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A Data Driven Analysis of the Competitive Effect of Amazon’s entry into Australia

Executive Summary

This report is written to show how, using data driven decision-making, business can make relevant and timely decisions about one of its largest threats to come into Australia – Amazon. Data is gathered from diverse sources to show that while some threat does exist, the predictions of calamity in the Australian landscape cannot be justified. On all indications, business can expect Amazon to capture 10% of the market, but taking advantage of the many opportunities that exist (as explained in this article) could see increased business arising from Amazon entering the Australian landscape.

Introduction

Amazon announced in April 2017 that they would be launching operations into Australia in 2017 offering an expanded range of products from an Australian web platform along with distribution centres in every Australian state. On December 5, 2017 after months of speculation, Amazon launched into Australia. Prior to the launch, Australians could shop on Amazon using the American platform (amazon.com) but customers shopping for physical product could experience long delays plus expensive shipping costs. Australian customers shopping on the US site also experienced price increases through the exchange rates between the US and Australia making some products uncompetitive. Before December the 5th 2017, Amazon in Australia sold kindle books, audiobooks and reading devices (via a third party) from its Australian website amazon.com.au and since the launch sells a much larger range of products.

Throughout 2017, Australian retailers were concerned about the business impact that Amazon would have. Analysts at Stanley Morgan, the US investment banking firm, highlighted news report stories of doom and gloom for Australian retailers by dubbing Amazon ‘the country killer’ (MandyBur, 2017). Justin Braitling, chief investment officer at Watermark Funds Management, an Australian equity funds manager, warned that Australian retailers will be hit with downgrades to their earnings due to the launch of Amazon (Braitling cited in Boyd, 2017). An unnamed spokesperson at Amazon stated to Boyd (2017),

We are going to destroy the retail environment in Australia

Paul Krugman, Distinguished Professor of Economics at the Graduate Center of the City University of New York, argued that Amazon has too much power and uses that power in a way that is harmful by entering the market with low prices and driving out the competition, using, as Krugman suggests, ‘robber-baron-type market power’ (Krugman, 2014). According to IBISWorld senior industry analyst Kim Do, Amazon ‘intends to challenge domestic retail prices by offering items for 30 percent less’ (Reilly, 2017). Research by Nielsen found that 75% of Australians aged 18 and over are ‘interested’ in buying from an Amazon Australia website, and that 56% are ‘likely’ to buy (Richards, 2017). As Morgan Stanley reports,

Amazon’s entry in Australia will have a profound impact on the Australian retailing industry, in our view, as it has had on most markets (Pash, 2017)

This article analyses the entry of Amazon into Australia using a traditional SWOT analysis methodology using data driven decision making to make a value judgement as to whether Amazon is truly a danger as suggested by commentators to Australian retailers. Further consideration is given as to what strategies retailers can use to meet the intense competition that Amazon will bring to the environment. This article will also highlight the opportunities and threats that Amazon will bring to Australian retailers.

Background

Amazon commenced operations in 1994 as an online book seller and quickly rose to be the world’s largest internet retailer in terms of both revenue and market capitalisation. Amazon diversified under the concept of founder Jeff Bezos to be the ‘Everything Store’ (Stone 2013) and now sells across the whole range of retail inventory items, from apparel to software, and from furniture to foods.

Jeff Bezo’s philosophy that Amazon would become the ‘unstore’ Stone (2013) which meant Amazon would not be constricted to follow the normal rules of the retail industry. Bezo’s philosophy was to offer low prices always combined with great service to become every store or an ‘unstore’. Amazon also allow third party sellers, predominantly small business, to sell their goods on Amazon in an ‘ebay like’ experience. Amazon has expanded internationally rapidly in the last few years opening operations across 13 countries.

The Business Data

To make relevant business decisions upon the entry of Amazon to Australia we need to consider the data to rely upon. Data such as revenue online sales vs Amazon’s share, and examples of Amazon’s international expansion are some of the data to look at. Australian consumers already spend between $500 to $700 million dollars shopping on the American Amazon site and research indicates that now Amazon has launched in Australia this spending could expand to $3.5 to $4 billion in sales within the next five years, capturing around 14% of all online sales (Bogle, 2016).

