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Amazon Australia just opened – and analysts think it's prepared to bleed cash to 'destroy' rivals

Amazon Australia fulfillment centre in Melbourne. (Photo by Robert Cianflone/Getty Images)

  • Amazon Australia has opened to “a small number” of customers.
  • IBISWorld says Amazon will absorb initial losses to undercut the prices of local rivals by 30%.
  • But Amazon will have to deal with delivery costs associated with Australia’s geography.

Amazon Australia soft-launched to “a small number” of customers at 2pm Thursday, with a full public launch next week expected to shake up the local retail industry.

Based on precedence in other countries, Amazon will absorb losses early on to establish its market presence, according to research firm IBISWorld, as the web giant will significantly undercut local retailers.

“The company intends to challenge domestic retail prices by offering items for 30% less than domestic retailers. This is expected to appeal to price-conscious Australian consumers, and is likely to affect local retailers that have found it difficult to adjust to a shift in consumer spending behaviour over the past five years,” said IBISWorld senior industry analyst Kim Do.

“The company is expected to focus on providing consumers with low prices, a diverse product range and fast delivery.”

Do said that throughout its 20-year history as a public company, Amazon’s revenue had “grown significantly” but profit margins have remained stable.

“This is to allow them to gain market share in new markets.”

However, IBISWorld warned that Amazon’s business practices would have to adapt for the Australian market.

“Australia’s large geographical size and dispersed population will lead to higher distribution costs compared with Amazon’s home market in the United States. This is likely to limit the company’s ability to offer Amazon Prime Shipping services in the short to medium term,” said Do.

In the US and some other countries, Amazon runs a subscription programme called Amazon Prime, which provides customers with unlimited 2-day shipping, streaming entertainment and e-books for $US99 annually or $US10.99 monthly.

OFX partnership manager Ed Wiley agreed that Amazon will find it difficult initially, saying delivery costs in this country will not be cheap as what the company is used to.

“Fulfillment costs will be higher, as the brand will have fewer centres initially. Building its Fulfillment by Amazon service may result in a slow start for the giant and there is still the potential for unseen repercussions relating to fulfillment in the world’s sixth largest country [in area].”

What took Amazon so long?

Australia is a perfect market for the US global giant, with high disposable income and concentrated populations along the south-east coast. But it has taken 20 years for Amazon to arrive Down Under.

Amazon’s Jeff Bezos on January 1, 1997 in Seattle. (Paul Souders/Getty Images)

The first indications that it was setting up shop came a year ago via a leaked comment from a staffer that Amazon would “destroy” the Australian retail scene. In April, Business Insider confirmed that the US giant had indeed started local operations.

Amazon’s first fulfillment centre in Australia was discovered in eastern Melbourne in July, while by last month signs were seen welcoming staff in with its corporate mantra that it’s always “day one”.

Expected products

As it has for many years, the front page of Amazon.com.au is still only showing as a bookshop. But the last fortnight has seen accidentally published pages of non-book goods in tantalising previews of what Australian shoppers can expect.

Business Insider has seen pages showing HP computers and printers; household appliances from Dyson and Sunbeam; all sorts of odds-and-ends from Amazon’s own in-house label AmazonBasics; and sporting goods from Adidas, Asics and New Balance.

The goods match up with UBS research that shows the top three types of products Australians will be looking for on Amazon:

1. Electrical/ Appliances: Particularly high-margin accessories which, in our view, make up a large portion of electronic retailers’ gross profits.
2. Apparel/ Shoes: While customer returns are an impediment to the category, Amazon has been allocating more capital towards apparel since 2012. Specialty fashion retailers, as well as department stores are most exposed.
3. Cosmetics/ Skin: A low value / high-margin category which is particularly valuable for Australian Department stores (~20% sales exposure).

A catalyst for an online shopping boom

UBS has also estimated that Amazon’s arrival will trigger a spike in online shopping in this country, taking the current 12% rate for non-food retail spending online to 19% by 2023.

“The common outcome from Amazon’s full entry is a more educated and empowered customer, via increased price transparency and service expectation,” UBS analyst Ben Gilbert said.

Sydney business GetBackToBasix, which makes and sells lunchboxes and personal healthcare products, has already found success selling on the US and Canadian Amazon sites – and urged Australian small businesses to get on board.

“The infrastructure that they will soon have in place in Australia will hugely assist in the timely and efficient distribution of product – at scale. This is a game-changer for independent sellers,” said founder Noelle Sadinsky.

“Amazon has been successful in promoting private labels and giving them scope to fight against the big players, building a credible brand identity. Australians by nature love to support an underdog. If retailers embrace supporting locally based up-and-coming brands, it will foster recognition and loyalty from Aussie customers.”

Soft launch Thursday

On Monday, Amazon emailed Australian third-party merchants telling them to prepare for sales from Thursday afternoon when the general goods site would be opened to a limited number of customers.

As the 2pm mark passed, products began appearing online but were not yet available for sale.

And while ice cream cart business owner Scott Kilmartin said he was contacted by an event management company to give out free Amazon-coloured treats at Southern Cross Station in Melbourne, he told Business Insider on Thursday that the promotion had been cancelled.

In its latest quarterly results, Amazon beat market expectations to post $US43.7 billion in revenue. The company made $US256 million in net income, which translated to $US361 million in comprehensive income after adjustments.

The company is forecasting between $56 billion and $60.5 billion revenue for the lucrative Christmas quarter, which would be 28% to 38% growth from the same time last year.

Bezos briefly became the wealthiest person in the world in July, and retook that title last month with $US117 billion to his name.

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