The Amazon Effect

After much speculation, Amazon recently announced its plans to enter the Australian market. Although the launch date is yet to be confirmed, one thing is for certain: it will completely an utterly transform the Australian retail landscape for good. The premise is simple: bring Australian consumers low prices, vast selection and fast delivery. But, before we whip out our credit cards, we must first ask ourselves, what makes Amazon so unique, what impact will it have on our Aussie retailers and how can they best prepare themselves for the onslaught?

 

Why Amazon?

When Jeff Bezos first launched the start-up out of his garage in 1994, Amazon.com sold books. Today, Amazon is a global monolith of e-commerce, logistics, hardware, data storage and media. Across the globe, Amazon.com is the go-to site for online shoppers and merchants alike, living up to its vision as “Earth’s most consumer-centric company.” Ranked number 12 on the Fortune 500, Amazon accounts for one in every two dollars spent online in the United States. But, its influence extends beyond the US. Amazon also has a strong presence in the UK, Canada, Mexico, Germany, France, Italy, Spain, Japan, China and India. In fact, Amazon now sells more non-food products in Germany and the UK than any other retailer, accounting for around a third of growth in all retail sales in both nations during 2016.

Clearly, Amazon is doing something right and that ‘something’ is known as the ‘flywheel effect.’ Bezos borrowed this ideology from Stanford Business School Professor and acclaimed author, Jim Collins, back when the retailer merely traded books. In Amazon’s original flywheel (pictured below), each component revolves around a continuous improvement of the customer experience.

The more each area succeeds, the more the Amazon business accelerates. Brad Stone, author of the bestselling Everything Store, describes the process below:

More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop.

This is precisely why Amazon has been dubbed the “country killer” by management consulting firm, Morgan Stanley. Its price differentials make the e-retailer virtually impossible to beat. As the company continues to succeed, its funds are reinvested into innovative practices that continue to fuel the business’ growth. Not only this but, Amazon’s highly profitable and fast growing cloud services cross-subsidise the company’s retail operations in order to deliver low prices to consumers. These ‘service sales’ account for 75% of Amazon’s operating profit or US$41.3 billion in sales during 2016.

The impact:

Unsurprisingly, this spells trouble for our Aussie retailers. Amazon has had a profound impact on each of the markets it has infiltrated and Australia will be no different. In fact, the global e-commerce giant has set its sights on “destroy[ing] the retail environment in Australia” taking a reported $12 billion chunk out of the industry in the coming decade. Analysis by Credit Suisse revealed that Amazon will likely reach over 5 percent market share in many retail categories within its first five years in Australia. This will be driven by demand from 56 percent of Australian consumers who intend on buying from Amazon when it lands. Amazon already does $1 billion in sales in Australia by shipping goods from overseas. This is, of course, just loose change for the retailer who has a market capitalisation of $US460 billion ($AU630 billion). To put this in perspective, the total value of Australia’s big listed retailers (Wesfarmers, Woolworths, JB Hi Fi, Myer and Super Cheap) comes in at around $80 billion.

Our department stores will be among the worst hit with reports stating that Amazon has plans to undercut local prices by 30 percent. This all comes down to its lean business model. During 2016, Amazon sold US$94.7 billion worth of products globally. However, a substantial US$88.3 billion was tied up in the cost of buying or manufacturing these products, leaving a gross profit of just US$6.4 billion or 6.8%. This small mark-up on each of its product allows Amazon to undercut competitors with relative ease. Our Aussie retailers don’t stand a chance when you consider that last year JB Hi-Fi had a profit margin of 21.9 percent, Woolworths 26.8 percent, Wesfarmers 31 percent, Harvey Norman 31.4 percent, Myer 42.1 percent and Super Retail Group 43.3 percent. Add to this Australia’s high operating costs (wages, advertising, marketing and leases), and the retail landscape is looking increasingly dire for our home-grown traders.

Where do we stand?

According to Yngve Andresen, partner at Australia’s leading management consulting firm, Bain & Company, Amazon’s entry won’t spell the end of brick and mortar stores. But, Aussie retailers need to act quickly if they’re going to stand a chance against the conglomerate. In a recent study conducted by the Commonwealth Bank, a staggering 78 percent of Australian retailers revealed that they do not have a plan in place to combat Amazon when it arrives on our shores late this year/early next. Despite its unparalleled success abroad, only half view the retail giant as a significant threat. So, not only are our retailers incredibly unprepared for Amazon’s arrival but, they underestimate the impact that this will have on their bottom line. If they are going to stand any chance, retailers need to get organised, get updated and get involved.

Step 1: Get organised

Aussie retailers need to develop a pre-emptive strategy that offers value to customers in ways that Amazon cannot. Reality is, our retailers will never be able to compete with a price-based agenda.  They simply don’t have the scale or capital to do so. Instead, they need to leverage their existing assets, such as brick and mortar stores, loyalty programs and customer data to engage directly with shoppers and offer them unique services and experiences.

Step 2: Get updating

Retailers need to get their e-commerce operations in order if we’re to expect anything like Amazon Prime’s one hour delivery service in the States. This means upgrading clunky websites and using a combination of click and collect and other established logistics providers to deliver orders efficiently and economically.

Step 3: Get involved

Things are a little different for our SMEs. In fact, if you’re a small retailer, you can’t afford not to be on Amazon. When done right, Amazon Marketplace can generate significant returns for third-party sellers offering small retailers another channel to reach their customers. James Thomson, former business head of Amazon Services, says that “it’s actually quite common to see retailers start a small Amazon account only to find that account soon representing more than 50 percent of their total sales within one or two years.”

Be it small, medium or large scale retailers, the fact remains, Amazon is coming to Australia and it will affect each and every one of them. Either we prepare for it and try to safeguard the local industry or we allow Amazon to do what it does best and dominate the market. The choice is ours.

 

 

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