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.
24 thoughts on “Will Amazon Destroy Australian Retailing?”
As someone who has recently moved from Sydney to London – I was shocked at the level of online shopping across all the categories, but particularly food and amazon small parcels.
Some of the reason behind the UK having a higher rate of online shopping compared to Australia can be put down to the lack of penalty rates for the delivery drivers and other staff. It costs the supermarkets the same to have a driver on the road at 9pm on a Sunday night as it does at noon on a Tuesday. I quite like having my groceries delivered between 9pm and 10pm on a Sunday night because I know that I am going to be home at that time. The delivery fee is usually only £1-2 (and can often be reduced to £0). A 9pm to 10pm delivery slot on a Tuesday or Wednesday night is almost universally £0. Woolworth/Coless simply cannot offer this level of convenience at the same price because of the penalty rates that they need to pay their staff. I’m not for a moment advocating removing penalty rates in Australia – I think the lack of penalty rates in the UK is terrible.
Also car usage is also a factor in my opinion. My wife and I have both moved into jobs which are practically identical to the ones we had in Australia. The demographics of the people we work with are very similar too. We both ran cars in Australia as did the overwhelming majority of our respective colleagues. Here we don’t have a car and neither do the overwhelming majority of our colleagues. I’ve certainly found that going shopping in a bricks and mortar shop is far less convenient when you don’t have a car.
Agree with BMINLON, the reason online penetration is Australia is low is most probably due to the poor offering and relatively high prices. Take the example of Booktopia, book prices are not really cheaper than in a bookshop and it cost $7 to get the book delivered which is quite expensive.
BMINLON’s other point is also important. In Australia, we don’t have mega cities with most people living in apartments, no car, couple/parents both working, etc… this could be a large impact on online sales.
Also, increase in Amazon’s growth during GFC could also be attributed to the growth of mobile internet during the same period.
I don’t know about penalty rates most delivery people are subcontractors and with a vast country and a small population delivery costs are always going to be more expensive.I get stuff shipped from the US and the postage is really expensive more than when I ship stuff back.
Nice to see some rational analysis and comments. Have to skeptical of media quoting a hedge fund with a provocative unnamed source. Expect a bit better from the AFR…
Why do you “expect a bit better from the AFR”? They’re not exactly the Wall Street Journal
Yea, but there not published by Newscorp either.
For the sake of clarity, I wasn’t having a go at the AFR because it is owned by Fairfax but was just surprised that someone would expect quality journalism from it. Most people would agree that the AFR’s quality has deteriorated in recent years because, like most newspaper companies, Fairfax’s business model has been destroyed and so it has fewer funds available to invest in quality journalism.
In my view, the WSJ and the Financial Times are far superior in terms of business journalism compared to the AFR and Australian newspapers in general, which was the point of my perhaps flippant comment. That enough people are willing to pay for their content is the reason why.
Haven’t done the research but would have thought looking at specific industry segments would be far more instructive. For example, Amazon might have ~20% of total e-commerce spend in the US, but 90% of widget sales. In that case, they might very well crush the Australian widget industry’s online sales.
Completely agree Will.
Thoughtful and useful analysis. But short of the mark. You need to think about the fact that Amazon may take 20% of the local online market (high estimate) but may grow that market to over 10% of share. A bit like when a cheap enough/reliable enough offer of electric cars will grow the market because people will have a reason to switch. Witness the iphone for smart phones, or Aldi for discount grocers. To be sure, homebrand and discount grocery has always been available as a product line, but it was never done well enough to justify consumers switching from main lines. Now Aldi has not only captured a large share of discount shoppers, but is capturing a significant share of main line shoppers, or growing the market as a whole, at the expense of the non discount market. Wherever you look in an industry, its not the current share of a segment you have to thing about, its there ability to grown the segment and the share of it, relative to the rest of the industry as a whole. None of this means that your analysis of the likely success of Amazon is wrong, I agree with the ultimate conclusion. But the reasoning is off, to the extent that it doesn’t really address the reality of how microeconomics work in these circumstances.
Couple of comments here.
1. Back around 30 years ago on a visit to UK, our friends who we stayed with took us to a “catalog shop”. Back then pre-internet, you picked the goods you wanted from the printed catalog, phoned in, and rocked up to a tiny tiny tiny shopfront, to pick up the items a day or so later. Resemblance to internet shopping? This was a big thing back then, because it was simple, convenient, fast, etc.
2. All around the big UK cities these days you will find “Sainsburys Local” and similar – supermarkets for people living in the area who have no car, so the shopping is frequent and small. This is pretty much a foreign concept in Australia, except in some inner city areas of the big cities. A step up from 7-Eleven but not your suburban woolies mega-mart.
These things all lead me to think that the people, expectations, demographics, etc are rather different – not to mention distances.
