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Businesses that could survive the Amazon onslaught

Businesses that could survive the Amazon onslaught

Morgan Stanley’s tech team recently devised a framework to help investors consider which industries should withstand the impending Amazon threat. Labelled the BRIAN framework, it makes essential reading for all investors.

“The Amazon Effect” – that is, Amazon’s dominance over all things retail and the shift in consumer expectations around the shopping experience – has become increasingly visible. The traditional retail distribution model of selling goods via brick and mortar stores has been disrupted, with a growing share of retail transactions shifting online to players such as Amazon. Amazon’s entry into a market irreversibly changes consumer shopping habits, disrupts supply chains and exerts price and margin pressure on incumbent retailers. These trends have been well-publicised, and the lack of any signs to indicate that they are abating makes the framework all the more important.

The BRIAN framework elucidates a number of barriers that should make it harder for Amazon to disrupt these businesses. While Amazon boasts a huge range of items, data on consumers’ preferences, distribution infrastructure and the necessary systems to make the shopping experience seamless, it’s likely that businesses with the following characteristics are less likely to be displaced by Amazon.

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Let’s look at each of these barriers in turn.

Bespoke

Firms that sell unique and bespoke items such as luxury goods retailers, grocery stores, or tailor-made suits are better-positioned.

Regulatory hurdles

Industries with heavy legal and regulatory burdens when making a product sale provide barriers that protect these companies. The pharmaceuticals and insurance industries are good examples of this.

Industry/business model

Morgan Stanley suggests that e-Commerce companies find it more difficult to scale products with lower gross margins, lower order frequencies, lower inventory turnover, and/or heavier weights. Retailers that sell goods of this nature are likely to be more difficult for an e-commerce player such as Amazon to disrupt. Industries such as auto parts and home furnishing sell goods characterised by these factors and may be more defensible against online competition.

Attention post sale

Businesses that require a high level of post-transaction customer service are better-placed to compete against Amazon. Examples include the travel industry, where customers may need to contact a travel agent if issues arise, as well as auto parts, given that some components need to be installed after purchase.

Nuances

Transactions that are complex and nuanced are harder for Amazon to capture, and the increasing complexity of a transaction makes scalability more difficult. For example, a contract for a large-scale machinery purchase could take weeks or months to negotiate, making it ill-suited to being displaced by Amazon’s current retail model.

While the above framework may spark thoughts about which retailers are better-placed to compete in an environment that includes Amazon, there’s no assurance that the online juggernaut won’t evolve its model to eventually encroach on these businesses.

The Montgomery Global Fund and Montaka own shares in Amazon (Nasdaq: AMZN)

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George joined Montgomery Global Investment Management in September 2015 as a Research Analyst. Prior to joining Montgomery, George was an investment analyst at Private Portfolio Managers where he covered global equities across various industries, using a value investing framework. George’s prior experiences include equities research and investment banking roles at both Citi and Greenhill & Co.

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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.

3 Comments

  1. I would like to comment on the “Regulatory” column being a barrier to entry or not succumbing to Amazon’s influence. Generally there may be a case for regulations in the manufacturing and clinical trials requirements of pharmaceuticals.

    However, there may well be cases where there was disruption in regulated industries such as Uber. Before Uber, owners of taxi licences thought their industry was protected. Yet Uber comes in and the value of ‘regulated’ licenses fell.

    Even people dissatisfied with the quality of NBN services are circumventing the NBN into a do it yourself for example this article, http://www.smh.com.au/technology/technology-news/daniel-saffioti-built-his-own-private-radio-network-to-get-access-to-nbn-20170111-gtpedc.html and this one http://www.bendigoadvertiser.com.au/story/4757385/diy-fix-for-nbn-woes/. Here’s another one, http://www.upstart.net.au/bypassing-the-nbn/. Even if Google Fibre is not as successful, http://bgr.com/2017/07/18/google-fiber-wireless-broadband-problems/ , it does allude to attempts to fill a need which is not satisfactorily met by the regulated NBN.

    Then we have the removal of tarriffs, which were ‘regulations’ putting a ‘premium’ or barrier-to-entry on goods made overseas. Overnight a government can remove such a barrier-to-entry and overseas-produced goods and services are easier to access.

    Moreover, there are regulations which promote a particular method of energy generation instead of coal such as the renewable energy target (‘RET’). In another article by your colleague Mr Montgomery, he argues that with the economies of scale, wind and power will be so cheap to produce that there will be no need for subsidies. This suggests that the RET could well disappear overnight.

    The overall point is that if you think that regulation is a barrier-to-entry it may well be disrupted either by technology such as Uber or by government fiat the removal of protection or incentives. Thus a regulatory barrier to entry may not be something that lasts forever.

    Thank you,
    Anthony of Belfield

  2. Emanuel Antoniou
    :

    We’ve been told plenty about the negative impact on businesses from the arrival of Amazon. What I would like to know, will there be any companies/sectors that will benefit from Amazons arrival.

    • Brands that can sell straight on Amazon (using Amazons fulfilment model) and cut out the likes of JB Hi-Fi could do well – depending on volume/margins of each of course.

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