Forget Aldi, Amazon is coming

Woolworths Limited (ASX:WOW) and Wesfarmers Ltd (ASX:WES) face a huge threat if Amazon sets up shop in Australia in 2017

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Retailers won’t have to worry about discount supermarket retailer Aldi next year, because the largest US retailer is setting up shop in Australia in 2017.

No, not Walmart, Amazon.

According to Justin Breitling, chief investment officer at Watermark Funds Management, “They will be dropping distribution centres and performance centres in every state next year,” he told the Australian Financial Review (AFR).

“They will be doing general merchandise, and they will be doing fresh as well. They will also be putting physical stores on the ground which I don’t think anyone knows about. These will mainly be in regional areas because fulfilment is a lot harder in regional areas than in the cities.”

He added, “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’.

According to the AFR, Breitling refused the name the person at Amazon that gave the special briefing in the past week and who is responsible for rolling out the Australian strategy.

Amazon is expected to launch in September 2017, having pushed the time table back six months so they could do fresh at the same time as the general merchandising offer. It’s not just groceries that Amazon is a threat to. Kmart, Target and Big W would all be put under enormous pressure as well.

Breitling argues that every retailer in the US is priced relative to the perceived risks to their business from Amazon. According to the AFR, Amazon captures half of all e-commerce sales in the US.

Supermarket retailers Coles – owned by Wesfarmers Ltd (ASX: WES) – and Woolworths Limited (ASX: WOW) have been fighting back against discounter Aldi by cutting their margins and improving their offerings. Aldi too is expanding its fresh produce offering which it feels has been neglected since the retailer arrived in Australia. Getting that right could see Aldi achieve as much as 15% market share.

Coles and Woolworths have 33.2% and 36.3% market share respectively, with Aldi on 12.5% and Metcash Limited’s (ASX: MTS) IGA on 9.8% according to the latest data from Roy Morgan Research.

But the retailers may all lose market share if Amazon does setup shop and is as successful as it has been in the US. That’s not guaranteed, though. Taking on the incumbents is difficult as eBay found out in New Zealand and eventually left the market all to Trade Me Group Ltd (ASX: TME).

Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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