Amazon is opening a giant fulfilment centre in Sydney as problems build for retailers

Australian retailers hoping that the threat of online retail giant juggernaut might blow over have been served another warning today after the group announced it’s to open a new 43,000 square metre fulfilment centre in Moorebank, South West Sydney.

The Sydney centre will become operational over the second half of 2018 and will join Amazon’s Dandenong South centre in Melbourne in distributing goods around the major urban centres of Victoria, New South Wales, and beyond.

Amazon reported that in Australia it currently ‘offers customers tens of millions of items from 23 different product categories, including consumer electronics, books, sporting goods, fashion and Amazon devices”.

Just yesterday one of Australia’s most successful retailers in recent times in JB Hi-Fi Limited (ASX: JBH) warned that home appliance sales at its Good Guys stores were suffering from “heightened price competition” and as a result group profit guidance was downgraded, with the stock sent 6% lower.

Other listed retailers facing a battle for market share include Accent Group Ltd (ASX: AX1), Super Retail Group Ltd (ASX: SUL) and the Reject Shop Ltd (ASX: TRS). While the likes of Wesfarmers Ltd’s (ASX: WES) Target and Woolworths Group Ltd’s (ASX: WOW) Big W budget department stores are also now in competition with Amazon.

Even if the above retailers can maintain market share their margins are likely to come under pressure in doing so, as Amazon is well-known for operating on wafer thin margins in attempting to win market share.

It also confirmed it’s planning to launch its Amazon Prime membership service in Australia by mid-2018, which suggests its launch is only a couple of months away.

The other big lesson for investors is how Amazon has taken foot traffic away from shopping centres operated by real estate investment trusts such as Westfield’s Scentre Group Ltd (ASX: SCG) or Charter Hall Retail REIT (ASX: CQR).

Arguably much of the ‘Amazon threat’ is already priced into the shares of Australian retailers, although remember markets are forward looking and the effects of Amazon’s competition may not start to reveal itself on retailers’ income statements until the financial year ending June 30, 2019.

Aside from Amazon local listed retailers are already facing multiple problems from other overseas competition, feeble wages growth and households carrying too much debt on their balance sheets usually related to mortgage borrowing.

When you consider that flat or falling house prices over the next 18 months may take their toll on consumer confidence and household balance sheets then it’s hard to have confidence in the retail space ahead.

As such I’m avoiding retailers, unless I see extreme value offered by one or two of my preferred picks.

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Motley Fool contributor Tom Richardson owns shares in Accent Group and Amazon Inc.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of Super Retail Group Limited. The Motley Fool Australia has recommended Scentre Group and The Reject Shop Limited. 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 Scott Phillips.

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