This data suggests that the total ‘pie’ available is therefore expanding. Rather than take customers from each competitor, business can take advantage of the overall increased custom. In terms of market share though, research by UBS, an American investment firm, indicates that Amazon is only likely to take about 2% of total retail sales (Mitchell, 2017). Before its launch into the Australian market, Amazon already made about one third of its Australian sales from third party retailers who sell on the Amazon market place. In Australia eBay captures about 22% of all retail online sales (Bogle 2016) and therefore the market place platform could have an effect upon eBay within Australia with minimal impact upon Australian retailers considering that eBay currently operate here.

Australian shoppers have also embraced online shopping in the last decade with revenue increasing by 21% from 2013 until 2017 alone to now stand at $32.56 billion dollars (Specommerce, 2017). With a large number of consumers already shopping online traditional bricks and mortar retailers have been experiencing increased competition for years.

Amazon offers a wide range of products via amazon.com.au the website of Amazon selling across the whole range of merchandise, which also includes Amazon Marketplace the ‘ebay like’ platform that allows other retailers to use Amazon’s platform for a fixed fee in order to sell their goods. Amazon also launched Prime Video in 2016 to rival Netflix and Stan although the impact within Australia so far has been minimal.

Amazon music unlimited is a service that essentially competes with Apple music, and Amazons smart assistant to compete with Apples Siri, and Amazon Fresh – Amazon’s grocery and fresh food delivery service. The fresh food delivery service has seen remarkable success in the US and UK but has not been introduced in Australia and is probably some time away from being launched due to the logistics of delivery.

In terms of the impact upon Australia it would be beneficial to determine the impact that Amazon has had on its expansion into other countries in recent years – looking at historical facts can be an indicator of future events. Amazon launched into Canada in 2012, under very similar circumstance to its launch into Australia. Both Canada and Australia have similar demographics.

Amazon Canada is Canada’s largest e-commerce business according to analysists. BMO estimates the Seattle-based retailer and operator of Amazon.com and Amazon.ca generated just over $3.5 billion in Canadian e-commerce sales in 2016, up from an estimated $2 billion in 2014 (Shaw, 2017) However, according to research by AT Kearney, Amazon has had a slower rollout of categories of products (similar to Australia) which has affected its market penetration.

Amazon Canada has been losing market share and also lagging behind the general level of online participation to have only 10% penetration (down from 15% in 2002). AT Kearney opinions that domestic and foreign retailers have successfully strengthened their competitive advantages in response to Amazon (Kearney, 2017). For instance, Walmart Canada is strongly competing with Amazon particularly since Walmart has a large traditional shopfront presence. Kearney (2017) has found that the effect of Amazon on traditional Canadian retail business has not been as large as predicted; Amazon is not taking customers away from traditional big retailers, at least not to the extent that analysts had predicted.

BMO analysts report that expected discounts from Amazon have not eventuated and that Canadian retailers have not seen any ‘significant negative impact on their revenues’ (Sturgeon, 2015) due to Amazon. AT Kearney have also predicted that Amazon would at the most achieve a similar market penetration in Australia similar to Canada of around 10% of online retail and approximately 1% of total retail sales (Kearney, 2017).

From examining the data, Amazon’s entry into Australia, while of concern to existing retailers, should not be seen at the level of complete business destruction. Business would do well to prepare for increased competition by undertaking a SWOT analysis of the external environment – in effect looking at the opportunities and threats that Amazon bring to the market and formulating responses to them. The next section highlights those threats and opportunities and the responses to improve business practice and therefore business strategy.

An Analysis of the Threats and Opportunities

Threats:

The major threat identified from Amazon is its ability to cut prices beyond what its competitors can offer. However, looking at the data with examples from overseas it appears that Amazon’s ability to price-cut may be limited internationally. In 2012, Amazon launched into India under the website Junglee.com (Roy & Chakraborti, 2014). India, with a population of over a billion people and an increasingly technically savvy young population, this move should have been extremely lucrative for amazon. But the launch in India saw Amazon lose $936 million in the September (2012) quarter alone as it faces intense competition from Flipkart, an Indian e-commerce business in direct competition to Amazon (Salman, 2017). Internal losses have increased 73% year on year since 2012. The argument is that Amazon cannot continue to expand internationally and keep attributing losses – it is unsustainable. In fact perhaps Amazon have learnt that lesson - the launch into Australia was reported to be disappointing to consumers with large price discounts failing to eventuate. As the data indicates, Australian business may lose 10% of the market and therefore policies and procedures should be put into place to prepare for that eventuality. The next section discusses the many opportunities available to mitigate this expected loss of market.

