The arrival of US online shopping giant Amazon.com in Australia has been as threatening to our retail sector as a wet sausage but there're growing worries that the launch of Amazon Prime will pose a greater risk than what the market is anticipating.
This means some of our listed consumer stocks could be facing a sell-off, particularly for those shares that haven't been discounted for the Amazon risk.
Amazon Prime is a yearly subscription that gives consumers free two-day shipping on anything they buy from their local Amazon.com website.
The speed and cost of delivery is the new battleground for the industry and most of our incumbent retailers are poorly equipped to meet this new challenge.
Australian investors won't be happy to hear that Morgan Stanley thinks the cost to Amazon for offering its Prime service here won't be much more than in the US where the online retailer has gotten so powerful that US President Donald Trump is threatening to regulate the shopping behemoth.
The broker believes that the high concentration of the population in three of our largest cities helps drive the economics of the service with around 40% of Australians living in Melbourne, Sydney and Brisbane.
In contrast, only 12% of the US population is centred in its top three cities while the figure is about 30% in Canada.
"Strong Australian courier competition drives down delivery costs, in our view, which partially offsets low major city population density in Australia (2.2k per sqkm) vs US (2.6k) / Canada (3.4k) and high minimum wage costs (Australia US$13.70 vs US US$7.25, Canada US$9.92)," said Morgan Stanley.
What's more, upper-middle income consumers are most likely to use Amazon Prime in the US. If this trend holds true here, the service should gain strong traction given that Australia has a flatter income distribution compared to the US.
The other bugbears about Amazon that has limited its effectiveness to compete with local players are also waning. Amazon's product selection is expanding while its pricing on first-party products is the same or cheaper than our leading retailers, according to the broker.
First-party products are those that are logistically managed by Amazon as opposed to third-party products where the seller uses the Amazon website just as a point of sales.
But given the underperformance of some of our leading retail stocks like Harvey Norman Holdings Limited (ASX: HVN), Myer Holdings Ltd (ASX: MYR) and JB Hi-Fi Limited (ASX: JBH), the growing presence of Amazon may not trigger a shock sell-off in the stock.
However, Morgan Stanley believes the same can't be said about our largest non-food retailer Wesfarmers Ltd (ASX: WES), which generates sales of $2.2 billion across Bunnings, Kmart, Target and Officeworks.
The broker warns that investors are underappreciating the impact of Amazon to the conglomerate given that its divisions operate with high operating margins (which makes it ripe for disruption), very low or no online presence, and a large proportion of their stores locked into leases.
The share price of Wesfarmers has rallied 22% over the past year compared to a 10% gain by the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.
In contrast, the share prices of Myer, Harvey Norman and JB Hi-Fi have slumped 40%, 19% and 8%, respectively.
It's not all bad news though. The experts at the Motley Fool believe there is a sector that is primed to outperform the market in FY19 and beyond.
Click on the link below to find out for free what this sector is and the stocks that are best placed to benefit from this thematic.
