Amazon in Australia - Impact

Amazon is setting up shop in Australia. This has significant and transformative implications for Australian retail landscape. Keep in mind the following:

1.   Amazon market capitalisation is ~ USD 470 billion;

2.   US traditional retail sector (entire cohort) market cap is ~ USD 295 billion;

3.   Australian big three (Woolworths, Wesfarmers & Harvey Norman) market cap is ~ USD 60 billion.

Majority of the market value of Amazon (almost 90%) can be traced to its relaunch of Webservices. Amazon relies for most of its profit from high margin webservices and negligible profit (or value) from its retail operations.

Australian retailers (or for that matter the US) have no such fallback.

Amazon Retail – A lean destructive model

In 2016 Amazon sold USD 94.7 billion of products globally with a gross profit of USD 6.4 billion. That is cost was around USD 88.1 billion (or a gross profit of ~7%). Compare this 7% with:

1.   Woolworths of ~27%;

2.   Wesfarmers of ~31%,

3.   Harvey Norman of ~31%.

Majority of this “excess” gross profit of Australian retailers goes primarily to service a legacy fixed cost structure. This leaves a “net” margin of ~3% on average for Australian retailers.

There is no need for Amazon to start a price war in Australia. Just sell the same product at its gross margin and destroy Australian retailers. 

What is likely to happen?

1st a significant reduction in retail employment is likely to occur in the next decade. This will be more pronounced initially in the non-grocery aspect of retail. Thus, the initial impact will be higher for Myer, David Jones, JB Hi Fi, Harvey Norman and others of similar type.

2nd this, in turn, will push a change in the “rental-retail mix models” of our shopping centres if they are to remain viable. We will see shopping malls in high-density areas to do better than low-density areas. Whilst I do not see a landscape littered with mall closures (like the US) there will be rent pressure.

3rd the alternative to this is what Amazon wants i.e. push retailers to Amazon Marketplace. Nearly 4/5th of Amazon sales are third party. This provides an opportunity to nimble small Australian retailers to benefit from the ready platform. 

In short, the inefficiency of legacy will be replaced by the efficiency of cutting edge technology. This provides significant benefit for the consumer and exceptional new opportunity for small retailers to ride on the back a web services giant.