Amazon still has some huge challenges to overcome to build its business in Australia

This is an Amazon “fulfillment centre”:

(Photo by Jeff Spicer/Getty Images)

The centres are the vast warehouses that form distribution hubs for the global retail giant’s operations in various countries.

That one above is in Hemel Hempstead, north of London. Here’s another, also in the UK, in Peterborough:

(Photo by Oli Scarff/Getty Images)

These things are huge.

They are also hard to find, and expensive.

And Amazon hasn’t got one in Australia yet.

That’s a problem, because the fulfillment centres are a vital part of Amazon’s revolutionary approach to serving modern retail customers. The hubs allow it to live up to its consumer proposition of being the “everything store”, and shipping rapidly.

In confirming its expansion and investment plans for Australia today, Amazon told us it was looking for a 93,000-square-metre warehouse. That’s the size of five MCGs.

It’s a requirement that’s ambitious and necessary, but also difficult. Where are they going to find it? Right now, the company can’t even say whether it will be in Sydney, Melbourne, or Brisbane.

There’s also a potential complication in that the major commercial property operators of warehouse spaces that might even come close to meeting Amazons’s needs — like CBRE and Charter Hall — do large amounts of existing business with long-standing clients in the retail sector that Amazon wants to destroy.

On top of that, if Amazon really is to enable fast delivery, it probably needs fulfillment centres in at least two of the major east coast cities, if not three.

So it’s a big problem three times over.

And then once they have the warehouse, they’ll need to fit it out and stock it.

This has two important implications:

  • Amazon will launch with a limited offering and it will take time — realistically speaking, probably years — before the full suite of services is available, including the coveted Amazon Prime, which gives free two-day shipping, streaming video, online storage space, and other services.
  • Products, and premium service like fast delivery, are likely to be expensive, certainly relative to other countries.

Thomas Kierath, a star retail sector analyst at Morgan Stanley Australia, cautions in a note to clients today that Amazon in Australia will have some specific challenges:

Plans to build just one 93,000sqm fulfillment centre probably won’t enable Prime, in our view. AMZN’s success has largely been built on Prime where consumers pay a relatively low annual fee for free one/two day delivery. We estimate 35% of US households are Prime members. Observing the lags between entering a country with physical media products (usually the first product offering) and launch of Prime shows considerable differences exist by country; for instance AMZN launched physical media in China in ’04 but Prime launched 12 years later in ’16, but in Italy and Spain Prime launched in the same year as physical media in ’10 and ’11. The point we would make is since AMZN can’t leverage any existing (i.e. cross border) fulfilment centres (like it can in Europe) the Prime offer will take longer to roll out and hence the impact on listed retailers will be years, not months. Further, Australia is a huge country with low population density within its major cities so delivery cost/time will be relatively high, in our view. This likely means that the cost of Prime will likely be higher (vs the US at US$99) and delivery times slower.

And on price, Kierath warned:

In the same way that international retailers entering Australia in recent history (Zara, Costco, H&M, Uniqlo) have entered with higher prices vs their home markets, we think AMZN will too. Amazon prices differentially across countries as most products would rely on local supply. For instance, we think when it sells flat panel TV’s it would be supplied these products by the Australian subsidiary of Samsung, Sony, LG, etc. which incur Australian dollar costs for marketing, advertising, sponsorship and employee expenses hence the AMZN buy price in Australia would likely be higher and thus the retail price higher too.

So, although more than half of Australian adults say they are ready to buy from Amazon, it might be a little early to get excited about low prices, the full product range, and fast delivery — and the retail sector Armageddon many see coming to Australia may be some way off.

But make no mistake: this is not to question the scale and intent of Amazon’s ambitions here. This is a long-term play, and as we have reported over recent months the planning is well advanced and the company has been aggressively ramping up its operations, hiring lawyers, developers, product managers and marketers.

And the company is swimming in money (or revenue, at least). In February, the company reported $US136 billion in full-year revenue, up $27% from the previous year’s $US107 billion.

In regards to the premium for subscribers, Amazon may well be willing to eat some of its own margin as it builds out its business and market share. This long-term view — a hallmark of the business philosophy of founder Jeff Bezos — stands in contrast to how Australian retail companies are run with shareholders having high expectations on quarterly profit results.

The answer in the medium term for Australian retailers is investment in product lines, price, and distribution — all of which may add up to a hit to profitability in the short term, which the market will not like.

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