Morgan Stanley has just downgraded a series of ASX-listed Australian retailers after completing a deep analysis on the coming impact of Amazon.
The global investment bank estimates Amazon will generate $12 billion of sales by 2026 with five distribution centres established across Sydney, Melbourne and Brisbane.
“Since the announcement of Amazon’s entry in Australia, we think the market has mispriced the impact across Australian consumer [sector],” the Morgan Stanley analysts write in a note to clients.
“Amazon’s entry in Australia will have a profound impact on the Australian retailing industry, in our view, as it has had on most markets.”
Amazon officially announced in April its entry into Australia, saying it will take on retailing with taking on retailing in Australia with a “vast selection” and “fast delivery”.
The online retailer is looking for a fulfilment centre and has started hiring to add hundreds more to the 1000 employees already in Australia. Among them will be a country manager to oversee the development of the Australian market over many years.
Here’s how Morgan Stanley has repriced local listed retailers:
“We have downgraded our Industry view to cautious (from In-line) because we believe the Amazon impact will be broad-based,” the Morgan Stanley analysts write.
Wesfarmers has been downgraded to underweight from equal-weight and the price target reduced to $36 from $41.
Morgan Stanley believes the market has overlooked the impact on Wesfarmers.
“What strikes us is that the stock of the largest non-food retailer in the Australian market — Wesfarmers, which generates $22 billion in sales and $2 billion in profits from non-food retailing — has barely moved,” the analysts write.
“We think that this market reaction implies that WES (Wesfarmers) will be relatively unaffected by Amazon’s entry — we would argue to the contrary.”
The analysts think Wesfarmers’ Kmart has the most to lose from Amazon’s arrival because it has a very low average sale value and it sells highly commoditised products.
The average purchase at Kmart is far lower than at other retailers at less than $10.
“This means that it is uneconomic for a physical retailer to ship these goods profitably,” the analysts write.
“When Amazon launches Prime in Australia, we think that consumers will purchase these products online rather than going into stores, given the ease of purchase (such as free delivery).”
eBay is the other big loser.
“Initially, we think that Amazon will take a significant portion of eBay’s business in Australia, which will lessen the impact for most retailers in the early years,” the analysts say.
And Australian department stores such as Myer look more exposed to Amazon than specialty retailers.
Morgan Stanley says Australia is overbuilt with department stores, the long store leases mean they can’t close stores as they become unprofitable, their online offer is weak and they generate a a large percentage of sales from clothing, a category where Amazon is successful.
Among retailers in a better position to repel Amazon are JB Hi-Fi and Super Retail, both with good online sales already.
Here are Morgan Stanley’s estimates on the individual company impact from Amazon’s entry in Australia:
“Assessing the impact of Amazon on the Australian retailers is a little fraught at this early stage,” the analysts write.
“That’s because pricing, ranging, and the Prime offer — all significant drivers of its success in offshore markets — aren’t yet known.
“But given the success Amazon has had in other markets, we think it’s fair to assume that when it arrives in Australia, the offer will be very competitive.”
Morgan Stanley’s preferred consumer stocks are Domino’s Pizza and Treasury Wines.
Both companies are largely unaffected by Amazon’s entry in Australia and generate a large portion of earnings from offshore.