Prime Mover Magazine

Nature of the beast

Nature of the beast

The country’s logistics landscape could be on the brink of a major shake up after e-commerce giant, Amazon, confirmed plans to launch in Australia in late 2018.

US online retail company, Amazon, has attracted a selection of monikers since rumours emerged that it would be in the process of setting up shop in Australia. David White, National Leader at Deloitte’s Retail, Wholesale & Distribution Group, has called it ‘the elephant in the room’, management consultancy Azurium dubbed it the potential ‘great white shark’ and Harvey Norman co-founder, Gerry Harvey, described it as a ‘strange beast’.

At the end of April, the company finally broke its silence and confirmed it was searching for a “large distribution and fulfilment centre” in Australia in the hope to launch services such as Amazon MarketPlace, Amazon Prime Now, Amazon Pantry and Amazon Fresh as early as 2018.

“Amazon Web Services launched an Australian region in 2012, we launched a Kindle Store on in 2013, and we now have almost 1,000 employees in the country,” Amazon said in a statement – confirming information leaked by ex-employee, Brittain Ladd, at the end of March. “The next step is to bring a retail offering to Australia, and we are making those plans now.”

Albeit short on details, the confirmation of the company officially arriving in Australia caused the nation’s supply chain and logistics industry to switch into action mode: “The potential for market disruption is huge,” David commented, adding retailers had already set up task forces to assess the potential impact of an Amazon market entry. “Where Amazon has entered markets, the impact on local retailers has been seismic in almost all categories and channels,” he explained. “Retailers cannot afford to wait and see what Amazon does – they need to be developing strategies and taking action now.”

Australian consumers, meanwhile, are excited by the prospect of lower shipping rates and increased choice after arriving late at the age of discounted online goods, where people are using the Internet to compare and save, bagging bargains while competition is driving prices down.

Until recently, sky-high postage and packing charges as well as geo-blocks – restrictions placed on what overseas retailers could ship to Australia – had worked in the favour of local retailers, who were all too happy for the market to remain closed and prices high. While the situation has improved – shipping prices have reduced slightly and consumers are finding ways around geo-blocks – Australian shoppers are still being offered the short end of the stick when it comes to purchasing foreign-made goods, experts agree. With Amazon’s arrival, however, change is now finally on the horizon.

Speculation has been rife for months about the company’s Australian ambitions, even without Amazon commenting on them. The first sign that Amazon was looking to expand its offering in the region came in November 2016, when it launched Prime Video for the Australian audience. Access to the video platform was first derestricted quietly to make the initial airing of ‘The Grand Tour’ available to Australian viewers, along with others. The Grand Tour TV show is a successor to the wildly popular Top Gear program produced by the British Broadcasting Corporation (BBC), featuring Jeremy Clarkson, Richard Hammond and James May, who previously presented ‘Top Gear’. Amazon reportedly paid $325 million to bag the trio back in 2015, so understandably wanted to allow interested parties to watch the show legally once it aired and prevent them from resorting to less scrupulous methods. A full selection of region-permitted shows and movies were added soon after, once the service had been officially announced.

In January 2017, news outlet Business Insider discovered that Amazon had been recruiting throughout 2016 for roles based in Queensland, primarily software development positions for ‘AmazonFresh’, taking the project “from inception through launch.” AmazonFresh is an online grocery service available as an add-on to Amazon’s Prime offering. The start of the recruitment process was a further clue that Amazon was ramping up to launch the full slew of its services – free shipping with Prime, same-day shipping with Prime Now and PrimeFresh. AmazonFresh has been available to US shoppers since 2007 and was launched in London in 2016. Free delivery is given as standard for users, and in some regions same-day and early next morning delivery is offered.

Amazon is able to offer US Prime users delivery perks such as free two-hour delivery for Prime Now members and the option of US$8 ($10) one-hour delivery thanks to an expansive network of distribution centres spread across the territory. In order to offer a similar service, Amazon would need to have distribution centres located close to all of Australia’s major metropolitan areas – though as yet there has been no word of the e-commerce company leasing or developing its own facilities, apart from news that commercial retail company CBRE has come on board to support the launch in some capacity. It could be that Amazon is planning to offer only a pared-down version of its shipping service here, with a view to expanding down the track. For this reason, Citigroup’s Head of Research Craig Woolford told the Australian Financial Review (AFR) in February that he believes Amazon is unlikely to establish a full physical presence in Australia for another two years, citing the need to establish distribution centres and sorting centres, and to secure local brands – roughly in line with Amazon’s official timeline.

More important than the official launch date, however, is the impact on the logistics and transport market at large, says James Stewart, Retail Partner at Ferrier Hodgson. “When Amazon comes to Australia, whether it’s this year or not, it will take a year or two to have that knock-on effect.”

