Amazon delays Australian launch to September to include fresh goods

Tony Boyd
Nov 3 2016
AFR
The fund manager with the largest short positions in the Australian market has warned of the impending damage to the profit margins of local retailers from the arrival next year of United States online retailer Amazon.
Justin Braitling, chief investment officer at Watermark Funds Management, is well informed about Amazon’s plans, thanks to a special briefing in the past week from the Amazon person responsible for rolling out the Australian strategy.
“They [Amazon] will be dropping distribution centres and performance centres in every state next year,” Braitling said.
“They will be doing general merchandise and they will be doing fresh as well.
“They will also be putting physical stores on the ground which I don’t think anyone knows about.
“These will mainly be in regional areas because fulfilment is a lot harder in regional areas than in the cities.
“We spoke to the guy rolling out Amazon’s business here in Australia and in his words: ‘We are going to destroy the retail environment in Australia’.”
Braitling refused to reveal the name of the person at Amazon who briefed him but said that the launch in Australia had been put back from March to September.
“It has been deferred for six months – they were originally launching in the first quarter of next year,” Braitling said.
“They have decided they want to do fresh at the same time as the general merchandising offer so that has put them back six months.
“They want to roll the whole thing out at the same time.”
‘Shorting disruption’
Braitling was speaking ahead of the release of a prospectus for the Watermark Global Leaders Fund, a listed investment company that will offer investors the first locally managed global market neutral fund.
The aim is to raise $110 million from retail investors in Australia and New Zealand with the ability to accept up to $40 million in over subscriptions.
Watermark, which has $600 million under management in three funds, began managing international money two years ago. This international carve out of funds delivered a 22 per cent return over the last 15 months.
“One of the benefits of being an international investor is being able to identify and see trends that play out internationally before they play out here in Australia,” he said.
“In technology for example, because we don’t have a tech sector we don’t have a good understanding of the disruptive forces at play here and how they are going to impact the Australian industry.
“They are going to be significant.
“Amazon, for example, is going to be rolling out a large B2B business in the US.”
“They are going to do the same thing through their own fulfilment centres in Australia and none of the analysts are thinking about the impact this would have on a Blackwoods, which is one of hidden jewels in the Wesfarmers portfolio.”
Braitling says Watermark has already positioned its fund to profit from Amazon’s expansion in B2B by shorting one of the largest distributors of industrial products in the US, Grainger.
Watermark takes the view that Australian investors are unaware of the risk involved in the “Amazon effect”.
The fund manager argues that all retail stocks in the US are priced relative to the perceived risks to their business from Amazon.
Amazon has $US1 of every $US2 of e-commerce sales in the US and their market share is growing 20 years after it was founded by Jeff Bezos.
E-commerce is set to reach 20 per cent of sales in the US in 10 years and by that time Amazon will account for 10 per cent of all US retail sales, according to data prepared by Watermark.
Amazon is building a technology platform specifically for the Australian market which is designed to integrate with its international operations, according to the research undertaken by Watermark.
The Amazon platform will be under the online brands used elsewhere called Prime, Prime Now and Prime Fresh.
Watermark’s understanding is that prior to turning on its system, Amazon will go through and collect price-points on everything before setting prices at a 30 per cent discount.
The fund manager has been told that Amazon sees enormous potential in Australia because it believes prices are way too high. Amazon’s motto in relation to Australia is along the following lines: “Your margin is our opportunity”.
Watermark is one of a number of Australian hedge funds which have been able to deliver consistently high returns over an extended period of time. Others are Regal and Platinum Asset Management.
All these funds are in the top quartile of the 453 global market neutral funds measured by the Prequin database in the UK.
Watermark’s Market Neutral Trust has ranked in the top 5 per cent globally since its inception four years ago. It has delivered a compound return of 14 per cent per annum return since inception 12 years ago.
A market neutral fund is structured so the invested funds are placed on deposit. The manager then builds a short portfolio through borrowed stock. The borrowings are then invested in long positions. The manager is successful when the spread between the returns earned on the long and short portfolios is positive.