It’s no exaggeration to say that Amazon’s impending launch into Australia sparked panic among retailers on both sides of the Tasman.
And no wonder: in the US, it now dominates retail to an incredible extent. Statista indicates that of July 2017, 49.9 percent of internet users in the United States lived in a household with a subscription to Amazon’s paid-for priority membership programme, Amazon Prime.
A study by Slice Intelligence released in February found that 43 percent of all online retail sales in the US went through Amazon in 2016. Wall Street firm Needham said in an April research note that Amazon is expected to grow its market share to 50 percent of all online retail by 2021. With a current market capitalisation value of more than US$531 billion, its value is roughly equivalent to the GDP of Argentina.
Amazon confirmed persistent rumours of its interest in entering Australia in April 2017. Its first moves following official confirmation were to scout out locations for its first logistics facility and start hiring staff. Later in the year, it appointed one of its German directors, Rocco Braeuniger, as country manager for Australia and secured a 24,000 square metre warehouse in Dandenong South, Melbourne.
It’s fair to say Australian retailers are in a state of upheaval. Back in 2016, the managing director of Wesfarmers, Richard Goyder, famously told a retail forum in Sydney that Amazon would “eat all our breakfasts, lunches and dinners”. The present sentiment seems similarly gloomy.
Often, when large foreign companies announce they’re coming to Australia, there’s a silent “and New Zealand” included with that statement, but Amazon has so far been silent about its intentions for Aotearoa.
Fear of the unknown
Speculation has flourished in the absence of concrete information. Massey University’s 2017 Big Issues in Retail survey attributed a 10 percent year-on-year drop in business confidence since 2016 to the “Amazon effect”. Just under 40 percent of survey respondents expected their sales to increase in the short-term. The number of retailers who expected their sales to decrease also rose from 12 percent in 2016 to 18 percent this year.
Lead researcher, Professor Jonathan Elms, The Sir Stephen Tindall Chair in Retail Management Director at the Centre for Advanced Retail Studies, says comments from the respondents cited Amazon’s potential entry into New Zealand.
“Retailers were particularly concerned about the combination of Amazon’s arrival and the loss of sales due to GST charges,” he says. “Domestic retailers have to pay GST and overseas retailers don’t, so there is effectively a cost disadvantage for local businesses.
“Amazon is a very large, efficient retailer that is able to do things cost effectively. But it is going to appear even cheaper because they’re not paying GST on their imports under $400 into New Zealand. Domestic firms see that as a double disadvantage to their business.”
Elms characterises New Zealand retailers’ feelings about Amazon as “fear of the unknown.”
The ecommerce giant has the ability and the resources to move in many different directions, quickly, but it hasn’t released any signals about its intentions towards New Zealand. Its movements in Australia are also minimally telegraphed.
Elms says the combination of this limitless potential and element of uncertainty is what’s spooking Kiwi retailers. Successful retailers in New Zealand are “not stupid people” and they’re feeling the pressure to make a move without much information to base their actions on.
“[Amazon] are just so secretive that anything could happen,” Elms says. “It could be all-out market domination or it could be business as usual.”
“Could they buy up a New Zealand retailer and have a store presence, even?”
Elms says retailers will now be seeking to limit any damage stemming from Amazon’s potential entry into the New Zealand market, and cautiously preparing to take any opportunities which may arise.
He reports that SME retailers are mostly ambivalent about Amazon. Their customers tend to be “very loyal” and they are mostly offering differentiated products or experiences, insulating them against the Amazon effect.
It’s the “big guys” in New Zealand retail which are most concerned about Amazon’s potential entry. Department stores and mass apparel retailers are actively changing their business models as Amazon has much more presence in these markets, Elms says.
The Warehouse Group chief executive Nick Grayston explicitly linked the company’s recent focus on change and innovation to the threat of Amazon in March 2017. Speaking to The Register about The Warehouse Group’s first-half result, Grayston signaled plans to further implement an everyday low price strategy across the Red Sheds.
In the March interview, Grayston said it was obvious to him after his 15 years in US retail that retailers who pursue a high-low strategy struggle more than those with an everyday low price strategy. Discount-driven retailers are especially vulnerable to the aggressive growth of pureplays like Amazon, he then said.
The Warehouse Group announced in September it would cease offering short-term sales altogether. During the same month, discussing The Warehouse Group’s full-year result, Grayston expressed little concern about Amazon’s potential market entry.
