Thursday, April 13, 2017

Brian Gaynor: Amazon’s Aussie move spells danger for NZ retailers

The direct entry of into the Australian market is another step in the company’s attempt to conquer the world. The online retailer’s establishment across the Tasman could create major issues for New Zealand retailers and retail property owners.

Amazon is one of a handful of companies – including Apple, Facebook and Google – that are changing the world. But the big difference is that Amazon is attempting to disrupt existing operators while the other three are essentially offering new and unique products.

Amazon is the most successful in terms of revenue, with total sales of US$136.0 billion ($195b) for its latest financial year. This compares with Apple’s revenue of US$93.6b, Google (Alphabet) US$90.3b and Facebook US$27.6b.

The current sharemarket value of the four companies is: Amazon US$429b, Apple US$754b, Google US$578b and Facebook US$408b.

Jeff Bezos, the driving force behind Amazon, was born in Albuquerque, New Mexico on January 12, 1964.

He graduated from Princeton University with a science degree in electrical engineering and computer science. After graduating in 1986 he worked in a number of jobs on Wall Street, including looking at internet-based companies for a hedge fund.

In 1994 he drove from New York to Seattle with plans to establish an online sales company. He was convinced that the internet offered massive online sale opportunities. Online sales companies had also received a big boost from a US Supreme Court ruling that exempted mail order companies from charging sales taxes in states where they had no physical presence.

Amazon was established in Seattle on July 5, 1994 and began selling books over the internet the following year. The company has been almost totally responsible for the demise of the bookstore sector.

Amazon’s December 1997 year annual report showed that sales had increased from just US$0.5m in 1995 to $15.7m in 1996 and $147.8m in 1997. At the end of 1997 it had 1.5 million customer accounts and 614 staff.

Bezos’ 1997 letter to shareholders emphasised two important issues – his determination to create long-term shareholder value and a relentless focus on customers.

He wrote: “We believe that the fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.”

As far as customers were concerned, he wrote: “From the beginning, our focus has been on offering our customers compelling value. We realised that the Web was, and still is, the World Wide Wait. Therefore, we set out to offer customers something they simply could not get any other way, and began serving them with books. We brought them much more selection than was possible in a physical store (our store would now occupy 6 football fields), and presented it in a useful, easy-to-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day”.

In addition, “we dramatically lowered prices, further increasing customer value”.
Online shopping has received a huge boost from the expansion of high-speed broadband and the development of mobile apps. As a consequence, Bezos’ “World Wide Wait” has been transformed into the customer friendly World Wide Web.

One of Bezos’ goals for 1998 was “to add music to our product offering, and over time we believe that other products may be prudent investments”.

Amazon has come a long way since 1997, as illustrated by the following figures:
  • Total revenue increased by 27.1 per cent in 2016, from US$107.0b in 2015 to US$137.0b. This compares with total revenue of just US$0.15b in 1997.
  • Customer numbers have soared from 1.5 million to 300 million.
  • The company now has 341,000 employees, compared with 614 in 1997. It also has 45,000 robots.
  • Books are now a minority product compared with electronics and general merchandise.
  • Amazon’s current sharemarket value of US$429b compares with Wal-Mart’s US$217b and eBay’s US$37b.
Consistent with his emphasis on the creation of long-term shareholder value, Bezos’ annual salary is US$81,840 and the highest paid senior leadership team member is on a US$175,000 salary.

Amazon is planning to establish a strong physical presence in Australia, although there has been no official announcement of this. It is recruiting a large number of employees across the Tasman and former Amazon executives are speculating that the online retailer will be fully operational in Australia next year.

This includes the establishment of an Australian website, distribution centres and delivery systems. This could include a much faster delivery service to New Zealand.

Media speculation indicates that Australians could be buying everything from groceries and takeaways to electronics and clothing from Amazon’s greatly expanded offering next year. This could include the launch of an Australian version of Prime.

Prime is a membership programme that gives customers access to streaming video, music, e-books, free shipping and a variety of other Amazon-specific services and deals. It cost US$99 per annum to join and includes a two-day free shipping service.

This Prime two-day delivery service could be extended to New Zealand, particularly as most of Amazon’s new Australian employees are on the country’s east coast.

Response to Amazon’s Australian expansion has been mixed, partly because no specific details are available.

Associate Professor Gary Mortimer, a retail expert at Queensland University of Technology, is quoted as saying the fear about the arrival of Amazon was “scaremongering” and “the sky will not fall in”.

He said: “I genuinely think if it [Amazon] comes, a proportion of Australian consumers will trial it. But it will generally be consumers that are already using online shopping platforms.”
He said research showed people who shopped online would continue to do so, but those who didn’t, would continue to be non-users.

Recent statistics show that global online sales continue to grow and Amazon could make a big impact across the Tasman:
  • US online sales have grown from 2.2 per cent of total retail sales at the end of 2004 to 8.3 per cent at present and are forecast to reach 20 per cent of total sales by 2025. Amazon accounts for 43 per cent of US online sales.
  • Australian online sales increased by 11.1 per cent in 2016 compared with total retail sales growth of just 3.7 per cent over the same period. Online sales represent 7.2 per cent of bricks and mortar sales and analysts are forecasting that this could increase to 12.5 per cent by 2015, with Amazon gaining a 25 per cent market share.
  • Online sales are also increasing much more rapidly than traditional retail sales in New Zealand. BNZ online retail sales data shows that online sales surged 16 per cent in the December 2016 quarter, compared with the same quarter in 2015, whereas total retail sales grew by 4.7 per cent over the same period.
Online retailers have a massive advantage over bricks and mortar retailers because they are open 365 days a year, 24 hours a day and have a huge selection of products. Increased broadband speed and mobile apps have also facilitated online sales growth but online retailers have not totally resolved the problems associated with slow delivery times.

If Amazon’s entry into Australia substantially reduces its delivery time to Australian consumers, as well as New Zealand purchasers, then retailers and retail property owners on both sides of the Tasman face more challenging times ahead.

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.

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