How hard will Amazon really hit Aussie retailers?

AmazonYes, online retail is here and it’s here to stay. Yes, it will impact the retail industry and it’s gaining momentum. Yes, Amazon is a giant and it’s crushing segments of the traditional retail market.

Now we have that out of the way, here is why the biggest expected threat to traditional retail – Amazon – is not as black and white as you might think.

My favourite discussion topic is when people ask me to compare Amazon in USA to Amazon in Australia. So here are the facts:

Amazon is a formidable opponent to any retailer (whether online or traditional physical store). This is largely because of their distribution network, which is significantly greater than its competitors.

In America, Amazon has over 70 e-fulfilment centres (EFC) automated warehouses used for package distribution with over 60 per cent of the American population within 50 miles of one.

This is an unbelievable statistic. The next best is Walmart, with 26 EFCs, and GAP has three. Effectively this means Amazon’s average shipping distance is 75 miles, whereas Walmart is 137 miles, and even Walgreens is 812 miles.

You can see what’s happening here. Amazon’s incredible network significantly reduces transport costs, meaning Amazon can derive higher margins and/or pass these saving onto the consumer WITHOUT compromising convenience and shipping times.

Amazon currently has one EFC in Victoria and another one expected in Sydney later this year, so it has a long way to go.

It took Amazon approximately ten years to gain significant traction when it initiated its introduction into Canada.

Why? Because it needed to bed down its distribution network BEFORE it could start penetrating the market and offering something attractive to customers.

Australia is far more demographically thin than the USA (24.1 million people compared to 325.7 million over a similar sized area).

In other words, Amazon would have to bed down a huge distribution network in Australia to cater to a potential buying market which is 13.5 times smaller than their American counterparts. A lot of effort and expense for 1/13th of the potential market.

Large American cities had the foresight to implement a grid-like structure in their town planning, so every block is rectangular or square-shaped.

This makes deliveries incredibly easy and is something major Australian cities are not lucky enough to boast. It may seem insignificant, however, this minor detail is extremely relevant for an organisation whose major competitive advantage is distribution and delivery times.

And probably the biggest difference is the amount of retail floor space per capita in America vs Australia. Total shopping centre space in Australia is about 0.35 sqm per capita.

The equivalent ratio in the US is 1.25 sqm which means the US has over 3.5 times the retail space per capita than Australia. In effect, the US market is oversaturated with physical retail stores which are not relevant and never were.

So, of course the introduction of Amazon is going to wipe out the weaker part of the market, which weren’t any good to start with.

And that’s what we’re hearing and experiencing at the moment in Australia. We’ve already recently seen the demise of Outdoor Furniture Specialists, Oroton, Aussie Farmers Direct, Baby Bounce, Esprit, and Masters to name a few.

Mecca of margins

So, the big question is, why would Amazon make the move to Australia with the above factors considered?

It’s because of our margins.

This is exactly why Aldi, Costco, and H&M have all entered the Australian market, and it’s why Lidl, Kaufland, and Decathlon are also placing their flag in Australian soil.

Australia is a mecca for retail margins, and is providing higher margins than Europe, America or Asian retailers could expect.

With the margins they have been enjoying, Australian retailers have had it far too easy for far too long, so the introduction of new retailers was an inevitability. And who wins? The consumer.

Online retail is here to stay, but I would suggest it’s not all doom and gloom. Penetrating and entering a new market is no easy feat, even for a sophisticated retailer like Amazon.

All we have to do is look at Masters, and how badly that went, to realise how different consumers and retailers can be in different parts of the world.

Bunnings is also experiencing an enormous loss after entering the UK, which adds more fuel to the fire. Bunnings is an absolutely magnificent retailer with over 60 per cent market share in Australia, and even they are facing challenges.

It goes to show, you cannot presume one thing will work in another country.

I don’t think Amazon will be all that scary in the next five years. I do feel the lazy Australian retailers will get a shake-up, so you will continue to see stores and brands go under.

In a lot of ways, these are the brands which have been lazy with their offering and have lost touch with their consumer base.

The best retailers in the world are still competing fantastically with online retail trends and will hold their relevance far longer.

Cal Doggett is director of Properties & Pathways.

 

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