Amazon’s arrival: Judgement Day for Australian Retailers… or is it?

August 4, 2017

 

On the 4th of July, the Australian Bureau of Statistics released the latest retail sales figures, touching on many of the retail segments services by the ASX listed retailers. Retail turnover rose 0.6% in May, with all retail categories experiencing growth except for department stores which fell 0.7%. Despite being down from the 1% growth in April this result, which is triple that of the market’s estimated 0.2% rise, the latest sales figures are a welcome surprise for investors, as the retail sector is at the centre of investor uncertainty amidst news of Amazon’s imminent arrival.

 

                                                                               Source: Australian Bureau of Statistics

 

Although Amazon is not expected to arrive until the end of 2018, confirmation of their arrival has caused share prices of Australian retailers to fall, such as Myer (ASX:MYR), who are down 44%, JB Hifi (ASX:JBH) down 5% and Harvey Norman (ASX:HVN) who has fallen 13.8% since January.  It seems that investors are still uncertain of the true impact of Amazon on our retail sector – though if it’s staggering international growth is anything to go by we are only going to see more decline in local retailers’ margins and market share.

 

What Do Australians Have To Look Forward To?

 

Amazon has already proven popular for Australian consumers, however its arrival on Australian shores promises to solve problems that our brick and mortar retailers are continuing to struggle with.

 

Amazon Promises Faster Delivery Times

 

One of the biggest complaints of Australian consumers are delivery times, both from international purchases and from our own retailers who trade out of warehouses in Australia. With Amazon’s arrival set to store products (sourced from overseas and local retailers) in nearby fulfilment centres, consumers can breathe easy with faster delivery times.

 

Amazon’s current shipping times to Australia are:

 

 

                                                        Source: Amazon

 

Australian consumers will be able to take full advantage of Amazon Prime, where free and express delivery are offered all-year on all items for just $99USD. With it’s VIP upgrade – Prime Now – shoppers can have their products in as little as 2-hours, something that few Australian retailers offer. With Prime Now also having your groceries and take-away delivered in under an hour, we can expect a significant impact on the likes of Woolworths (ASX: WOW) and Wesfarmers (ASX:WES), as well as the likes of Deliveroo, Menulog and UBEReats.

 

The above timeframes will be significantly shortened once Amazon establishes distribution centres in Australia, with same-day delivery guaranteed to be an option for shoppers.

 

Greater Product Variety

 

Australian shoppers are used to having limited access to products that are offered overseas – opting to have them shipped from the US, often by third-party shipping companies which charge upwards of $30USD for Australian delivery. With popular products stored in Australian Amazon distribution centres, we can expect to gain access to products around the world, across a range of categories. Currently, the only products available from the Australian Amazon website are books.

 

Better Customer Service

 

Customer service is likely to be a key differentiator, with many Australian retailers struggling with the move from brick and mortar, and forgoing the level of customer service that online shoppers have come to expect. Michael Glennon recently discussed this in his article ‘Bonds and the Amazon Threat’. Despite Australian businesses having online capabilities (eg. Bonds), they are failing to meet expectations of consumers in terms of customer service, delivery, returns and accessibility – things that Amazon are renowned for.

 

Lower Shipping Costs

 

Every Australian who shops online knows the struggle to find a product that is reasonably priced, without the $30+ shipping price tacked on. We are expecting to see shipping costs decrease significantly, as Amazon can forgo fees associated with international shipments to Australia. Amazon’s current shipping charges are summarised below, and whilst it is yet unclear as to how much these delivery fees will change upon Amazon’s arrival, it is almost certain that delivery fees will be lower or even free depending on certain order conditions.

 

                                                                             Source: Amazon

 

Amazon Prime’s Media Suite

 

Amazon Prime also offers exclusive access to movies and TV shows (Prime Video), ad-free music (Prime Music), unlimited photo storage (Prime Photos) and Kindle books. This will pose new competition for the likes of Stan (Nine Entertainment, ASX:NEC), Foxtel (Newscorp and Telstra, ASX: NWS and ASX:TLS) and Netflix (NASDAQ:NFLX) as these media providers battle for new and existing subscribers.

 

Amazon Echo

 

One of the big questions is whether Australia will get the Amazon Echo from launch. The smart speaker, an international rival to Google Home and Apple Home, offers everything from reading news reports and giving updates on traffic, weather and sports scores, to controlling lights, fans, TVs, switches, thermostats, garage doors, sprinklers, locks, and more inside your home.

 

In the US, Amazon has also partnered with companies like Uber and Domino’s to allow users to order rides and pizza using Echo. Given Australia’s widespread use of ride-sharing apps (Uber) and food-delivery apps (UberEats and Deliveroo), consumers are waiting to see if Amazon will be setting up those kinds of partnerships in Australia so local Echo owners can eventually get those features as well.

 

What Do Australian Retailers Do Better?

 

That’s not to say that Australian retailers haven’t got the upper hand when it comes to the online consumer market. There are significant differences between the two, with well established retailers moving quickly into the growing online space. Here are some barriers that Amazon should keep in mind upon their arrival:

 

We Already Have That…

 

Amazon’s major product categories (apparel, books, computer hardware etc.) all have established retailers with online capabilities in Australia. The likes of Myers (ASX:MYR), JB Hifi (ASX:JBH) and Harvey Norman (ASX:HVN) have established online presence so Amazon’s entry will not be unobstructed.

 

Population Density

 

Australian cities have nothing on its American counterparts. Low population density – even amongst central commerce hubs such as Sydney and Melbourne – means that it would be difficult for Amazon to achieve the same level of service as it did in the US. To put it in perspective, Sydney’s population density is 405 people per square kilometre compared with 1161 in New York, which is destined to create cost and time inefficiencies for Amazon.

 

Established Grocery Market

 

Woolworths and Coles’ combined network of over 1800 supermarkets give them scale and logistical strength to make in-store, online home delivery and click-and-collect shopping feasible. It remains to be seen how Amazon can gain a logistical advantage over incumbents Woolworths (ASX:WOW) and Wesfarmers (ASX: WOW) particularly in the groceries space.

 

One thing is certain however, that Amazon’s US$13.7 billion acquisition of Whole Foods means it will enter the groceries space. For now, Woolworths and Coles’ duopoly in the Australian grocery market remains intact.

 

Australians are getting used to Woolworths and Coles’ online service as their online sales grew at 20% and 16% respectively on an annual basis. With online sales only accounting for 2% of both companies’ sales, there is much room for these two retailers to leverage their store network and domestic presence to increase their online grocery presence.

 

Same-Day Delivery

 

Many Australian retailers (The ICONIC, David Jones, Glue Store etc.) currently offer same-day delivery for items ordered prior to midday, thus it remains to be seen how Amazon can differentiate itself on this basis like it did in the US. One of its strongest marketing points in the US was being able to offer fast and reliable delivery – with that becoming more accessible by Australian shoppers already, Amazon will need to go above and beyond to get the upper hand.

 

While there are certainly some markets that Amazon may struggle to see growth in once on Australian soil, there is no doubt that Australian retail will experience a significant shake-up once the online retailer’s operations are underway. As we have discussed previously, Amazon may be the solution to problems Australian consumers are experiencing with Australian retailers – namely delivery time and customer service.

 

Amazon’s strength in these will be of concern to domestic retailers, with the absence of a dominant online force creating a sense of complacency in how Australian retailers deliver upon their promises to online shoppers. While Amazon’s arrival does not necessarily mean the end of Australian retailers, it does promise to show local players how to create an experience that delivers on customers’ expectations.

 

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