is overblown, the current combination of stagnating wages and increasing household expenditure such as mortgage rates and energy costs is likely to present an overhang for retailers.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct. Members of the E&P group of companies currently manage funds or portfolios that include this security.

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Lyle Meaney

Managing Director & CEO – E&P Wealth

In his primary role as Managing Director, Wealth Advice, Lyle ensures all Investment Advisers and Analysts deliver the highest level of proactive service and advice in line with Investment Committee’s views on market conditions. All Investment Advisory clients have a dedicated Investment Adviser, who works closely with Dixon Advisory’s Superannuation Specialists, Financial Advisers, Estate Planners and Property Investment Specialists to deliver the best possible financial outcome. 

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