Retailers rebound as Amazon underwhelms

On Tuesday, the Amazon Australia website finally launched after several false starts, to a lukewarm reception by Australian consumers. Customers complained of an underwhelming selection, uncharacteristically expensive prices, and limited delivery options. The stock prices of local retailers, under pressure for months, rebounded sharply as investors bet that the Grinch would not steal the retailers’ Christmas. However, does Amazon’s underwhelming launch (against unrealistically high expectations) really mean Australian retailers’ intrinsic values are higher today than they were last week?

Let’s consider the following.

Firstly, Amazon launched its Australian website almost stealthily, with little fanfare. Beyond the free “advertising” from copious press coverage and speculation, Amazon did not run a flashy marketing campaign. Amazon’s low-key launch is likely deliberate – having been scarred by the Christmas debacle in 2013 when millions of packages failed to arrive before Christmas (in the U.S.), it was unlikely Amazon Australia would have risked orchestrating an extravagant launch with untested systems, capacity and logistics so close to Christmas. Failure to deliver could have caused early and significant damage to the Amazon brand in Australia.

Secondly, the underwhelming selection at launch should not be extrapolated beyond the near-term. Bain & Co estimates that Amazon Australia launched with around 7.5 million stock keeping units (“SKUs”) across 23 categories, barely a fraction of the estimated 500 million SKUs available on the U.S. website, but this should not be a surprise to anyone. Of these SKUs, 7 million were books, music and movies, leaving only 500,000 products across the other 20 categories. Even so, for important Christmas categories such as toys, Amazon’s assortment far exceeded other retailers – the website carried 47,650 toy products compared to 2,716 SKUs at Kmart and 2,174 SKUs at Big W, and often at more competitive prices.

Thirdly, with respect to the complaint of Amazon’s prices being more on the expensive side, this is more a function of the seller mix. The vast majority of launch products are from third-party sellers on the Marketplace, where Amazon does not control prices. As Amazon builds its first-party selection, especially its private label range, price perception should shift towards the cheaper side. Over time, the third-party products that win the coveted “Buy Box” will also be the ones that offer the most consistent value proposition to the customer.

Predictions that Amazon would undercut local retailers by 30% across a wide range of categories and products lacked commercial sense. While Jeff Bezos is well known for saying “your margin is my opportunity”, Amazon is not a charity. From our discussions with former Amazon executives, the company always has profitability in mind and does not provide services for free or run businesses at a loss just because customers want the lowest prices. With listed retailers’ gross margins at 30% or less in Amazon’s key categories, it is highly unlikely we will see Amazon consistently undercut local retailers by up to 30% across a wide range of branded products. Firstly, as any competent retailer should know, one does not need to cut prices across the board to drive traffic. Secondly, as I have written about previously, Amazon’s wide moat comes not from price but from convenience. Price is but one tool Amazon uses to achieve customer lock-in through convenience. Australian retailers would be premature to breathe a sigh of relief, as Amazon has yet to deploy any of its lock-in tools in Australia.

Finally, the limited delivery options and service speed are again largely a function of seller mix. Fulfilment By Amazon (“FBA”) is yet to come to Australia, so the third-party Marketplace sellers which make up the majority of SKUs right now are responsible for setting their own delivery fees and times. This will change once Amazon Australia expands its first-party selection and reaches sufficient scale to launch Prime and FBA. For those who doubt Amazon’s ability to gain scale in Australia, consider that the country has for years been Amazon’s largest international market where it does not have a direct presence, and Amazon.com is Australia’s second-most visited e-commerce website behind Woolworths’.

The big risk (and opportunity) of Amazon’s low-key launch is that it could lull Australian retailers back into complacency. That Amazon didn’t launch with a bang should not be an excuse for local retailers to relent in their e-commerce and omni-channel investments, nor lose sight of a customer-centric proposition. The real challenge will come once the full Amazon experience is available, including Prime, FBA and Alexa-enabled Echo speakers. While the Montaka team, as consumers, are a little disappointed by the current Amazon offering, we are certainly excited about the potential opportunities that may arise should both investors and local retailers start to underestimate Amazon’s long-term potential in the Australian market.

Montaka owns shares in Amazon.com (Nasdaq: AMZN)

DH5_2155Daniel Wu is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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