Frank Newman: The arrival of Amazon

There is increasing discussion in the business press about the changing nature of retail spending and the affect this is having on the demand for retail space. This is a matter of keen interest to commercial property investors.

The debate on this issue has become more prevalent in Australia, with the imminent arrival of Amazon.  In April Amazon announced it was looking for a location for an Australian distribution facility, and said it was about to establish a branch office in Australian to oversee its operations. It is quite likely that it will use the Australian base to service its New Zealand customers.

The arrival of Amazon is being taken seriously. The CEO of Wesfarmers  (whose retail chains include Coles, Bunnings, Target and Kmart) is reported to have said Amazon will “eat all our breakfasts, lunches and dinners”.

Although Amazon started life as a book seller in 1994 it is now an “the everything store” with a huge presence. It is estimated that it accounts for more than a third of all e-commerce sales in the US, and that share is increasing as it expands into food products.

There is no reason to suggest Amazon will not capture a significant share of the retail market in Australia, and a share of the market in New Zealand, although the range of product available in New Zealand is likely to be limited by not having a local distribution centre.

The key for online retailers appears to be in speeding up delivery times. If they can reduce those times, then they stand to make even greater inroads into the retail market. Amazon wants to get delivery times down to 30 minutes by using drones, and it has been trialling this service in the UK. New Zealand is also some way down this (flight) path with Domino's delivering its first pizza by drone in November last year, which by all accounts arrived hot and intact.

Experts say the foot traffic in Australian malls has peaked and may now be on the decline. This, they say, is due at least in part to the uptake of online shopping by the younger generation. While there will always be those who prefer to shop in a real shop, the issue for retailers - and therefore their landlord investors - is the tipping point at which it is no longer viable to have a bricks and mortar retail presence.

The interesting question is which retailers will be most affected by the arrival of Amazon? My guess it will be the retailers that are already finding the going tough. This may even include the likes of the Warehouse, which is facing increasing competition from other big format retail stores like K-Mart.

It is no secret that the Warehouse has been struggling to hold its status within the retail sector, even without the arrival of Amazon. Earlier this year it shed 130 jobs, or about 1 per cent of its workforce, and was rationalising its administration as a cost cutting exercise. Profits are well down on last year.

It is reportedly addressing the potential threat from Amazon by focusing on low prices and e-commerce. In March the Company's CEO said, "One of the first things we're doing is pulling together a unified view of the customer - we're understanding their needs".

I am surprised they do not already fully understand their customers’ needs, and I question how well prepared they are for Amazon, when it too competes on price, is a leader in e-commerce, and is an innovator. It has a momentum that will be difficult to beat.

As an admittedly infrequent shopper, I personally think the Warehouse has lost its differentiation. It is no longer the place "where everyone gets a bargain", and I don't think it has differentiated itself from its competitors in terms of service or range. And there are now quite a few competitors in the price discounting market.

Quite possibly some of the smaller shopping malls in Australia and New Zealand will face a slow-death, as have central business district shopping areas. To survive, CBD’s are increasingly turning to customer experiences other than shopping, and  the slow process of converting office space into residential apartments.

The only certainly is that the arrival of the giant Amazon to Australia - and by extension New Zealand - is likely to have a very significant impact on the viability of bricks and mortar retail. That’s something that will be watched very closely by commercial property investors.

Frank Newman writes a weekly article for Property Plus.