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Amazon to start selling pet supplies

Amazon, the online retail behemoth, is now going to start selling pet supplies for dogs, cats, fish, reptiles, other small animals and birds.

In the short-term this probably won’t mean that much. The market seems to have dramatically overestimated the damage to JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) and other retailers so far.

But, it’s a signal of intent from Amazon about the categories it wants to win.

An obvious potential loser from this announcement is Greencross Limited (ASX: GXL), Australia’s largest pet care business. Australian retail made up over 60% of revenue in FY18, it also contributed $74.4 million of the company’s $97.6 million underlying earnings before interest, tax, depreciation and amortisation (EBITDA).

It must also be pointed out that Greencross’ online sales grew by 70% to $20 million during FY18, so it is becoming a major online player too.

Greencross isn’t the only potential retail player to be hurt, Petstock, Pets Domain and Best Friends are other pet retail chains that could be damaged.

Pet food and accessories are also products sold by supermarkets such as Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd’s (ASX: WES) Coles. Whilst pet items aren’t key segments for the supermarkets, it could be enough to hurt the few percentage points of growth.

Amazon is only just starting its retail offering in Australia. For now I don’t think it is anything to be too worried about for the Australian retailers, however in time its economies of scale will get bigger and it can offer lower prices.

Foolish takeaway

Greencross is currently trading at just over 11x FY19’s estimated earnings with a grossed-up dividend yield of 6%. Whilst Greencross does look cheap I think you need a fairly contrarian mindset to invest in Greencross shares at the moment. I am personally holding my current shares but not buying any more.

One ASX share that seems very well placed to deal with the Amazon threat is this hot stock.

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Motley Fool contributor Tristan Harrison owns shares of Greencross Limited. The Motley Fool Australia owns shares of and has recommended Greencross Limited and Wesfarmers 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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