With speculation rife that Amazon will hit Australia’s shores imminently, investors are focusing their attention on the potential impacts of the online shopping behemoth on local retailers’ bottom lines. International investors with firsthand experience of Amazon’s disruptive effects in other markets are drawing parallels with Australia, cautioning Amazon’s arrival will increase competition, challenge incumbent retail business models and transform the sector.
While the US company is yet to officially confirm it will establish a physical presence here, Amazon’s arrival appears certain with more than 100 jobs in Sydney and Melbourne currently advertised on its website and leases signed for CBD office space in both cities. Amazon has also reportedly appointed agents to find industrial properties to serve as distribution centres, otherwise known as fulfilment centres.
With scant details available about Amazon’s entry into Australia, including product categories and services it intends to offer, the possible impacts on retailers are many and varied. In the other markets it has forced the closure of department stores and traditional retailers. It is broadly expected that Amazon will provide Australian customers with access to its broad range of competitively-priced goods, as well as products sold through Marketplace – its online platform that allows third parties to sell products. Currently, Australians can only buy a limited range of goods through Amazon, primarily books.
For Australian retailers, Amazon’s arrival has the potential to increase competitive pressures by forcing them into a global market place. In turn, this would potentially put downward pressure on their prices and ultimately their profitability. Retailers of products with a major disparity between the local and global prices would be particularly exposed to this risk.
Some commentators have focused on the potential threat to supermarkets if Amazon rolls-out its Amazon Fresh service, which offers same day delivery of groceries with free shipping on orders over a certain value (in the US, it is $US50). Similarly, retailers are considering possible effects of Amazon’s Prime Now service which, for an annual fee, guarantees purchases are delivered to consumers within two days with no delivery cost. Amazon Prime is likely to increase the appeal of buying through Amazon and increase customers’ expectations of delivery times across the retail sector.
While small, easy to ship goods such as electronics and apparel are highly susceptible to Amazon’s disruptive impact, other products are likely to fare better. Large, bulky goods are considered to be somewhat inoculated from Amazon’s effects. Likewise, highly regulated products such as pharmaceuticals may be protected from Amazon’s reach, according to Credit Suisse.
Proactive response necessary
It is important investors are cognisant of the potential threats posed by Amazon on retailers, particularly those most at risk, and ensure these companies are responding proactively. Are retail businesses adopting strategies to effectively leverage online channels while capitalising on the benefits offered by a physical store front? Stores, after all, provide the opportunity to engage customers and provide them with product experiences, education and post-purchase support. That said, in the US Amazon has extended its retail footprint offline with the opening of several book stores to also offer customers a traditional bricks-and-mortar shopping experience.
Although Amazon’s arrival sees some potentially dark clouds gathering on the retail horizon, the impact will not be imminent. While the general consensus is that Amazon will arrive this calendar year, according to analysis by Credit Suisse its disruptive effect is not likely be felt for another five years – although it could be sooner.
In the meantime, the outlook for the retail sector over the next one to two years is positive as Australia’s economic conditions continue to improve.
Although house prices have likely peaked, we expect property values on the east coast to remain strong and continue to be a key driver of the economy and boost consumer confidence. This is obviously subject to how the banks move interest rates out of cycle with the Reserve Bank of Australia. Home to more than a third of Australia’s population, NSW’s economic boom shows no signs of abating as major infrastructure projects and net migration fuel further growth.
With all signs indicating Australia’s economic conditions are strengthening, we believe discretionary income is set to rise and consumer sentiment will trend higher, creating an environment for Australia’s retail sector to prosper over the medium term.
Retailers too are optimistic about the future, with a recent industry survey by professional services firm Deloitte showing 64 per cent of respondents expect earnings to increase by 5 per cent or more this year.