These are the 3 major impacts Amazon has when it enters new markets

Photo: Cameron Spencer / Getty Images

With Amazon poised to launch a major assault on the Australian retail sector, analysts from UBS have outlined the key ways in which it impacts a new market.

The analysis forms part of a detailed research report by UBS in late July, dissecting Amazon’s place within the global retail landscape.

The UBS team said that Amazon’s impact on a new market is threefold. It ramps up its online offering, puts pressure on prices and then uses revenues to expand its online presence.

1. “Accelerates online take-up and wins share”

UBS said that Amazon puts an early focus on maximising online penetration in a new market.

Amazon’s share of online sales is between 1-25% in the markets in which it operates, and in the US Amazon alone makes up for more than 50% of online retail sales growth.

The chart below shows how successful Amazon has been in taking up online market share in its current markets.

It also shows UBS’s estimates for Amazon’s prospective online share of the Australian market:

2. “Puts pressure on prices”

UBS said that Amazon’s strategy is not to directly undercut their competitors, but to maintain flexibility and price appropriately for specific markets.

“Our industry discussions suggest Amazon changes prices up to 30 million times a day globally,” UBS said.

The Amazon effect has been felt severely in the US, its most mature market.

This chart below how much margins have been squeezed for traditional US retailers:

3. “Drive increased investment in online capabilities”

Investment in the online platform is wide ranging. On the logistics side it encompasses lifting the product range, developing automated distribution centres.

There’s also a focus on service through improving convenience and offering post-sale assistance.

Lastly, UBS said that Amazon uses its online platform to build loyalty through the subscription-style Amazon Prime service.

Importantly, UBS noted that the biggest challenge for listed Australian retailers is the market’s focus on short-term profits.

“This limits incumbent’s willingness to invest in short term profit to build the necessary scale online.

Conversely, Amazon has the resources to reinvest now with a focus on building market share over the longer term.

UBS said the retail sectors that will be most hit by Amazon’s arrival are electronics, sporting goods and apparel/toys.

They said hardware, automotive stores and grocery will be less affected due to the higher degree of service required in those sectors.

“Amazon has not (yet) typically exceeded 1% share of each of these markets,” UBS said.

The analysts noted that Amazon already operates in Australia, generating around $400 million in revenue.

“However the biggest impact to a market is generally felt when AMZN launches a local marketplace and local distribution, both of which are not yet in Australia,” they said.

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