Rumble in the Jungle

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Online retailer Amazon has confirmed that it will set up operations in Australia. The company says it is looking for a warehouse (what the company calls a fulfilment centre), which may be the first of many.

It is also looking for a country manager to oversee the company’s development here.

Amazon said in a statement: “Amazon Web Services launched an Australian region in 2012, we launched a Kindle store on in 2013 and we now have 1000 employees in the country.

“The next step is to bring a retail offering to Australia and we are making those plans now.”

Ashton Reid, portfolio manager of listed property and real assets at investment manager Martin Currie, says 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. Reid says he does 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.

He says real estate investment trusts with logistics assets will benefit from Amazon’s entry and moves by other retailers to beef up their online presence.

Macquarie Securities estimates that 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.

Macquarie says 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.

Store contraction may be a priority in order to minimise losses of underperforming stores.

In the retail sector, Macquarie prefers Wesfarmers and Metcash in staples, and JB Hi-Fi and Myer in discretionary.

“There is risk to discount department stores, which impacts Wesfarmers only modestly and Metcash may actually benefit should Amazon require a strategic partner in grocery supply,” it says.

“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 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.

Macquarie says 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.


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