And according to Hermione Parsons, Director of the Centre for Supply Chain and Logistics at Deakin University, Amazon should be aware of the fact that it is not the only powerful player looking to expand into Australia. “There is a lot of competition in the space with other successful companies coming to Australia, playing in that same area of high competition globally,” she says. “Amazon, Alibaba and others are going to have to have incredibly well developed, agile and highly customer-focused offers that will give them the advantage over their formidable opponents, or competition.”

According to retail analysts at stockbroking firm Citi, Amazon’s entry into Australia could cause JB Hi-Fi’s sales to drop by 5.5 per cent, resulting in a drop of 23 per cent in the company’s earnings before interest and taxes (EBIT). Harvey Norman’s sales could drop by 3.9 per cent, Citi reported, resulting in a 19 per cent reduction in EBIT and Myer could come up short by 18 per cent in its EDIT with a loss of 1.7 per cent of sales.

As such, it comes of little surprise that Inside Retail’s ‘Australian Retail Outlook 2017’ revealed offshore online retailers to be the third biggest challenge currently facing the industry, coming in after rental overheads and international market entrants.
According to JB Hi-Fi CEO, Richard Murray, the electronics goods retailer has nothing to fear from Amazon. With its 300-store network, the “lowest operating costs” in the sector and the “keenest” prices, the store is well place to compete with any new arrival, he told the AFR.

JB Hi-Fi acquired The Good Guys’ 103 stores in 2016, giving it a greater presence in the market of big-ticket items that consumer like to view in store before buying. “I’ve no doubt new players will want to gain market share,” Richard said. “We’re just in a really good spot to compete.”

In January 2017, Gerry Harvey explained that Harvey Norman intends to succeed without resorting to shady business practices. “In America, [Amazon] is regarded as a very poor corporate citizen because it sent a lot of other retailers broke that used to employ people, used to pay taxes,” Gerry told 9news. “Amazon pays virtually no taxes…As a corporate system they’re terrible. “Now they’re coming here to try and send us all broke. They’re not going to send Harvey Norman broke, okay, but they’re going to be a pain in the backside. They’ve got a distribution model where they’ve got a warehouse and they send it out online,” he said.

“We’ve got shops in every town in Australia of any consequence, and we’ve got warehouses in every town, and we’ve got showrooms in every town. So, if you want to buy something you can come into the showroom, we can deliver it to you the same day – all that sort of thing – and we will be competitive with them come hell or high water.”

On the prospect of customers coming to a store to view a product in person then returning home to buy it online for cheaper, Gerry insisted that the store would be price-matching Amazon whilst offering the service, delivery and aftersales service that Amazon lacks. And since Amazon may occupy faceless out-of-city facilities, in the case of returns Harvey Norman would be the clear choice, he added.

“They think they’re going to take over all of retail. Now, let’s assume they do one day, and there’s no other retailers or half the retailers are gone. And there’s Amazon and half of what there are now. How is that a good thing? You’ve got less choice, you’ve got less competition, by that stage Amazon will have put up their price a lot more. How are they a good corporate citizen?”

Gerry said that, while he’s aware that many customers are led by their wallet, he is confident that Harvey Norman will win out when service and presence are taken into account. “I don’t think people are stupid,” he said. “But I do know they like price, I do know they’ll buy if it’s cheaper somewhere else. But if I can offer them the same price and better service, and a showroom, and I can guarantee you a good deal, you’ll still buy off me, okay?”

Woolworths is trusting in its pricing along with its local produce pledge – 90 per cent of all fruit and vegetables stocked by the supermarket chain are sourced from Australia – to stop it from losing market share if the US giant starts operations here. “Woolworths always welcomes competition,” a spokesperson told Prime Creative Media. “We are focused on putting our best food forward every time, irrespective of what our competitors do.”

Speaking to The Weekend Australian, Woolworths Chairman Gordon Cairns went more into detail: “Our view is whether Amazon comes or not, the standard they are setting should be the standard that we should be aspiring to for our customers,” he said. “So the best way to defend ourselves against any threat from Amazon is to get to the same kind of service that they offer.”

Hermione notes that local companies such as Woolworths are increasingly employing the type of strategies Amazon itself has used. “They are preparing now for the kinds of demand customers will make,” she said. “They’re moving their high-volume, high-demand products as close as they can to consumers, and creating small hubs from which they can distribute.”

She adds, “If you look at local retailers and how they’re responding, many of the larger local retailers are throwing all they’ve got at omni-channel development. Woolworths, Australia Post, there is so much attention to developing capability and skills for the future market as defined by this kind of business and consumer.”

According to Rose Elphick-Darling, Industry Research Fellow at the Centre for Supply Chain and Logistics at Deakin University, local retailers hoping to up their game and ready themselves in case of an Amazon invasion must recognise that today’s consumers are constantly changing their wants and needs and it’s no small feat to keep up.

