The impact of globalisation on the Australasian retail sector is growing, with the entry of Zara and H&M – their launch with flagship stores at Sylvia Park in Auckland, and an aggressive strategy of more to follow.
But an even greater threat to local retailers appears to be coming from US e-commerce, particularly Amazon. What does this mean for key bricks and mortar retail categories in NZ?
Earlier this month, Amazon’s founder and CEO, Jeff Bezos, released his annual letter to shareholders. In the world of listed companies, typically characterised by a singular focus on profit and earnings, the letter has been widely praised for its demonstration of Amazon’s unique obsession with customer satisfaction.
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Bezos has built Amazon’s success on the concept of what he refers to as a Day 1 company – defined not just by this customer-centric approach, but fast, effective decision making, an adoptive approach to emerging trends, and a refusal to let processes inhibit positive outcomes.
This is all in an effort to avoid the fate of a Day 2 company, which Bezos defines as “stasis”. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death.”
It’s an effective strategy, and one which has recently seen Bezos become the second richest man on the planet, due to a record rally in Amazon shares. It’s also a strategy which, some commentators have said, Australasian companies could stand to learn a thing or two from.
Although the listed and industry feedback on the precise timing of entry for Amazon in Australia is currently unknown, what does appear certain is the strategic intention to grow their presence in this part of the world.
Amazon currently enjoys a 4.2 per cent market share in the US (38 per cent of online sales), and 3.5 per cent market share in the UK (a total of 24.4 per cent of online sales).
In light of recent retail sales forecasts to 2025, and assuming Amazon can reach 25 per cent of total online sales in Australia, Amazon could potentially build a A$14bn business in that region. That scenario requires a number of assumptions as to the size and breadth of the market, but the risk for retailers in more commoditised markets, over time, including consumer electronics, apparel and general merchandise, appears significant.
A response to lower sales will be an increased focus on the cost base, including rents. Case studies from the US and UK markets (where Amazon is more mature) show that established retailers have reduced their number of stores, choosing to increase the footprint and focus on ‘flagship’ stores, as well as their own online offerings.
This may be a successful strategy for larger retailers, but it is in the next tier down where we believe the ability to respond to declining sales, and reduction in margins will be limited.
The theme of technological disruption hurting the sustainability of business models is not a new one. However, companies like Amazon have the ability (and the balance sheet) to revolutionise the current makeup of our domestic retail sector. That degree of ‘existential uncertainty’ will prevent existing retailers from significant investment, despite a back drop of lower rates and a weaker currency.
Mark Fowler is Head of Fixed Income at Hobson Wealth Partners Ltd.
The views expressed in this article are those of Hobson Wealth Partners Limited, an NZX Firm. The disclosure statement for Hobson Wealth is available free of charge by contacting us on 0800 742 737.