FYI | Mar 08 2017
By Peter Switzer, Switzer Super Report
Business killer Amazon is on its way and if anyone thinks I’m excessively dramatic talking about this online leviathan in this way, just think Borders! How could such a business disappear?
So who’s next on the death row created by Amazon, which can ignore important corporate imperatives, such as profits, to give itself time to murder its rivals?
A Business Insider story on why Walmart (the world’s biggest retailer) spent US$3 billion to fight Amazon underlines why retailers here in Australia and shareholders of those retail companies should be wary.
To fight Amazon, Walmart acquired an e-commerce start up called Jet.com for $3 billion (plus stock) to arm itself for the fight of its life. At the time, Walmart’s revenue was $500 billion, while Amazon’s was US$100billion but the latter’s was primarily online, while the former was doing only $15 billion via the Internet.
The chart below shows why Walmart is arming itself to compete with Amazon.
So, if the world’s biggest retailer is so worried about Amazon, what should our retailers be thinking and doing?
My old mate, Gerry Harvey, is starting a war of words, slamming Amazon as a “parasite” that “contributes virtually nothing to society”! He wants the Turnbull Government to put on a Donald Trump-style ban on the e-commerce giant, says news.com.au, but to me he at least wants them to pay their right share of tax.
Gerry says they pay everyone minimum wages, they predatory price, they use loss leaders, make no money and “send everyone broke and then put up the price.” This was “part of Amazon’s long-term plan” to control the market.
“It’s so obvious. They come in and because of their power in the marketplace, they can sell things as loss-leaders to make no money and send everyone broke, then put up the price.”
Gerry has talked about the value of customer service and that he will price match but that’s easier said than done. He told me last week that he sees four Amazon battle scenarios, which in all cases, he and Harvey Norman (HVN) would come out on top!
He refused to reveal those scenarios on the basis he does not want to reveal his battle plans to the enemy but the clear message is that a war is coming.
And this only adds to the war that supermarkets are facing with Aldi and COSTCO and don’t forget that Amazon is not hurting bookshops, white goods and retailers in the JB HiFi (JBH) and HVN space, but there’s also Amazon Fresh! Yep, they are selling fruit and vegies and 130,000 products in the USA and the UK!
Gerry might be planning on using local laws on predatory pricing to slow up Amazon’s march into Australia but we have seen how gutless governments have been with Uber and Airbnb, so there’s not likely to be easy wins for Gerry and his retail mates/rivals.
Interestingly, Citi’s retail experts think that the retail sector is in for a good year, and given the fact that interest rates won't spike this year, the economy is set to grow more strongly and the housing sector still has life in it, given the big house price increases we saw last week. Retailers should do OK, but the Amazon threat has to make life harder for JBH, HVN, Woolworths (WOW) and Wesfarmers (WES). I can see some upside for share prices in the short term because of better growth prospects for the Oz economy but eventually the Amazon effect, whether it be from direct competition or the result of the price war that hurts revenue, will take its toll.
Possibly a company like Nick Scali (NCK), because of its more unique offerings, will be less affected by the mass offerings of Amazon but mainstream retailers will be in a huge fight that can’t be good for bottom lines.
And this isn’t just my guesswork.
“If Amazon isn’t on the agenda at board meetings for Australian retailers, then it should be,” says David White, national leader of Deloitte’s Retail, Wholesale and Distribution Group. “We are already seeing several retailers setting up task forces to assess the potential impact of an Amazon market entry, but it’s not yet clear what exactly the company has planned for Australia.
“But we do know that where Amazon has entered new markets, impacts on local retailers have been seismic and across almost all categories and channels.
“So retailers can’t afford to wait and see what Amazon does — they need to be developing strategies and taking action now.”
But wait there’s more, as a news.com.au story revealed.
“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’,” said Watermark Funds Investment chief investment officer, Justin Braitling.
And this is why I’m wary about going long retail beyond a short-term play.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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