Amazon’s $12b raid on Australian retail: Who’ll feel the pain and why consumers won’t gain (too much)
2nd June 2017
The monolithic online retailer Amazon — well known for devouring anything with a cash register in its path — is set to take a $12 billion bite out of Australia’s retail pie within the next decade.
That’s the analysis from the big broking house Morgan Stanley, which has found Amazon’s imminent arrival will have a “profound” impact.
With an extraordinary 370 million items stacked on its digital shelves, it is difficult to imagine a retailer that wouldn’t be affected when Amazon sets up shop in Australia.
What sort of pressure will retailers be under?
It won’t be as totally crushing as existing at the bottom of the Mariana Trench, but it will be intense nonetheless.
For many retailers Amazon is akin to a “Death Star”.
It has market capitalisation of $US460 billion ($630 billion) with investors still eager to buy its stock at $1,000 a share.
It is now twice as large as Walmart, which not so long ago was the world’s biggest retailer.
By way of comparison, add the value of Australia’s big listed retailers — Wesfarmers, Woolworths, JB Hi Fi, Myer and Super Cheap — together and their worth comes in at some loose change over $80 billion.
Unlike Australian retailers, Amazon’s global sales are booming, $US136 billion ($180 billion) annually, up 23 per cent year-on-year in its last quarterly filing.
Currently Amazon hardly even notices its sales in Australia, just $1 billion worth of stuff purchased via its offshore websites. That’s about to change.
Source: Company data, Morgan Stanley Research
What does it plan to do here?
While it is yet to unveil detailed plans since last month’s announcement that it was on its way, the betting is Amazon will establish up to five distribution centres spread between Sydney, Melbourne and Brisbane.
To illustrate the power of Amazon’s model, Morgan Stanley tallied up Amazon’s sales per square metre with its costs and then compared them to Australia’s big retailers.
While its costs are marginally higher than the likes of Woolworths, Coles and JB Hi-FI, its sales efficiency is significantly higher. That’s where the jaws open up for a big bite.
As Morgan Stanley’s Thomas Kierath says, “Amazon effectively is a pure play online department store that is super customer-focused and has a very long-term investment horizon, so it doesn’t mind losing money in the build-out phase.”
So who will be hit hardest?
On Morgan Stanley’s calculations, department stores and perhaps oddly enough, that other big digital disruptor from the US, eBay, will be the most affected.
Australia has more department stores per capita than anywhere else on earth — 807 all up, or one for every 30,000 residents.
In the US it is one department store per 62,000 people and France — that great defender of small retailers — it is close to 800,000 people to every department store, although you wouldn’t guess in the checkout queues.
Australian department stores can’t close, even when generating losses, because of the “must trade” clauses in their long-term leases, which leaves them pretty much as high-cost, sitting ducks.
Department stores here are also heavily dependent on sales of apparel — more than a quarter of their sales are in clothes and footwear — which just happens to line up with one of Amazon’s strengths.
|Company||Estimated sales losses in FY2026||Estimated sales loss in percentage terms|
|JB HiFi||-$964 million||-10pc|
|Harvey Norman||-$612 million||-10pc|
|Super Cheap Retail||-$229 million||-6pc|
Source: Morgan Stanley estimates, company data
In the US, department stores — like Walmart — accounted for 26 per cent of sales in 2005. That share fell to 11 per cent last year, and is forecast to be just 7 per cent by 2020.
Not surprisingly, US department store profits have halved in the past decade.
Mr Kierath said Wesfarmers’ very successful Kmart chain has the most to lose by Amazon’s arrival — being as profitable as all the others combined — and it sells a relatively narrow range of commodity products.
In other words Amazon’s bread and butter, and that is bad news for Wesfarmers.
Mr Kierath says eBay, which generates sales of around $5 billion in Australia, and is arguably the nation’s seventh-biggest retailer, is also in Amazon’s path and likely to get squashed.
