How big could Amazon.com, Inc. (NASDAQ:AMZN) be in Australia? There have been recent media reports that the U.S. online giant will hit our shores next year. The company, or at least an unnamed executive, has stated an intention to “destroy” Australian retail. And why not? Australian retail margins are among the largest in the world. But should retailers be shaking in their boots? Will Amazon march into the country like the Roman infantry, taking whatever market share they want? To me, this reads more like the blue sky case. So what does a more realistic scenario look like?
The Australian E-Commerce Landscape
It may surprise some that online penetration in retailing is less than 15% in most developed countries. In fact, very few are greater than 10%.
And Australian consumers have lagged their offshore counterparts when it comes to shopping on the internet. Australian online retail spend is just 7% of total retail sales. One reason could be because Australia has gone 23 years without a recession. The Global Financial Crisis (GFC) was a major catalyst for overseas consumers to seek cheaper alternatives. Amazon’s customer base accelerated during the GFC. For the three years leading into the GFC, it was growing at around 16% p.a., but accelerated during the next three years to around 23% p.a.
Australia was cushioned from the GFC by the resources boom, a buoyant property market and good starting points for government debt (low) and interest rates (relatively high). In this environment, there was little incentive for consumers to change their habits.
Another factor could be population density. For an online retailer, delivery costs are much higher when customers are spread out over vast distances. It’s no surprise that Japan and the UK are leading the world in online retail.
So where does that leave Amazon?
Undoubtedly, Amazon entering Australia would be met with much fanfare and accelerate online growth. This would enable Australia to gradually catch up to global peers in terms of online penetration. But Amazon’s starting point is a market with just 7% online penetration.
So how much of the Australian online market could Amazon gain? Let’s once again look offshore.
While Amazon is the largest online retailer in the US and Europe, it by no means has a majority share of these markets. Globally it tends to gain about a 15-20% share of e-commerce, a little higher in Japan, despite having the second largest share.
Applying this level of online market share to Australia, Amazon could expect to gain about 1.0-1.5% of total retail sales.
Perhaps Amazon’s presence will raise awareness of e-commerce and rapidly boost online share to levels seen offshore. In this scenario, Amazon could get to 3% or possibly 4% in say five to ten years. But even then, it will hardly be large enough to “destroy” the Australian retailing landscape.
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