“We’ve anticipated not just the arrival of Amazon, who is certainly a global behemoth these days, but generally the growth of online retail and pureplays,” he told The Register. “Really the rise of ecosystems like Facebook and Google have become engines of commerce as well. It’s our intent to be able to follow and inspire the customer.”
There may be winners
When queried about Amazon’s potential impact, Kiwi Property chief executive Chris Gudgeon called for “a slightly more balanced discussion” on the subject which takes into account the differences between the heavily Amazon-dominated US and other retail markets.
Kiwi Property is a listed property investment company which owns nine shopping centres around New Zealand, with a total value of $1.79 billion. They collectively earned $1.7 billion in annual retail sales over the year ended March 31 2017.
Gudgeon cited a recent report from Credit Suisse indicating that the US bricks and mortar retail environment had significant negative factors affecting it which those outside the country have been spared.
“The US has four times as much mall space as New Zealand,” says Gudgeon. “The New Zealand market is much more balanced in terms of supply, with a quarter of the floorspace per person. We’re simply not in the precarious position the US is in.”
According to the report, 46 percent of US shopping centres rely on department stores as their anchor. Traditional US department stores like Macy’s have struggled in an environment dominated by Amazon – Macy’s has lost two thirds of its market value over last two years, while its contemporaries JCPenney and Sears are barely afloat.
A widely-cited 2017 report from commercial real estate firm CoStar says nearly 25 percent of malls in the US, or around 310 of the nation’s 1,300 shopping malls, are at high risk of losing an anchor store.
Gudgeon says New Zealand shopping centres do not display this over-reliance on department stores. With one full-service department store, Farmers, and two discount department stores in Kmart and The Warehouse, Gudgeon says the Kiwi market has far fewer of this kind of retailer than the US.
“We are not over-provided-for. There should be room for one full-service offer and two discount offers.”
Gudgeon says Kiwi Property’s retailers have been proactive about establishing their own online presence, placing them in a strong position to be competitive against Amazon.
“The retailers we talk to very much embrace the bricks and mortar offer in combination with an online offer,” says Gudgeon.
He says landlords in New Zealand such as Kiwi Property are well-prepared to respond to the changing face of retail by upgrading shopping centres to suit modern customers’ preferences.
“We’re so much more focused on the social and experiential factors of shopping.”
Gudgeon is optimistic about the future of bricks and mortar shopping centres and their retail tenants if Amazon arrives: “There may be winners, and the winners will be large, compelling shopping centres that have the right curated mix, and this can happen alongside growth in ecommerce.”
A less-fearsome Amazon
Juanita Neville-Te Rito, founder of Retail X and retail strategy director, notes that it’s likely New Zealand will not immediately experience the power of Amazon’s full-service offer, which is where much of its edge lies.
“By rolling out Amazon Prime Alexa, Echo, Echo-Look or Amazon Fresh, the company infiltrates the home through their subscription offer and extensive services with everything from priority shipping, collect pick-up sites through to exclusive content access,” she says.
Neville-Te Rito says New Zealand’s competitive landscape isn’t simple, and its geographic diversity paired with the infrastructure required to service our relatively small population of 4.7 million will mean Aotearoa is “not necessarily attractive to conquer”.
She predicts the trans-Tasman markets of New Zealand and Australia will be “hard yakka” for Amazon and in the short term, Kiwi retailers have more to fear from the likes of Kogan and its relaunch of Dick Smith.
However, Neville-Te Rito notes Amazon has already had a strong presence in both markets via sales shipped from offshore or through its Amazon Web Services business for years, and warns retailers not to be complacent.
“What this entrant brings to our, at times, pathetic and complacent retail ecosystem, is a shake-up,” she says. “Retail leaders will need to revitalise, curate strong offers and customer experiences. Retail is a deeply social activity. Good retailers connect with the customer they serve and are a vibrant contributor to the ecosystem they operate in.”
The way out is through
Hamish Conway, director of Amazon ecommerce advisors Sell Global, speaks of hosting a 2017 talk in New Zealand, at which he asked the audience of approximately 100 Kiwis to raise their hand if they’d ever shopped at Amazon. Nearly everyone did.
Conway says the Kiwi retailers that are likely to be most vulnerable to Amazon are:
Briscoe Group. Homewares and sports equipment are popular categories on Amazon. The products tend not to be commodities but are “of that ilk”.
The Warehouse Group, in particular the Red Sheds. “They tend to play the price game, and service is, in my experience, not amazing.”
