It's official; American online giant Amazon.com is coming to Australia!
Jeff Bezos – CEO of the online retail behemoth – announced Amazon's plans to expand its presence in Australia late last year, indicating doors could open as early as September 2017.
The impending arrival of Amazon has left consumers rejoicing as prospects of increased competition in food, clothing and technology retail hopefully translates to lower prices.
Accordingly, a full-blown entry by America's leading retailer is likely to cause headaches for Australian retail stalwarts Harvey Norman Holdings Limited (ASX: HVN), JB HI Fi Limited (ASX: JBH) and Premier Investments Limited (ASX: PMV) as comparable products inevitably become available online for cheaper.
Even so, two companies which I believe have the most to fear from Amazon's entry are Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW).
Amazon's philosophy
Amazon's business model is founded on one simple theory – a competitor's margin is Amazon's opportunity.
Founder and CEO Jeff Bezos' philosophy is to focus on long-term success at the expense of short-term profits. This is why Amazon charges a minimal margin on its products, whilst investing heavily in its supply chain and logistics platform to make things cheaper for end customers. Accordingly, everything Amazon does is geared to build a more efficient, more sustainable ecommerce company for long-term success.
Culture breeds success
When Amazon first started in 1994, the CEOs of bricks-and-mortar retailers scoffed at Bezos' strategy, going so far as saying that Amazon would be bankrupt in a matter of years if it continued charging minimal margins on the products it sold. Nevertheless, Bezos stuck to his approach, continuously innovating and refining Amazon's offering to create one of the most successful companies in the world.
In fact, a comparison of bricks-and-mortar retailers versus Amazon shows that in the 10 years to 2016, the share prices of former American household names like Sears, JCPenney, Nordstrom and Macy's all went backwards. Amazon's shares, on the other hand, increased 1,934% over the same period.
Match point, Bezos.
Amber flags
Though Amazon has an illustrious history in America, virtually conquering online retail there, its foray to Australia leaves it in unchartered territory. Unlike America, Australia's market is much smaller and so is harder for companies to generate the same economies of scale as overseas.
Nonetheless, Bezos is unlikely to go down without a fight.
Why worry?
Amazon has stated that one of its key areas of focus in Australia will be grocery and fresh food retail. The company has already started hiring workers to implement its fresh food delivery operations – AmazonFresh – and will endeavour to make it Australia's preferred method of grocery shopping.
This, in my mind, spells trouble for Woolworths and Wesfarmers-owned Coles.
Although Woolworths and Coles are accustomed to competition, having managed to ebb the bleeding of market share caused by discount supermarkets Aldi and Costco, I believe Amazon is a different kettle of fish altogether.
With a minimal retail footprint, and a world-class supply chain at its disposal, Amazon truly has the potential to disrupt supermarket (and all other forms of) retail in Australia.
Accordingly, shareholders of Woolworths and Wesfarmers should take note.
Foolish takeaway
Whilst I don't believe Woolworths and Wesfarmers will rest on their laurels, the arrival of Amazon is undoubtedly going to shake things up in the retail sector.
Given Woolworths and Wesfarmers have the most to lose, with their high market share and generous margins, investors in the duo should monitor developments and considering selling some of their holdings at the right price.
