Should you really be afraid of Amazon?

Amazon3The physical entry of Amazon will change the retail landscape in Australia but will not be armageddon for local bricks-and-mortar retailers.

Try as it might, Amazon is a largely an impersonal retail experience, the fast food equivalent of dining out.

Amazon offers a broad range of products, competitive prices and certain convenience factors, including locating some hard to find products, payment options, home delivery and time savings.

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However, the online platform lacks genuine engagement and the entertainment and retail theatre element that bricks-and-mortar retailers can create in-store.

Amazon is transactional, offering products and a services directory, in many ways a reincarnation of the mail order catalogues that retailers like Sears & Roebuck distributed across the United States.

While technology has made Amazon a more potent retail sales platform than the mail order catalogues of a nostalgic 20th century America, it is still more utility and less pizzazz or inspiration.

There is obviously no doubt that the company has become a formidable competitor in the market and that there are customers who appreciate its retail offer, but there is no reason for other retailers to be frightened of Amazon’s physical entry to Australia.

There is reason for retailers to re-evaluate their retail offer and customer engagement strategies and to innovate, but not to fear the end of the world as Amazon attempts to lure their customers away.

In reality, the most vulnerable retailers in the headlights of the Amazon drive to recruit customers and boost sales in Australia are local online retailers.

And potentially the most vulnerable online retailer is Kogan.com because it has been developed along the same lines as Amazon with a broad rather than specialised range of products and services.

Amazon is currently seeking more than 200 employees to run its Australian operation that is understood to have committed to a lease of a 25,000sqm warehouse in Dandenong South, a suburb of Melbourne.

The property could be expanded to 50,000 sqm to underpin growth in sales and Amazon is expected to also secure a second fulfilment centre in Sydney as part of its Australian venture.

The company, which has annual sales of more than $630 billion, has appointed Rocco Braeuniger, as the head of the Australian operations. He will join Robert Bruce, the director of operations for Australia, in coming months.

Every media report on Australian retailers has canvassed the expected impact of the US retailer with dire predictions for future sales and earnings. However, it is unlikely to cause too much damage.

Amazon is estimated to have a market share of around five per cent in the United States but only around one in Canada which, like Australia, has more concentrated population centres with representation of major retailers and increasingly newer global retail brands.

Amazon’s success has relied on relentless expansion into new categories and on the convenience factor it offers to consumers in regional markets in the United States.

Bank of America Merrill Lynch rejects the view that Amazon will drastically impact on the Australian retail market, in part because of established consumer shopping habits here with around 7.5 per cent of all sales now transacted online.

Interestingly, the analysts believe lagging infrastructure will also constrain Amazon, which would be unable to provide the same speed of delivery that it can in other markets.

Operational scale will also be a factor limiting growth for Amazon with fulfilment of many products likely to be from the United States or Europe, simply because the company will not be able to maintain the same inventory profiles that it can in more densely populated markets.

As international bricks-and-mortar retailers have discovered, the scalability of the their Australia retail stores and higher operating costs have made it difficult to provide consumers in this market with the same prices they can offer in overseas markets.

IBISWorld also claims that concern about the arrival of the online behemoth is overdone, particularly in grocery sales.

Both Coles and Woolworths offer online grocery services, but neither have struck a goldmine with the service and IBISWorld estimates only 2.8 per cent of grocery sales use the online channel.

The research company’s forecast for online grocery sales for 2022-2023 is just 4.3 per cent.

More than a store

For bricks-and-mortar retailers, the online invader can be contained by improving the in-store experience through merchandising and customer service.

Amazon and most online retailers offer utility and convenience so bricks-and-mortar retailers need to focus on fun, making shopping a more engaging and personal experience and on bringing merchandise to life in way that Amazon and its peers do not.

One of the interesting aspects of retailing is that fact that few retailers ever convey to their customers the wisdom of their buying decisions, why they selected particular brands to offer to their customers.

Failure to convey that information leads to an over emphasis on price and that does provide a look-in for online retailers.

Bricks-and-mortar retailers can also contain Amazon by enhancing their own online retail offer with their specialisation in a limited number of retail categories providing greater opportunity for engagement with consumers than the mass merchandise catalogue approach of the US online retailer.

The specialisation factor and brand building also creates the best defence for existing local Australian pure play online retailers.

Local online retailers need to focus on developing a more personalised relationship with customers that is based on shared values and brand attributes rather than discounts and price promotions.

Back to the basics

All retailers, bricks-and-mortar, hybrid or pureplay need to go back to the basic building block of any business, the unique selling proposition – what they do differently or better than competitors.

That is why Kogan.com is more vulnerable to Amazon than most other online or bricks-and-mortar retailers notwithstanding the market leadership and brand awareness created by Russell Kogan.

Kogan.com has developed a portfolio of retail and services businesses that includes Kogan Retail, Kogan Marketplace, Kogan Mobile, Kogan Broadband and Kogan Travel.

The ASX-listed retailer has generated solid revenue growth and has indicated positive sales momentum in the fourth quarter of the 2017 financial year.

The company has benefited from the acquisition of the Dick Smith brand and customer lists and is continuing to scope new business opportunities.

However, the problem is that it will now face off against a direct competitor with stronger brand recognition, deeper pockets and a broader range of products and services that will match its price advantage in the market.

Rather than seeking to bolt on more product categories, the challenge for Kogan.com will be to find a distinct point of difference to Amazon.

The early promise of Kogan.com as a public company has arguably exceeded market expectations but the future seems certain to be more challenging.

It is also worth noting that the entry of Amazon into the Australian market might actually provide some much needed short-term stimulus for the retail sector which is showing little growth.

As Kogan himself said at last year’s AGM, its arrival will “lift all boats” in Australia. 

“Online retail is still under-represented in Australia compared to other major developed economies,” he said. “There’s no doubt that the arrival of a major international online marketplace will do great things to boost the profile of online retail locally.”

“At a high level, the potential arrival of Amazon means the biggest, hottest brands will have no choice but to put products and significant volume through online channels.”

 

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