Silvermoon. Retailers selling small, third-party-branded products which are easy to ship, at lower price points than fine jewellery, are at risk of being undercut by Amazon.
Rather than passively allowing themselves to be undercut, Conway says the way forward is to engage with Amazon directly, and do it as fast and as well as possible.
Sell Global doesn’t recommend wholesaling products to Amazon, but Conway says manufacturers, retailers and distributors should be ready to set up as a marketplace-style shopfront as soon as Amazon Australia launches, if they haven’t done so already.
“Get in first and get on page one, because that’s where 86 percent of the sales occur. Getting in early will be invaluable for protecting your brand and pricing, and staking your claim on how the brand is presented on Amazon. If you don’t do this, then someone else will.”
The relationship between a retailer with a digital shopfront on Amazon’s marketplace and Amazon itself is much the same as any other global marketplace, Conway says. The retailer sets up a digital ‘store within a store’ on Amazon’s platform and broadly retains control of what takes place there.
“As far as the other operators with ecommerce, Amazon is the choice of platform for us.”
It’s Conway’s pick over any other marketplace provider in the Western world.
“You want to have Amazon and your own ecommerce site,” he says. “Amazon will help drive traffic to your ecommerce site.”
Having a shopfront on Amazon allows retailers to get a slice of its sky-high conversion rate, Conway says. He cites a typical conversion rate of 2-5 percent for independent ecommerce sites, whereas with Amazon, “if you’re doing under 10 percent, you’re disappointed.”
Conversion rates of over 40 percent on Amazon aren’t unheard of, Conway says.
According to Conway, the three core reasons enabling Amazon to achieve this elevated conversion rate are: one-click buying; free two-day shipping; and the ability for shoppers to buy with confidence knowing that if their product isn’t right, they can return it for a refund.
How to adapt
Asked about the widespread apprehension from New Zealand and Australian retailers, he says it’s justified “for some”. Regardless of Amazon, Conway says, the retail industry is undergoing a transformation.
“Anyone who’s lazy and stuck in the past is going to be in for some real pain.”
Retailers who embrace the emerging challenges and adapt to the new environment will come out ahead, Conway says. Focusing on customer experience, enacting a bricks and clicks strategy across digital and physical stores, and building trust with the customer are all key.
“If people get their head in the customer experience, that’s the starting point.”
Asked whether Amazon is likely to erode margins through selling products at lower prices, Conway says the answer is complex.
“On some products, that’ll happen, but that’s actually misleading because that’s only if you wholesale to Amazon, and that’s only one of the ways to engage.”
For those offering unique products, Amazon will support their sales, not cannibalise them, Conway says. He recommends that retailers who are selling products bearing a different brand to their own look into an own-brand product with “a defensible point”, or concentrate on their in-store experience.
Retailers selling undifferentiated products will be effectively entering a “price race” with Amazon, he says, predicting suffering ahead for these businesses: “It’s not going to be fun.”
Personalisation is another front on which SME retailers can compete with Amazon: “Amazon doesn’t do personalisation very well, so that’s a big opportunity for people there.”
“While retail is hurting, [Amazon is] really going to help manufacturing brands.”
Conway believes Amazon may open a distribution centre in New Zealand within five years or so, but until then, it will ship out of Australia. New Zealand’s unique geographical challenges may result in any Kiwi Amazon Prime offering being priced at more than twice the cost of its Australian and US equivalent to cover the increased distribution costs: “They might even end up with their own plane.”
Those who hope New Zealand’s gnarly roads and wide-spread population will deter Amazon are set to be disappointed, however: “They will definitely want to ship to New Zealand.”
Conway says Amazon won’t be an immediate and significant threat to Kiwi retailers, regardless of what happens. While Amazon has the potential to be dominant online, ecommerce remains a small slice of New Zealand’s overall retail market: September’s BNZ Online Retail Sales Index reporting annual online spending across the categories it monitors at a little over $4 billion (excluding GST) against an annual value of official retail sales of approximately $49 billion.
Customers are always going to want to visit physical stores, says Conway.
“It’s not really going to be an immediate impact across the board with people going out of business left, right and centre. It’ll take a few years,” he says.
“They’ve got time. They’ve got time to do what they need to do to make their business more resilient, and the sooner they start really looking after their customers, the better.”
“They’ve got time, but if they delay, they’re in trouble.”
This story originally appeared in NZ Retail magazine issue 753 December 2017 / January 2018.