Should Amazon be feared?
Ahead of Amazon’s imminent entry into Australia, the success of the global retail giant is being threatened by increasing competition from incumbent retailers and global peers, a changing business model and increased scrutiny from regulators
Amazon’s business model is constantly evolving. The company is now moving into bricks and mortar retail, opening physical stores in various locations across the United States.
The recent Whole Foods acquisition in June, along with the opening of physical ‘Amazon Books’ and ‘Amazon Go’ stores, shows that the company wants to transition into sectors outside of online retail and adopt a ‘bricks and clicks’ retail model. This ‘back to the future’ strategy raises a number of questions around its potential to disrupt Australian retail.
International challenges
A number of regulatory and tax issues are now putting pressure on the Amazon business. US President Donald Trump has targeted the company, recently tweeting: “Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the US are being hurt – many jobs being lost!”.
In July 2017, a prominent US fund manager claimed the US Postal Service (USPS) effectively subsidises the price of shipping Amazon’s packages, disadvantaging other companies. While USPS rejected this claim, we expect regulators will focus on this source of competitive advantage.
Amazon attracted negative attention earlier this month after the European Union (EU) ordered Luxembourg to collect 250 million euros in back taxes from the company following a decision that its tax affairs did not comply with EU state aid rules.
Australian retailers rise up
Various businesses are rising up to compete with Amazon ahead of its entry into Australia. We believe Woolworths Limited (ASX: WOW) is best positioned of all retailers in Australia because of its market dominant network in liquor and food retailing. We expect Amazon will struggle to replicate the limited success it has achieved in US food retailing in Australia. Without an extensive network of stores or distribution centres, coupled with the geographic spread in Australia, Amazon is unlikely to achieve network scale and will face expensive fulfilment and quality issues.
With centres in North America, Westfield Corporation (ASX: WFD) has transformed its model from traditional malls and shopping centres to experience-focused ‘downtown’ hubs. Although we expect a higher turnover of retailers in its malls, Westfield is particularly well-placed to take advantage of a number of strategies and we expect it will continue to manage its development growth and remain a significant figure in the premium retail industry.
JB Hi-Fi Limited (ASX: JBH) is investing heavily ahead of the curve, focusing on fulfilment and service, to tackle the challenge head on. JBH is employing the lessons from global peer Best Buy based on its ability to combat Amazon in a number of markets and product categories.
When Amazon hits our shores
We have seen incumbent US retailers focus on their ‘bricks and clicks’ models to successfully combat Amazon. US behemoth Walmart is leading the charge, utilising its own store network to improve its fulfilment capabilities, outperforming Amazon.
As we’ve seen in the US, from competitors such as Walmart and Best Buy, retailers evolve to rise-up to the challenge of Amazon.
In Australia we’ve already seen retailers invest and explore alternatives to drive efficiencies, customer experience and to lower prices.
Disclaimer
Entities managed by Wilson Asset Management own shares in JBH, WOW and WFD.