Amazon is on its way

By Philip Bish

It's been a long time coming, but Amazon may finally be making its move to Australia, and it could be as early as September 2017. This is according to Justin Braitling – CIO of Watermark Funds Management, who recently attended a special briefing with the person in charge of rolling out Amazon’s Australian strategy.

Talking to the Australian Financial Review, Braitling claimed that Amazon will be opening distribution centres and performance centres in every state and will focus on general merchandise and fresh food.

Braitling said, 'We spoke to the guy rolling out Amazon’s business here in Australia and in his words: "We are going to destroy the retail environment in Australia".'

Whether Amazon does arrive here in 2017 remains to be seen, but if it does, we expect its impact will be far less than what is being claimed. It could in fact take years for Amazon to build its distribution network in Australia.

If Amazon does arrive, companies such as electronics retailers Harvey Norman, JB Hi-Fi and online retailer Kogan.com may feel the most heat.

For their part, the major supermarket chains Woolworths and Coles – owned by Wesfarmers – are already reducing margins and experiencing strong competition from low-margin entrants such as Aldi and Costco so Amazon is probably less of a threat to them.

More than just books

Though we are familiar with Amazon as an online book seller, in the US Amazon also sells smartphones, apparel, shoes, jewellery, sporting equipment and homewares. In fact, Amazon sells over 480 million products in the U.S.

Amazon is also the world’s largest provider of cloud infrastructure services and has over 40 subsidiaries including Amazon Studios and IMDb. Its popular virtual assistant named Alexa (similar to Apple’s Siri) has had more than 250,000 marriage proposals.

After years of sacrificing profits to build its business and grow market share, Amazon recorded a combined profit of $1.1bn over the last two quarters. Revenue continues to increase rapidly and is expected to be $42bn in the next quarter.

Amazon has enormous reach in the US and accounted for 60% of all online sales growth in 2015. It has 15% of the US eCommerce market and, after adding Amazon’s third party sellers (whose number is estimated at over two million), its market share rises to 30%.

The Amazon effect

As a result, US bricks and mortar retailers are feeling the pain as foot traffic dries up and consumers shop online. This phenomenon is known as the ‘Amazon effect’, and in August this year Macy’s, the USA’s largest department store chain, announced they would be closing 100 stores due to falling sales and increased online competition.

In Australia, online sales are also growing fast at 14.2% p.a. but are still relatively small. In the NAB Online Retail Sales Index, annual online sales of $20.8bn are still just 7% of traditional bricks and mortar sales, which stand at $298.9bn.

Your margin is our opportunity

One of Amazon CEO Jeff Bezos’s famous quotes is, ‘Your margin is my opportunity’, and across the US Amazon is competing with traditional bricks and mortar retailers and taking market share.

With Amazon’s massive global ambitions and workload, it's hard to know whether the opportunity in Australia is big enough to be a priority. Regardless, Australian retailers need to continually focus on making their businesses more streamlined and customer centric, traits for which Amazon is famous.

One issue that may stand in the way of Amazon is alleged anti-competitive behaviour. During the presidential election campaign, Donald Trump called Amazon an illegal monopoly, and went as far as threatening Amazon with antitrust and tax investigations. Whether Trump makes good on his threats though is anyone’s guess.

Even so, Amazon is an amazing company. If it does decide to come to Australia, companies will need to make sure they're ready.