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Amazon ‘Impacted’ Should Look To Canada For Guidance Claims New UBS Report

A 110-page report by UBS, into the effect that Amazon will have in Australia, claims that organisations who are set to be impacted by their Australian arrival should look to the Canadian market where the US online retailer got off to a slow start, analysts also claim that some people have over reacted to the threat in Australia.

The report claims that Amazon will only snare 2% of the retail market but they will have a material impact on retailer profits which some investors are already factoring in.

“Our view is the Australian ramp up will happen but it won’t be as aggressive as people think,” said UBS retail analyst Ben Gilbert.
The report claims that in Canada which is a similar market to Australia, Amazon rolled out its full retail offer eight years after launching Marketplace – but is now generating revenues of $3 billion and growing sales by around 50 per cent a year after expanding its product range by about 90 million units to about 130 million units since 2013 and opening seven distribution centres.

“After two to three years as they start to get scale they’ll build designated warehouses and that’s when the impact will be felt in a material way,’ Mr Gilbert said. “The impact will be significant but we think it will take longer, as it has in Canada.”

“The big factor will be [the launch of Amazon’s subscription service] Prime. When [customers] pay an annual fee, they get free delivery and that’s when people start Amazoning for things rather than Googling things.”

What retailers are going to have to learn is how to make profits in a market impacted by Amazon who will drive consumers to online where retailers’ margins are thinner, they will also force retailers to invest hundreds of millions of dollars into e-commerce infrastructure which may take years to deliver returns.

UBS estimates that margins for major listed retailers will fall by between 100 and 200 basis points by 2023, dragging down earnings by as much as 20 per cent, with Super Retail Group, Myer and JB Hi-Fi the most exposed.

USB Claim that Amazon’s pressure on retail prices will also have a major impact on the economy, slicing up to 0.25 percentage points from the consumer price index and putting further pressure on already weak retail employment, which has stagnated since the global financial crisis.

“Retail is the second largest employer with 10 per cent share, so any impact on the retail sector will be material for the overall economic outlook,” UBS chief economist George Tharenou told The Australian Financial Review.

“The structural dynamic of slower retail prices will persist for a number of years – three to five years – and it will have a cumulative impact over time which will wash through the entire economy.”

While Amazon will have a material impact on earnings, UBS believes investors in retail stocks and REITs have over-reacted to the threat, although there may still be some downside risk for retailers such as JB Hi-Fi, Myer and Greencross.

Shares in major listed retailers and REITs have underperformed the market by 15 per cent and 16 per cent respectively since speculation about Amazon’s intentions started building last November and the tech giant confirmed plans to launch its retail offer in April.

UBS expects Amazon to launch its retail products and services in 2018, although there is a chance it could launch towards the end of 2017, given current job ads for staff such as branded goods buyers and Amazon’s recent decision to sign a lease on a 24,387-square-metre former Bunnings distribution centre in Dandenong.

“Our view is the Australian ramp up will happen but it won’t be as aggressive as people think,” said UBS retail analyst Ben Gilbert.

Mr Gilbert believes Amazon’s Australian entry will be similar to that in Canada, a market with similar characteristics, a view shared by retailers such as Officeworks chief executive Mark Ward.

“Amazon won’t necessarily come and rip an enormous amount of sales and market share away from retailers in the initial years. The bigger and broader impact will be three-fold.”

Amazon will accelerate the rate of online penetration, prices will fall as Amazon matches retailers’ lowest prices and retailers will have to step up investment in e-commerce – improving their websites, widening their online range, adopting dynamic pricing and suggested purchases, and offering faster, more reliable deliveries as consumers’ expectations rise.

“There’s a misconception that Amazon comes in and prices to beat everyone,” Mr Gilbert said.

“We found globally Amazon changes their prices tens of millions of times a day globally. If there’s a lot of high/low pricing and deep discounts … Amazon will match to the lowest price every week.

“That can have a 100 to 200 basis-point impact on pricing per annum over a multi-year period, so it does drive deflation.”

Categories likely to be most exposed to Amazon include electronics, fashion, sporting goods and toys, while hardware, auto and groceries are likely to be least impacted. The initial impact will be felt by online marketplaces such as eBay.

UBS has cut its longer-term profit forecasts for JB Hi Fi by 20 per cent and downgraded its recommendation from buy to neutral.

“While JB Hi-Fi is better placed compared with its US/UK peers Amazon will trigger a material margin rebase (down 100 basis points) through sharper pricing and services,” the report said.

UBS has also cut longer-term profit forecasts for Harvey Norman by 9 per cent, Myer and Super Retail Group by 13 per cent, Woolworths by 6 per cent and Wesfarmers by 7 per cent.

“Department stores and sporting goods will be under pressure,” Mr Gilbert said, “but there are cases where retailers can pull through and not be annihilated.”

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