Amazon’s Aussie entry: ‘Overhyped but offshore lessons aplenty’

From

Jim Power

Martin Currie Australia, a leading Australian equity affiliate of Legg Mason, believes Australian retail sector can, by and large, cope with the arrival of Amazon and that the most vulnerable businesses will be the second-tier ones in the consumer electronics sector, where Amazon has a strong record of success.

Consumer sector research analyst at Martin Currie Australia, Jim Power, who has just returned from a field trip to the US to study the ‘Amazon effect’, notes that “while Amazon will have an impact on the Australian retail landscape, based on my discussions with a wide range of market participants in the US, I remain positive of the Australian retail sector.”

Power had in depth discussions with a wide range of US and global retailers and companies active in the supply chain including Walmart, Carrefour, Best Buy, Sainsbury, Hibbert Sports and others as well as Amazon.

“My main take away from these meetings was that Amazon’s key advantage is that its strategy is driven by data, not gut feel, and the key source of this data is the Marketplace.

“For Amazon’s Marketplace to be successful in Australia, Amazon will need a good product range, including local specialty suppliers. I think this may prove difficult.

“We recognise that Amazon’s entry will, of course, impact on the Australian retail landscape, but we view the current price weakness in Australian retail stocks as an over-reaction, given the strengths of major shopping malls, and their leverage to Australia’s employment and population growth.

“Amazon has done well in the US and UK against inefficient players, but efficient bricks-and-mortar retailers can compete if they can use their existing scale and supply chain to lower ‘last-mile’ delivery costs and time. However, they need to react quickly.

“It is likely that small independent retailers and discount department stores will find it very difficult to compete. However, we see that the good-quality large retailers are likely to survive or even thrive in the face of Amazon.”

Mr Power believes Amazon’s impact on Australian supermarkets will be more muted than currently expected as offshore experience suggests consumer interest in online grocery delivery is low.

“Goldman Sachs state that less than 3% of groceries and consumer packaged goods are bought online in the US…Carrefour, which is in 30+ countries, also told me that there has only been real interest in online food in the UK, China and Korea. In all other countries, it is only a small percentage of its business even though it has been developing it for 20 years.”

Noting the impact that Amazon could have on the consumer electronic sector, Mr Power said “Consumer electronics are at the heart of Amazon’s commercial offering. Despite concern regarding Amazon’s impact on the Australian market, my trip to the US has made me confident that large Australian electronic retailers can compete with Amazon. Although, it may be at the expense of the second-tier operators that can’t keep up.”

“On this trip I looked closely at Best Buy, a company that has survived, and even thrived in this space in the US, despite initially struggling to compete with Amazon in the US in the early years. In fact, its earnings per share, and share price are now at a record high.

“Here are my key points for Australian retailers to manage the Amazon threat to their business.”

Price perception is key

I learnt that one of the key reasons that Best Buy initially struggled was that it didn’t react quickly enough to normalise the large price gaps between itself and Amazon. Amazon’s algorithms mean that prices can change multiple times per day, whereas Best Buy’s pricing was less flexible.

Some bulky or high-end categories, like televisions, furniture and white goods, are more likely to continue to be sold from physical stores, whereas Amazon is focused on smaller, low-end items. But while Best Buy had only a small overlap in the lower- end space, it was the price ‘perception’ that led to consumers losing confidence in Best Buy in the higher- end space.

Now, Best Buy offers a blanket ‘price match’ guarantee no matter the segment, and this has helped to restore the perception of price leadership across the board.

Putting power back in the hands of supplier

A key insight gained by retailers was in how they could put pressure back onto their suppliers in terms of enforcing recommended retail prices across all distribution channels (including Amazon), thus levelling the playing field in terms of price and hinder Amazon’s ability to undercut them.

While this may be somewhat more difficult in Australia due to Australian Competition and Consumer Commission (ACCC) rulings on the subject, companies such as Apple appear to have been successful in controlling price across channels.

Understanding customer data

Australian companies, on the whole, already have a firm grasp on the benefits of data analytics. Best Buy was late to the party, but found that the eventual investment in understanding its customer data better (i.e. credit card data, loyalty programs, web traffic) allowed it to improve targeting clients and increase customer loyalty.

Enhancing the ‘offline’ experience and service

Best Buy deliberately added value that could only be accessed in-store, such as its Geek Squad (a subsidiary of Best Buy offering support services); ‘store in store’ installations, where part of the retail space is used by a different speciality company; and delivery and installation.

Making the most of infrastructure

Existing scale is also a very significant advantage. Incumbents like Best Buy were able to use their own store network for home delivery, rather than from distribution centres, and this helps to shorten the ‘last mile’ (the movement of goods from a fulfilment centre to their destination). The ongoing development of new stores and distribution centres will therefore only strengthen the supply chain.

Innovating with innovation

The proliferation of the ‘connected home’ trend bodes well for companies that sell innovative home products like Best Buy. This is because for newer, more innovative products, customers prefer to have direct interaction with sales advisors over the use of these new products. Combine this with the ‘price match’ concept above, and bricks and mortar can compete.

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