CITI: Amazon could launch in Australia as soon as October

CEO of Amazon.com, Inc. Jeff Bezos. Photo: Getty Images.

Amazon could launch in Australia as soon as October to take advantage of the Christmas retail boom, according to Citi analysts.

In a note to clients this week, the team, led by Bryan Raymond, says Amazon has already placed its first orders with suppliers, suggesting a pre-Christmas launch is likely.

“We would expect a formal launch to occur sometime in October 2017, ahead of Black Friday on 24 November,” Raymond and his team said.

The Citi team believes Amazon will offer free delivery for orders over a certain value, and will look to launch its membership service, Prime, which offers streaming video, music, e-books, free shipping and other Amazon-specific services and deals in July next year, coinciding with Prime Day.

Amazon has been building its presence in Australia since announcing in April that it would launch here. The company has not yet given a specific start date, but by July it was hiring for a massive fulfilment centre on the outskirts of Melbourne in Dandenong South.

Citi says buying terms have been set with suppliers and first orders placed in recent weeks.

While incumbent retailers currently have the advantage of range and delivery over Amazon, Citi expects the challenger to push hard on its key advantage, price, in order to drive volumes, placing near term gross margin risks on retailers.

It sets up the potential for a pre-Christmas price war that would have shoppers celebrating while an already flat retail market is hit during the most profitable part of the year.

“Amazon is likely to maintain a strategy of matching or being the lowest price in the market at all times. This could spark a response from incumbent retailers who are intent on not being beaten by Amazon on price during the key pre-Christmas sales event,” Raymond and the Citi team say.

“In our view, lower pricing will likely be the result of Amazon’s lower margin and ROI expectations, particularly in the short term. A lower cost-to-serve could provide support for favourable buying terms relative to bricks and mortar retailers.”

Citi says Amazon Marketplace is “a secondary focus”, although several retailers and eBay sellers have been targeted.

The analysts say lead times on some products and logistics capacity remain key issues in terms of launch timing and that Amazon may look to use third party warehouses as a stop-gap measure, with a Sydney site large enough to cope with sale period needed.

That means Amazon is likely to target the gift market initially, and Citi believes that food, alcohol, furniture, hardware and auto will be the first retail sectors to feel the US behemoth’s impact, with estimated sales for Amazon in the June 2018 quarter at around $200 million or 0.2% of total Australian retail sales.

The online retailer is believed to already have $1 billion in sales in Australia via shipping from overseas.

Next on the hit list are electronics, department stores, leisure, clothing and footwear, with Citi saying the earnings impact from Amazon likely to be larger than the impact of market share loss.

Raymond and the Citi team says JB Hi-Fi, Harvey Norman, Myer, Super Retail and RCG are the most exposed stocks as a result.

Bunnings has around $11.5 billion in revenue, JB Hi-Fi $3.9 billion and Harvey Norman $1.8 billion.

Online retail sales hit $21 billion in Australia last year and are growing at 14.2% annually.

Australia’s retail sales growth has ground to a halt with the Australian Bureau of Statistics (ABS) reporting yesterday that July sales were flat in seasonally adjusted terms, missing forecasts for an increase of 0.2%.

It was the weakest result since March when Cyclone Debbie caused widespread damage and disruption in southeast Queensland and northern New South Wales.

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