Reminds me of that same trip 30 years ago. We met up again with our friends in Scotland: On the BLAH of MAY, we’ll meet you at 7pm in the car part of the railway station at Fort William. (well you had to do this kinda thing pre mobile phones). It worked, they drove the 700 miles from London in a day, after getting incredulous looks from colleagues: “You can’t do that… it’s so far!”. Not if you are an Australian, mate!
The UK has very dense populations centres, which makes deliveries cheaper. Aus… Hmmm…. might be a big tougher.
A final though: We can already buy from Amazon, we get hammered on shipping. We can buy from The Book Depository (owned by Amazon) with free shipping, frequently cheaper. So… what, exactly, is going to change?
There are a lot of items that are not available to be delivered to Australia from Amazon. The significant factor there is price. The same item will cost 20% more in Australia if available at all. I’m guessing this is some sort of market protection by the manufacturers. It will be interesting to see if the transparency about prices will change, and whether we will share North American prices and ability to buy. As for shipping, I’ve paid double the cost of an item to ship from Amazon and the cost of the product landed here was 60% the price of the cheapest I could get it here even with gst added.
I think it would be helpful to look at the online penetration into different categories of retail sales. Retail is a multi-faceted sector with some categories much more susceptible to online sales, and thus the %penetration would be higher.
So, for example, I would suggest the online % would be higher in many of the categories someone like Kogan operates in, or sporting apparel and goods etc than say fmcg (primarily grocery stores at present anyway) or larger white goods and furniture items.
My guess would be that these two areas (grocery stores and larger goods) comprise well over 50% of retail sales (but I stand to be corrected on that Daniel), so if you excluded them from the denominator, you would find the online penetration would be much higher in certain areas of retail.
I”d like to know a wee bit more about the ‘breakdown’ of what retail covers to make sure we are comparing apples with apples.
I do know that the retail gross margins in Australia look very juicy and attractive to overseas retailers, and that the operating costs (I shall define that as all the costs between gross and net profit) for many of our major retailers are much higher than overseas retailers – 20% to 30% higher in many cases. So you can see why they are coming.
Whether it’s as online or shopfront is just a question of what works for them in an attractive Australian retail market where the retailers have been lazy. So, for example Aldi, Costco, H&M, Amazon etc each have different approaches – and they are each successful. Amazon certainly won’t destroy retail in Australia, but it may pose serious challenges to some of our retailers who have been living in clover or been lazy in terms of their business model.
Agree with Wally re the UK and catalogue shopping. Argos is still going (although feeling the heat from Amazon prime).
The head of Sainsbury’s earlier in the year commented that they are seeing a shift to a less frequent major shop but with more frequent top up shops being done at the metro/local/express shops Wally refers to.
It’s also worth remembering that the smaller footprint supermarkets exist (at least in part) to get around Sunday trading restrictions. Shops over a certain square footage are only able to trade for 6 hours on a Sunday – which is why all the big supermarkets are open 10-4 on a Sunday and Marks and Spencer is open 10-4:30 (but between 10 and 10:30 the registers aren’t open – so you can go in and try stuff on but can’t pay until 10:30 (the first 30 minutes isn’t trading!)). The smaller footprint supermarkets will usually be bang on the limit for Sunday trading.
The nearest big (but no massive) Tesco’s to me (about a mile away) is open 24hrs from early Monday morning until midnight Sunday (and then the standard 6 hours on Sunday) and there is a Tesco Metro 6 or 7 stores down the road (literally 50 meters).
The one thing I am still shocked at is the number of convenience stores open more or less 24/7 – which have very reasonable prices. On the high street just around the corner there are 4 shops such shops within a 30 meter radius. They are all open very long hours, have slightly different focuses (one has more fresh fruit and vegetables another has more alcohol and the third is bigger on breads) the food and range is really quite good (one of them even has vegemite and marmite) and the prices very reasonable. These are like large 7/11s but much better quality. This morning a 4pint carton of milk and 6 free range eggs cost me 2 pounds. Go another few hundred meters down the high street and there are more of these shops. I have absolutely no idea how they make any money.
Sorry this was all slightly O/T.
Amazon have a major problem to solve and that is the cost of distribution. They would probably need to build something that may be called Uber for Amazon to avoid high fixed costs of owning a shipping company.
Another problem is in many regulations that protect cozy monopolies. E.g. books can only be sourced from official Australian distributors that impose ridiculously high prices.
There are many ways of slicing and dicing the Australian market. One way to do it is to think about it as 3 large aglomerations each more than 4 million of relatively sophisticated and well off customers (Sydney, Melbourne, Brisbane and adjacent coast). Each can be served by one large robotised warehouse that Amazon mastered. This would be very effective. This covers 50% of population, but may be good enough until a cost effective Australia wide distribution network is build. This is similar to what Aldi did. Until recently they were only present in the 3 eastern states.
It is also worth noting that many of the problems of sparse and widely distributed population affect the standard retailers as well. In some cases it is even worse for them as they have also maintain the distributed infrastructure – shops, workforce and distribution.
A friend of mine, who runs a manufacturing business already uses Uber for deliveries around the Aus city he operates in. He said he’d avoid traditional courier companies at all costs. Uber’s already eating plenty of lunches. It’s only going to get worse for any incumbents.
Even if Amazon “only” takes 1-1.5% of total retail sales in Australia, their effect on other retailers will be orders of magnitude larger because pricing is determined at the margin.
I envisage a future where Aussie retailers need to get a whole lot leaner, whilst selling their products at much lower margins just to maintain their market share.
Like Apple, Google, Uber and the rest of them, Amazon will not pay tax in Australia_ and that is a hole that can only get bigger. What a joke!
Imagine it is the year 2000, you are a retailer in the electronic/electrical/white-goods space, and (with the benefit of hindsight) you are contemplating two possible stunamis headed your way:
1. The combined tsunami of price transparency (thank’s to the internet), a strong Australian dollar (thank’s to the mining boom), GST-free imports, and continuing massive price deflation (thanks to the China effect, as well as to price deflation).
2. The arrival of Amazon.
Which of those two tsunamis looks scarier?
Well the first one has not only struck, it hung around for several years, and yet our strongest retailers, in the sector, have still got the largest market share and are still profitable. And what’s more, I would suggest that the biggest challenge posed by tsunami number 1, was the staggering price deflation that occured over an extended period. This deflation now seems to be unwinding.
Is the Amazon threat, by comparison, a storm in a tea cup (though no doubt, a very large tea cup, with it’s own currents and storms… ha).
I guess it depends who’s tea cup you are talking about Mars.
I’m sure most would have said 15 years ago no-one could seriously challenge the virtual oligopoly of Woolworths and Coles in the grocery market. Then along comes Aldi. Ditto the same for Dan Murphy – who do you think could possibly challenge it. But Aldi certainly has made a dent in their market share with almost a pindrop footprint by comparison.
I’m not so sure David Jones and Myers have been travelling well with some of the international retailers making significant inroads, including Costco.
Amazon certainly will not mean carnage but it will be a wake-up call for quite a few, with Wesfarmers being one of the most vulnerable (I suggest) who have used the high margins to consolidate the Coles acquisition, and make significant money in Bunnings.
I cannot imagine it will be quite so easy for them when Amazon arrives. Retail margins will be squeezed with the bigger Australian retailers, and who knows what that means for them if they do not adapt.
Coles and Woolworths will always struggle because their business models require significantly higher wages than the Aldi (and Costco) models, and that is a big big cost in retail these days.
My point is that the retailer’s I was referring to, have already had a perfect storm, as I described. Is Amazon a bigger threat than the combined tyranny of massive price deflation, a strong Australian dollar leading to cheap GST-free imports etc? Maybe. But gee, that’s a hard act to follow.
The only tyranny experienced by Woolies, prior to the onslaught of Coles and then Aldi, was the self inflicted wounds of capital misallocation and general stupidity.
One look at the Amazon complaints page and you will discover why its share price fell.
1. The love affair with online at Amazon has stalled. The honeymoon is over. Consumers are not getting what they want from Amazon.
2. More suppliers are abandoning Amazon because they lose control of their brand, pricing and integrity of the product. Just ask Birkenstock about counterfeiting.
3. There is a spillover from the fake news stories and “what you see is not what you can believe” on the internet.
The tide has turned.. Amazon’s returns policies have turned consumers off.
Everyone loves Amazon (or did) = time to sell Amazon?
Everynone hates Harvey Norman (and Gerry) = time to buy Harvey Norman?
I recommend a read of ‘the everything store’ to get an idea of how Bezos approaches new markets and how he runs the company.
I also agree with the earlier comment about margin impact. Add to that the fact that Amazon has a history of running losses (across a range of business lines) for longer than any other public company I know of in pursuit of long term domination, and it makes for a grim outlook for a large chunk of Aussie bricks and mortar retail.
In the categories that Amazon traditionally dominates (and we still don’t know where that line ends), Australian retailers will need to get lean very quickly, and even then most won’t be able to cut it.
Suburban shopping centres and retail strips are also likely to take a hit over time, if UK experience is anything to go by.
Its also worth discussing Amazon’s business model. There is nothing inherent in its business model that can’t be replicated by others. Amazon’s key competitive strength is the enthusiasm of its shareholders that enables it to absorb weak profitability now with the promise of longer term market ‘dominance’. For those investing in the late 1990’s, there is a rhyming familiarity with all this. The market assumes that Amazons increasing scale will enable a satisfactory return to be generated in the future, but if a number of copycats emerge (which will and may come from existing bricks and mortar channels), then their scale advantage will be much less differentiated.
I am also a strong believer that humans are inherently social creatures, so there is still a role to play for bricks and mortar stores. There is certainly a good chance that bricks and mortar stores evolve to be primarily a collection point for online sales, but any decent retailer will probably evolve to generate most of their margin from selling incremental products to customers as they collect their goods in store.