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Aussie retailers, watch out – could Amazon Go disrupt you?

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Aussie retailers, watch out – could Amazon Go disrupt you?

Our retailers are about to face a whole new challenge. Amazon has announced it will trial a new concept store in the US that uses its ‘Just Walk Out’ technology to change the format of a traditional grocery store by removing cash registers and the check-out process. Customers simply use the Amazon Go app, then take the products they want, and go. It’s set to come to our shores in late 2017.

The video below demonstrates the Amazon Go concept.

This provides an indication of how automation and technology could dramatically change retailing in a way that goes beyond the impact of the online channel, impacting the bricks-and-mortar market as well.

Reports suggest that Amazon is planning to enter the Australian market in the second half of calendar 2017. This was reportedly delayed by six months relative to its original plan in order to incorporate its new fresh food offering into the launch.

While Amazon’s online presence is likely to have a relatively rapid impact on the level of price competition in the market, even if the concept store proves successful, it would take a long time for Amazon to roll out enough stores to represent a meaningful bricks-and-mortar presence in Australia. However, it shows that the investment in stores is unlikely to be a short term requirement for both Coles and Woolworths, as the bar is progressively raised by new competitors.

This sort of concept also has interesting implications for the Convenience segment of the market. As such it is not only relevant for WES, WOW and MTS, but also for CTX and the competitive position of the convenience store sales that are driven off the back of its fuel offering. CTX is investing heavily in growing its retailing business. There could be implications for the long term return CTX generates on its investment if the company’s convenience stores are no longer as convenient as the product offering of new entrants.

Given that Amazon Go shoppers need an Amazon account to purchase goods, Amazon will be capturing detailed data on the shopping habits of all of its customers, not just those that participate (and utilise) the retailer’s loyalty scheme. Additionally, the way the system works, the data would accurately track the activities of the consumer while in the store. This would provide broader and deeper data on its customers than would be available to incumbent retailers.

This highlights that the historically high returns generated by the food retailers in Australia are likely to come under attack from a number of angles including the need to increase ongoing capital expenditure due to new solutions to consumer access and shopping experience.

Stuart is the Portfolio Manager of The Montgomery [Private] Fund. Stuart joined Montgomery in 2015 after spending 19 years in research roles with JP Morgan in Australia and in New York. Stuart was appointed Executive Director at JP Morgan in 2005 and for 8 years was Deputy Head of Research. Prior to this he worked as an analyst in the Australian Equities team at Bankers Trust Asset Management for 3 years. Stuart is a CFA® charterholder.

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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary.

5 Comments

  1. Thanks for the article Stuart. Interesting stuff…

    One thing that did appear to be a common occurrence in the video was that the customers were only picking up one or two items at a time. This suggests that the threat is more towards the 7-Elevens of the world rather than the large scale supermarket. It appears the perfect customer is the “lunch-time” crowd in densely populated locations such as CBD’s.

    Do you have any insights/research around how the Amazon Go business model may alter the grocery buying habits of families etc. who, like most people do their grocery shopping in bulk or on a once a week basis?

    If this technology severely alters the “once-a-week” grocery shopping habits of people then this is a definite game changer.

    Whilst Coles & Woolworths are under the pump around margin contraction, at the end of the day we all need what they sell. The 1st time I went into an Aldi you couldn’t even get a box of BBQ Shapes for example (the original model too, not the “new” tripe they’ve turned out). I thought the Aldi product range was very poor but that’s just my opinion.

    Appreciate any thoughts.

    Dean

    • Hi Dean,

      The Amazon Go concept store is a convenience format, so you are right in saying that this is likely to be the market that is most impacted. However, I don’t see why the technology won’t be adapted to a full service supermarket in time. Additionally, both Coles and Woolworths (as well as Caltex) generate a reasonable amount of their sales from convenience formats through their petrol stations. Additionally, the improvement in the offer and ease of use for consumers could have an impact of larger supermarkets by taking some of the smaller basket (but high gross margin) convenience shopper away. Full service supermarkets rely on a range of consumers to drive their economics. There is a once a week large basket shopper, but more frequent smaller basket shoppers are just as important. This is while Woolworths embarked on an aggressive investment in its fresh food offer and branding back in the 1990s. Customers buying fresh food need to visit the store more frequently. The same can be said for pre-prepared meals.

      In terms of Aldi, the competitive threat is to the core once-a-week shopper. Aldi has a limited range, but prices that cannot be matched by the full service supermarkets without cutting margins significantly. Aldi is growing its share of the core once-a-week shop for core items, with the consumer then using Coles and Woolworths as a top-up shop. This strips the majors of the large basket shoppers, impacting their stock velocity on core basic items.

      Supermarkets are high fixed cost, low gross margin businesses that rely on high stock velocity to make the economics work. If velocity falls, the fixed cost leverage kills the economics. The risk is that the growth in low cost and price alternatives like Aldi, Costco and Amazon Fresh (expected to arrive next year) are eating away at the large shop customers, while growth in convenience competitors like Amazon Go could then attack volumes from the smaller high margin and frequency convenience shopper.

  2. if it’s not Amazon, it is something else.
    this is precisely why I avoid investing in the cut throat competitive world of retailers,
    particularly in the modern world where people are much more interested in cheaper
    prices for everything rather than quality.

    • Hi Carlos, we agree. Retailing is a very hands on business. Management has to remain focused on the detail at all times. With technology breaking down traditional barriers to entry, those that have been reliant on being a big fish in the small pond to generate returns for shareholders will inevitably be exposed.

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