The market may be racing higher today, but one area of the market which is struggling to follow the market higher is the retail sector.
In morning trade the likes of Greencross Limited (ASX: GXL), Harvey Norman Holdings Limited (ASX: HVN), JB Hi-Fi Limited (ASX: JBH), Kogan.com Ltd (ASX: KGN), and Myer Holdings Ltd (ASX: MYR) have all dropped lower after retail behemoth Amazon launched its Prime service in Australia.
The incredibly popular Amazon Prime service is now available in Australia for $4.99 a month for six months before rising to $6.99 a month or $59 a year. This is significantly cheaper than its U.S. version, which could be an indication that the company is being aggressive in its pursuit of market share.
What is Amazon Prime?
Amazon Prime offers subscribers free two-day deliveries, access to Prime Video (its version of Netflix), and free eBooks through its Prime Reading service.
Which could be bad news for many of Australia’s leading retailers. The free and quick deliveries could lead to many consumers choosing to shop on Amazon’s website instead of going into their local Myer or JB Hi-Fi stores.
Is it time to panic?
While I think it will take time for Amazon Prime penetration in Australia to reach the same levels as in the United States, I do think it will happen eventually. Especially if Amazon can meaningfully undercut its rivals.
Because of this, I wouldn’t want to be holding the shares of JB Hi-Fi, Harvey Norman, and Myer right now. I suspect that their margins will come under significant pressure over the coming years and potentially lead to sizeable declines in earnings.
Which shares should you buy?
I continue to believe retailers with strong brands such as Lovisa Holdings Ltd (ASX: LOV) and Premier Investments Limited (ASX: PMV) will thrive despite the Amazon threat. This could make them worth a closer look.
Alternatively, you could avoid the sector altogether and look at this huge investment opportunity.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon. The Motley Fool Australia owns shares of and has recommended Greencross Limited and Premier Investments Limited. The Motley Fool Australia has recommended Amazon and Kogan.com ltd. 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.