The impact on Australian retailing from the expected entry of Amazon appears to be under-appreciated, according to analysis by Credit Suisse.
The research shows Amazon will likely reach a better than 5% market share in many retail categories within five years of arriving in Australia.
“Amazon is likely to cause a fall in prices in some categories that either generate excess profit or where the existing Australian cost structure is excessive — excess profit and excess cost both being reduced,” says Credit Suisse.
Amazon has not yet officially signaled a move into Australia, but there have been increasing reports of the giant US online retailer preparing for an entry here, with the company recruiting for a wide range of new roles related to its retail operations and also reportedly seeking warehouses, which would be vital components in its disruptive distribution model.
In January, Amazon had job advertisements for Brisbane describing work for a local launch of its grocery service, PrimeFresh.
Last November, a fund manager leaked details of Amazon’s plan to “destroy the retail environment in Australia” by undercutting competitors by 30%. Distribution and performance centres in every state and even physical stores in regional centres were reportedly in Amazon’s vision.
Among ASX-listed retailers, Myer could be hit the hardest. Credit Suisse estimates the 117-year-old department store chain faces sales revenue falling by 4% to $3.16 billion in the 2022 financial year, compared with 2016, and EBIT falling 29% to $81 million.
“And the profitability of online sales falls due to competition in delivery fees and additional online expenses,” write Credit Suisse analysts Grant Saligari and Troy O’Dwyer.
Companies with high gross margins and costs of doing business are vulnerable.
Analysis by Credit Suisse shows Myer at the highest risk followed by Harvey Norman, JB Hi-Fi and Super Retail Group.
Amazon customers have high engagement with electrical, home, sporting goods, clothing and children’s toys.
“Almost anything that can be put in a small box is likely to be vulnerable to Amazon,” the analysts say.
The success of Ruslan Kogan’s online retail business Kogan.com could be a precursor to the US giant’s inroads with Credit Suisse saying prices for private-label electrical accessories in JB Hi-Fi appear to be high and Kogan’s prices are similar to Amazon US and UK.
In Australia, online shopping accounts for 16% of spending on consumer electronics and electrical appliances. And about 90% of online sales are captured by local domestic online retailers including Appliances Online, Kogan, JB Hi-Fi and Harvey Norman.
That helps cushion Harvey Norman. The impact of Amazon is mitigated by Harvey Norman’s bulky product range and its business outside of Australia.
Here’s an example Credit Suisse’s risk analysis across a group of ASX-listed retailers:
And the estimated fall in earnings caused by Amazon by 2022:
“The entry of Amazon challenges the economics of established business models in many ways, some obvious and some more subtle,” says Credit Suisse.
A typical response to Amazon entry is for retailers to accelerate the development of online capability.
And many Australian retailers are doing just that.
“We note that, whilst assisting with revenue retention, these solutions often generate significantly lower profitability,” the analysts write.
“A retailer might find that, as sales move online, warranty, other attachment and follow-up sales are harder to achieve.
“Between a rock and a hard place — perversely the online development further exacerbates negative mix shift.”
Here’s where Credit Suisse sees high impact on prices:
The most common responses to Amazon have been to reduce price, increase range, transact more business online and to reduce investment in stores.
But many of these strategies have not been particularly successful, says Credit Suisse.
“When quizzed, the common response from competitors of Amazon was that they felt that they had to defend what they had and worry about the profit implications later,” the analysts write.
“The main lesson that could be drawn for Australian retailers seems to be: be prepared with a defendable range, sustainable cost structure and sustainable allocation of capital.”
A number of retailers in Australia operate with high gross margin and high cost structures, which made them noncompetitive with Amazon.
Credit Suisse says the high margin and high cost upper right quadrant in the chart below is an area of risk: