Amazon’s entry puts big retailers at risk: Credit Suisse

DAVID ROGERS
March 20, 2017
The Australian

Markets Editor Sydney | @DavidRogersOZ 

Retailers such as Myer, Harvey Norman and JB Hi-Fi face a “broad-reaching” impact from the prospective arrival of Amazon that appears to be “under-appreciated” by the investment community, says Credit Suisse.

The Swiss investment bank says the disruptive effects on retailers’ business models and pricing are likely to be felt within five years of the global online retailer reaching our shores.

A scenario analysis by Credit Suisse found that if Amazon were to enter the domestic market this year, department store operator Myer could lose up to 55 per cent of its potential earnings before interest and tax by fiscal 2022, compared with a situation where Amazon doesn’t enter the market.

“Amazon forces businesses to change their business models, often to their detriment,” Credit Suisse analyst Grant Saligari said. “The lesson for Australian retailers is to be prepared with a defendable range, sustainable cost structure and sustainable allocation of capital.”

Myer is the most at risk from Amazon in Australia, based on a company risk assessment combining online purchasing factors associated with customer engagement and distribution barriers, with company-specific characteristics of gross margin, cost of doing business and price positioning.

For Solomon Lew’s Premier Investments, the potential impact of Amazon would be mitigated by the growth of Smiggle outside Australia. But excluding the stationery retail chain, the risk to Premier is also very high, due to the value of its customer engagement in the clothing category and its relatively high gross margin and cost of doing business.

Harvey Norman, JB Hi-Fi, Supercheap Auto, Rebel and Amart Sports, BigW, Kmart and Target face “above-average risk”, while The Good Guys screen as “below-average risk”, primarily because of the bulky nature of its product and relatively low gross margins and operating costs.

“Almost anything that can be put in a small box is likely to be vulnerable to Amazon,” Mr Saligari said.

Offshore experience shows products that are easily substitutable or with widespread availability have been challenged, while products with limited distribution or physical or regulatory barriers to distribution have been more resilient to competition from Amazon. 

But Amazon’s entry would bring threat and opportunities for retailers, according to Credit ­Suisse.

“For retailers with strong sourcing capability and low distribution, access to Amazon’s distribution capability could be attractive,” Mr Saligari said. “Conversely, retailers without access to globally competitive sourcing are likely to struggle, irrespective of existing distribution capability.” 

While Australia probably isn’t a high priority market due to its small population, the nation has many characteristics potentially attractive to Amazon and no insurmountable entry barriers. 

Attractions include a growing high-income population; population concentrated in a relatively small number of cities and adequate population density; high internet penetration and online shopping propensity; high retail labour costs; and attractive retail sector profitability. 

Five years after entry, Amazon was likely to reach a better than 5 per cent market share in many categories and third-party sellers were likely to bring global sourcing and pricing capability, in addition to Amazon’s own sourcing, according to Mr Saligari.

“Supply chain changes (were) likely to disrupt domestic pricing, enhanced delivery standards (such as two-day Prime delivery) would begin to switch previously store-based shopping trips — often of high value items — to online, resulting in an adverse retailer basket mix and fall in shopping centre traffic.” 

In Mr Saligari’s view, there are a number of electrical, home and sporting goods categories in Australia with large enough price discrepancies versus international comparisons, and generate excess profits or have “excessive” cost structures.

And a number of retailers operate with high gross margin and cost structures, which in many cases “would not be competitive with Amazon”.