Watch out retailers: here comes Amazon

Watch out retailers: here comes Amazon

Amazon is about to hit our shores, and its arrival is bound to be as disruptive here as it has been in the U.S.  But which retailers should be most worried?  And is there anything they can do to protect market share in the face of this retail juggernaut?

Investors in Harvey Norman over the last few weeks have had cause for concern as the company botched its disclosure to the market about what ASIC was, or was not, looking at with respect to its accounting and balance valuations.

Investors in Australia’s retailers however have much bigger worries to contend with as our recent insights into Amazon’s strategy reveal.

Many might not realize that Amazon IPO’d 20 years ago and now generates about US$4.2B in profits.  At a market capitalization of US$400B, it is the world’s fifth-largest company, with five per cent of all retail spending in America conducted on its e-commerce platform and 50 per cent of all new spending.

With an emphasis on long-term viability of its services overriding short-term profits, and a learn-adapt-grow approach to entering and growing in a country, there is a lot for Australia’s incumbent retailers to worry about, especially if the rumoured arrival of Amazon in the third quarter eventuates.

But the question is who should be most worried, and why?

The answer to that question lies in the experiences of competitors overseas who have had to endure the Amazon juggernaut’s emergence and expansion in their countries.  While the Sports Authority failed following Amazon’s expansion, Dick’s Sporting Goods has prospered.

To win against Amazon a retailer cannot simply rely on assortment and price.  On both of those fronts Amazon will always win hands down thanks to expertise gleaned from experience and massive support from the revenues being earned through Amazon Web Services, which provides computing power and analytics to the likes of Netflix and the CIA.

If a retailer is slow to take up a comprehensive omni-channel approach, including great delivery, they’re also in trouble because Amazon offers awarded service via its logistics and, through Amazon Prime, free two-day delivery. This is a very attractive alternative to waiting in queues at understaffed bricks and mortar locations.  According to a recent Harris poll, Amazon is held in higher esteem than any other company by Americans.

Amazon will launch without needing to get all things right.  It learns from the experience very quickly, adapts and reacts fast thanks to unimaginable data and analytics and then proceeds to grow. With the financial muscle to weather any storm, it is delighted to put long-term viability in terms of offering consistent service, above short-term profitability.  For incumbent retailers that means margin compression.

Amazon’s pricing policy is what justifiably worries most retailers.  Margins for retailers of the same product vary by as much as 1000 basis points (10%) and, using Amazon’s automated pricing engine, and analysis of trends and online product searches, it selects the products selling well and sets prices to match the lowest price offered by a reputable seller or be just below.  For example, if the lowest price offered is $100, Amazon will set prices at $99 or $95.  But remember, free delivery too.

Sports Authority was once the largest chain of its kind in the U.S., but filed for chapter 11 bankruptcy on 2 March  2016.  Ask an Amazon exec why the company failed and they might say it was simply a matter of trying to compete on assortment and price with an undifferentiated brand and product.  The company was also said to have been offering a mundane shopper experience, and a private label that was not well received by consumers.  That puts Australian retailers who sell third party brands on notice.  It should also be pointed out that consumers lost trust in the Sports Authority brand thanks to arguably poorly executed advertising tactics.  And that latter point suggests those who rely on promising ‘cheapest’ in their ads might find they cannot continue to make that claim in an Amazon world.

Competing on price with Amazon enters a company into an ‘automated’ pricing death spiral that Amazon will always win.

It is better to take the learnings of the failed Sports Authority and the relatively more successful (to date) Dicks Sporting Goods and invest in a better experience in-store for customers including store fit-out and training staff to be experts.  Retailers need to focus on specialty brands that don’t want their product on Amazon and are therefore unattainable there for consumers.  Retailers need to build consumer trust and/or be hyper focused on local markets.  Offering in-store pick up and advice is something Amazon cannot do well.  Dicks Sporting Goods provides expert advice on sporting equipment that needs customization like golf clubs that need shortening or bicycles that need fitting or archery equipment that requires stringing.  Dicks also deals with heavy and bulky items that Amazon doesn’t want to ship such as gun safes and canoes.

If you are like me, of course, you will see immediately that these markets tend to be niche and there are a large number of retailers that simply won’t be able to compete as Amazon focuses the initial phase of its rollout on household appliances such as mixers and coffee pots.

Amazon has been said to initially focus on media and digital products to help it understand the product velocity, web traffic and search preferences of its target market.  It then expands into highly consumable items and small packages with higher price points such as electronics before moving into products that are frequently purchased or with high repetition before moving towards bulker items like lawnmowers and TVs and, finally, grocery items.

For Australian retailers like Harvey Norman, JB Hi-Fi, Target, Big W and K-Mart – which derive a large portion of revenue from undifferentiated consumables that can be bundled into small packages and shipped quickly – Amazon represents a cloud service of the dark and stormy kind.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only 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 independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.