Retail stocks, such as JB Hi-Fi, Harvey Norman and Myer have taken a pounding in recent months, and one of the factors in their decline is all the talk about the entry of Amazon into the local market.
In April, Amazon confirmed that will set up operations in Australia but did not say when or in what form.
And last week it received extensive coverage when it bought the US grocery chain Whole Foods, giving rise to speculation that its entry here might include an acquisition.
Questions about Amazon have been asked at just about every investor briefing this year. Here is what some of the analysts and fund managers think.
Rhett Kessler, CIO Pengana Australia Equities Fund: We have spent a lot of time on this and we think it will have an impact. Retail space has been sold off.
But at the same time we have bought JB Hi-Fi. Its sales will come off but we still see good cash earnings, and it has invested capex to get match fit.
We have also bought Dollar General, a US regional grocery retailer. They have stores in rural and regional America and a lot of their customers pay with food stamps. That is not Amazon’s market.
Randall Jenneke, the head of Australian equities at T Rowe Price: Sixty per cent of the REIT [real estate investment trust] sector is retail. Will retail property be worth more in five to 10 years time? I struggle with that. I don’t own any REITs in my portfolio. They are expensive and the assets values are going to be challenged.
Investment bank retail analyst, who did not want to be named: There is a lot of speculation and we will wait and see. Amazon is engaging with local suppliers and establishing physical distribution here. But it does already sell into Australia, so how much are they going to change expectations around service and price.
Logistics will be an issue for Amazon. Because of higher wages and lower population density here their delivery cost could be higher.
Retailers will certainly need to be sharper. JB Hi-Fi and others have already felt the impact. Is there still risk? It is very difficult to say because we don’t know when they are coming or how they are going to price.
Ashton Reid, portfolio manager of listed property and real assets at investment manager Martin Currie: There are considerable differences between the US and Australian retail markets that need to be taken into account when considering the likely impact of Amazon’s entry into the local market.
Shopping mall space per capita is 46 square feet in the US and seven square feet in Australia. We do not expect the same impact on shopping centre revenues and valuations here as occurred in the US, given the significant difference in levels of retail capacity.
REITs with logistics assets will benefit from Amazon’s entry and also from moves by other retailers to beef up their online presence.
Macquarie Securities: Online will grow to 12.5 per cent of total retail sales by 2025 in Australia, capturing 30 per cent of total retail sales growth in the process. Based on its record in the United States, Canada and the United Kingdom, Amazon could be expected to gain a 25 per cent share of online retail sales.
Incumbents will need to address inadequacies in pricing, customer engagement and loyalty, data analytics, website speed, ease of use and fulfilment, which will require significant investment and will be a challenge for some.
In other markets, the success of Amazon has seen a number of weaker competitors fail, while the leaders have been able to restructure underperforming aspects of their business to return to a more sustainable level of performance. It has also allowed smaller, more nimble operators to prosper.
JB Hi-Fi is more than adequately pricing in the downside risk of Amazon’s entry, while Myer is addressing its excessive store footprint, repositioning its cost base and improving its relevance to customers.
In 2010 Amazon opened its first Canadian fulfilment centres. Details are scant but it appears that the company’s expansion into Canada has been disappointing. The company has had trouble dealing with the cost of outbound logistics across a sparsely populated country and a relatively limited product offering compared with the US site.
And like Australia, Canada’s online retail take-up has lagged the US and the UK. The characteristics that have limited Amazon’s growth in Canada are relevant to Australia. Amazon is likely to make a big impact here but it is not a done deal.