Retail disruption and the Amazon threat

Amazon currently operates in 12 markets globally with three markets offering the digital Kindle product only (including Australia). It is a well-known fact that Amazon has successfully disrupted numerous retail markets globally, with the most significant impact being the global sourcing and pricing it brings to a market. 

The most obvious reactions by domestic bricks and mortar retailers will be to lower prices, increase range and provide a greater emphasis on online sales (click and collect capability is particularly important). This will likely reduce margins and overall profitability, just in an attempt to maintain market share (unlikely). Those retailers with a global sourcing focus will also be better positioned to compete. 

No one is immune but bulk goods are more insulated 

The retail segments most at risk include: electrical, home goods, sporting goods, apparel and toys. Obviously, the smaller the product, the more vulnerable it is to loss of share to Amazon. Conversely, large and bulkier products (furniture, large electrical goods) that are more difficult to return and carry higher freight costs, are likely to be more insulated. 

Australia could well prove to be a more challenging territory for Amazon, largely in terms of the geographical dispersion of major population centres in relation to logistics in addition to higher labour/rent costs. However, we don't believe this will prove to be a deterrent for Amazon in its own right. The company has a long track record of basing its decisions on long-term market share vs short-term profitability. 

It will take time for Amazon to be able to fulfil customer orders in a short period of time; however, it is difficult to say it won't materially impact upon the domestic retail environment in time. 

In summary, we maintain a cautious view on the consumer discretionary sector with general spending conditions appearing to have peaked and increasing threats from offshore. 

Stocks potentially at risk if/when Amazon comes to Australia include: JB Hi-Fi (JBH), Harvey Norman (HVN), Super Retail Group (SUL), Myer (MYR), RCG; Adairs (ADH), Premier Investments (PMV), Woolworths (WOW), and Wesfarmers (WOW). 

We see the business model of Beacon Lighting (BLX), Lovisa (LOV) and Bapcor (BAP) as relatively immune from the threat. 

Another potential beneficiary of Amazon’s entry into the Australian market is Qube Holdings (QUB). Amazon may choose to use QUB’s Moorebank intermodal and industrial property precinct for its Sydney logistics operations. If nothing else, the entry of Amazon will force incumbents to review the efficiency of their Sydney logistics operations which may ultimately benefit QUB through new tenancies at Moorebank.