Amazon operates a very big and growing marketplace business, where third parties list their products on its website. So eBay may get a dose of its own disruptive medicine.
Who won’t be too badly off?
Probably a couple of well established “category killers” like JB Hi-Fi and Super Retail, as well as fresh food outlets, will cope the best.
Retailers in Australia have generally been slow to embrace online sales.
JB Hi-Fi is one of the few that breaks out online sales.
It reported 3 per cent of its main brand’s sales are online, while for its recently acquired Good Guys chain, it is closer to 5 per cent. And JB Hi-Fi is one of the few big retailers who really gives online a go.
Despite its success, Kmart is considered weak online.
It charges an additional $3 for “click and collect” sales, a charge that is sometimes more costly than the item for sale.
According to Morgan Stanley, Super Retail and JB Hi-FI are already well organised, competitively priced and reasonably placed to defend their ground.
In the US, similar “category killers” like Best Buys and Dick’s Sports Goods have managed if to, if not thrive, then at least survive with Amazon.
Fresh food retailers are probably best placed to continue to grow in Amazon’s New Retail Order for a number of reasons according to Morgan Stanley:
- The cost of picking and delivering food is far higher than for non-food.
- Local scale is more important than global scale for food retailers
- The fastest-growing category in food is fresh, which is perishable
Nonetheless, Mr Kierath says Amazon is still capable of gobbling up around 5 per cent of the fresh food market.
What will the impact be on prices?
Believe it or not, the price gap between the US and Australia has narrowed in recent years according to Morgan Stanley’s survey.
“Comparing the price of the same product across eight categories in both the US and Australia since 2011, and in seven out of the eight categories, the price gap has closed significantly,” Morgan Stanley said.
JB Hi-Fi’s average price for a group of consumer electronics products is just 11 per cent higher than the price for the same group in the US — as offered by Amazon.com, strawberrynet and other US company websites — compared to the 26 per cent premium in 2011.
Still, there is a considerable value gap in many products.
Source: Morgan Stanley
This doesn’t mean Australian retailers have been happily gouging away in the absence of competition from the likes of Amazon.
Australian retailers simply are sold goods at a higher price than their US counterparts.
“We examined the Australian accounts for five global retailers and found that 15 to 35 per cent of Australian consumer electronics suppliers sales are Australian dollar incurred costs,” Mr Kierath said.
‘Though Amazon is known for its very long-term investment horizons and competitive retail offer, we believe that it will compete on range and delivery, rather than price.”
There are pros and cons in Australia, even for company with its eyes on global domination.
- High disposable income
- High internet/smartphone penetration
- Population concentration, three cities have half the population
- A relatively underdeveloped online retail market.
- Distribution costs are likely to be far higher than in many international markets, given relatively low population densities and higher labour costs
So will consumers reap all the benefits?
Not likely, according to Morgan Stanley.
Judging by experiences in other markets, Amazon is likely to have very defined roll-out plan for its products.
Physical media, such as books, music and Kindle readers will be first, along with electronics, then apparel.
Categories that are likely to take far longer are dry goods, fresh food, and auto parts, given the higher start-up and distribution costs.
The other key insight from Amazon’s global roll-out is products will be sold at premium to US prices — although, that’s generally standard operating procedure for all foreign retailers in Australia.
“We believe that Amazon won’t rebase prices in Australia — based on our analysis, Australian retail prices aren’t all that much higher than those in other developed markets,” Morgan Stanley said.
“Australian retail prices have reduced considerably in recent years and are now only at slight premiums to the US, so we don’t see Amazon compressing Australian prices.
“The impact on retailers will be more of share loss and ensuing operating deleverage as consumers prefer the ease of ordering on Amazon with one-or-two-day delivery offered for free under Amazon Prime.”
In short, local retailers will see their margins crunched and market share devoured, while their employees are generally the first to suffer when the battleground is overheads.
Consumers may see a modest benefit in terms of price and range, but that’s about it.