“You might as well call it ‘me-commerce’, it’s so focused on the customer and customer experience,” she says. “That focus then leads to a different way of retailing. It means that you have to value-add in terms of the customer experience, regardless of whether it’s an online or a physical bricks-and-mortar presence. Then you need to back that up with totally excellent logistics.”

A survey carried out by market research company Nielsen in January found that Australia’s consumers are excited by the prospect of Amazon’s arrival. Nielsen reported that three in four Australian adults are interested in Amazon Australia and 56 per cent stated that they are likely to purchase from its Australian site. Forty-five per cent of respondents noted that they would subscribe to Amazon’s Prime service to avail of deals, discounts and fast delivery and two thirds of the Australians surveyed reported they are most keen to purchase electronic goods through Amazon, with books and clothes coming close behind.

It may perhaps come as some relief for Australia’s grocery stockists to hear that the survey participants showed very little interest in buying their groceries from Amazon. Still, Citigroup’s Craig told the AFR that Australia represents a very promising prospect for Amazon, and he believes Amazon could capture sales of at least $4 billion within five years of rolling out its services. “Australia’s appeal for Amazon becomes clearer when you adjust retail sales levels for population,” he said. “Australians spent $12,200 per person on retail goods last year, third only to the US ($15,700 per person) and Japan ($12,300 per person). These are both markets in which Amazon has a local presence.”

JB Hi-Fi, Harvey Norman, specialty retailers such as Super Retail Group and Premier Investments, department stores including Myer, Target, and BIG W and footwear retailers such as RCG have the most to fear from Amazon, according to Citigroup. “Amazon’s impact on [Australian] retailers would be diverse, given the magnitude of its product range. We expect the greatest impact to be felt by electronics retailers given Amazon’s product range and the branded nature of these products,” Craig reported.

Research from market research firm Statista and consultancy firm MWPVL International suggests that Australia’s consumers are quickly embracing e-commerce. The country’s online spend is set to jump to US$10.5 billion ($14 billion) in 2017, up from US$9.5 billion ($12.4 billion) in 2016. With the Australian market estimated to reach US$15.4 billion ($20 million) by 2021, it will be some time before it catches up with the US – customers in the US spent US$322 billion online in 2016.
Amazon is notoriously coy about giving hard figures on the number of orders it deals with, packages it sends and money it makes. In fact, analysts have received few details since a suggestion at the end of 2014 that the company shipped five billion items over the year.

What is known is that in order to services its US customers, Amazon has 214 operations facilities, ranging from fulfilment centres to sortation centres, across the territory – a number that is constantly growing. Elsewhere around the world, Amazon has 149 processing centres delivering internationally – including those in Germany that currently service Australian customers – and there are many more in the pipeline.

As such, it is tough to predict how many facilities the company would need in Australia. Spain shows a similar penetration of online shopping and is served by a 78,000m² fulfilment centre and a Prime Now hub in Madrid, with another facility planned – Europe’s first express delivery centre in Barcelona. Australia’s dispersed population would present a particular challenge, at least until such a time that multiple facilities can be established.

Details on Amazon’s strategy for an Australian expansion should emerge in the coming months and years. The company’s first statement does indicate a major shake-up for the industry, though, saying it was planning to bring “thousands of new jobs to Australia, millions of dollars in additional investment, and to empower small Australian businesses through Amazon Marketplace.

“We are optimistic that by focusing on the things we believe customers value most – low prices, vast selection, and fast delivery – over time we’ll earn the business of Australian customers,” Amazon explained – sending a message to Australian retailers who have so far benefited from being the big fish in a small pond that there is now a bigger, more intuitive fish eyeing the pond up. They need to come up with a plan, and fast.

Fast Fact
Until recently, Amazon benefitted from shipping low-value products from outside Australia, taking advantage of a law whereby imports with a value of below $1,000 did not incur GST. Since 1 July 2017, however, this advantage has been removed and suppliers with an Australian turnover of $75,000 or more per year are now required to register and charge GST. “Australia is at the lead of Internet penetration in the world,” says Rose Elphick-Darling, Industry Research Fellow at the Centre for Supply Chain and Logistics at Deakin University. “We adopt online shopping and Internet-based transactions very rapidly and [the introduction of GST on low-value products] should level the playing field somewhat. It becomes quite compelling for Amazon to move into Australia and put some infrastructure here.”

Fast Fact
While the domain is old news, it only enables purchases of ebooks at the moment – indeed, while it lists ebook readers, would-be buyers are directed to Officeworks’ website to make a purchase. In order to make use of Amazon’s vast catalogue of products including real books, clothing, electronics, homewares and toys, Australian shoppers have long been required to use the generic website, ordering items for delivery from Amazon’s distribution centres abroad and often incurring shipping charges steep enough to negate any price saving.

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