The King of the mountain cometh
By Terry Tolich, Senior Investment Analyst, Australian Shares
08 May, 2017
Amazon is a phenomenal company. Since its founding in 1994 it has transformed the retail landscape and is now the fastest growing retailer in the US while traditional retailers are closing stores. Outside of the US, the company has progressed from shipping goods from its US website to having a direct presence in 11 countries.
Recently, after months of speculation, Amazon confirmed it will launch in Australia. Its direct introduction into Australia will be via Amazon Marketplace. This is an e-commerce platform that anyone can use to retail their products, with Amazon charging a commission or service fee.
Amazon's likely strategy will be to use Marketplace to learn which product categories are popular with Australian online shoppers. It will then provide its own competitively priced offering in these categories. Once it has its logistics infrastructure in place, we'd expect the launch of Amazon Prime to quickly follow. This is a subscription service (US$99 per year) that gives Amazon's shoppers free one or two day shipping on most items and other perks (notably video streaming). Prime customers become very loyal to Amazon and spend far more than other customers. About half of US households have a Prime membership.
What does this mean for Australian retailers? Initially, probably not much. Ultimately, however, price competition will increase as Amazon Marketplace grows and Amazon introduces its own product offerings. Amazon founder Jeff Bezos sees the profits of traditional retailers as an opportunity to take market share and has famously said, "Your margin is my opportunity". Once Prime is available in Australia, traditional retailers will need their own online shopping capability with quick delivery and/or convenient pick-up or else they will be forced to adopt Amazon Marketplace or die.
We are very cognisant of the longer term threat posed by Amazon's imminent Australian arrival. But despite media assertions that Amazon will be the death knell for all Australian retailers we believe there will be some survivors who we expect may perversely become stronger as a result of Amazon. Those retailers whose competitive advantage takes them out of Amazon's target range will be able to maintain largely unassailable positions. The two largest consumer-related positions in our Australian portfolio, Domino's Pizza and Carsales.com, are outside Amazon's field of fire and we remain confident in their future performance.
* B-side of T-Rex's first UK #1 single, "Hot Love", released February 1971