Opportunities:

Collaboration: There can be quite large advantages in collaboration between competitors (or what Ritala et al. (2014) calls ‘coopetition’). Ritala et al. (2014) have found numerous examples of business cooperating with Amazon and gaining benefits over and above that which they could achieve alone, by sharing technology, taking advantage of high impact marketing and sharing risk. Amazon has driven consumers online and by sharing the Amazon technology, local business can take advantage of the added benefits coming from online sales. Business would do well to establish whether they could use Amazon’s marketplace platform to enhance their own goods and service placement delivery. In fact it is not just with Amazon that opportunities abound - Australia Post is now using parcel lockers at Woolworth’s stores and railway stations in order to decrease postage delivery times and beat Amazon in the delivery stakes. Australia Post have also launched Shipster to become a competitor to Amazon Prime. The final achievement is to beat Amazon in what is known as the last mile, that is the delivery of the goods to the customer in the fastest and cheapest way possible. All physical products need to be transported and the trick is to make it easier for the customer to get the product than it is to get Amazon’s product. Coles for instance recently had a trial whereby Uber drivers were getting paid to deliver groceries to its customers – a further example of collaboration between businesses.

Establishment of a strong online presence: For several years both Woolworths and Coles have offered online shopping and delivery of groceries. Having a strong online presence is critical in maintaining a competitive advantage over Amazon. It was this technological advantage that gave Amazon its start. Amazon were selling books over the internet a year before its nearest competitor, Barnes and Noble, even had an ‘about us’ website operating. Amazon is an innovator: being an innovative business will give a competitive edge.

Conclusion

Far from being “Amazoned” and the Australian retail environment destroyed as suggested by some commentators, an analysis of the data indicates that the entry of Amazon should be embraced, not feared. The prediction is that Amazon would take 10% of the market across the retail environment. However the total ‘pie’ is predicted to expand, meaning that business that is prepared for an e-commerce world would see increased sales and be an effective competitor to Amazon.

References

BOGLE, A. 2016. If all goes to plan, Amazon might be the messiest tech story of 2017 [Online]. Mashable Australia. Available: http://mashable.com/2016/12/07/amazon-arrival-australia-impact/#FB4gR6xTWOqy [Accessed 14/12/17 2017].

BOYD, T. 2017. Amazon delays Australian launch to September to include fresh goods [Online]. Financial Review. Available: www.afr.com/brand/chanticleer/amazon-is-still-coming-but-delays-australian-launch-by-six-months-20161103 [Accessed 14/12/17 2017].

KEARNEY, A. 2017. Amazon is coming are you ready?: AT kearney.

KRUGMAN, P. 2014. Amazon's Monopsony is not OK [Online]. Available: https://www.nytimes.com/2014/10/20/opinion/paul-krugman-amazons-monopsony-is-not-ok.html?_r=0 [Accessed 14/12/2017].

MANDYBUR, J. 2017. It's official: Amazon is hitting Australia and local competition is probably screwed [Online]. Mashable Australia. Available: http://mashable.com/2017/04/19/amazon-confirms-australia-expansion/#weMdI9irpaql [Accessed 14/12/17 2017].

MITCHELL, S. 2017. Amazon entry to Australia will hit retailers, landlords and economy: UBS report [Online]. Australian Financial Review. [Accessed 14/12/17 2017].

PASH, C. 2017. THE AMAZON EFFECT: Morgan Stanley on the 'profound impact' the Jeff Bezos juggernaut will have on Australian retail Business Insider.

REILLY, C. 2017. Welcome to the Jungle: What to expect from Amazon Australia [Online]. c|net. Available: https://www.cnet.com/au/news/welcome-to-the-jungle-what-to-expect-from-amazon-australia/ [Accessed 18/12/17 2017].

RICHARDS, D. 2017. NewNielsen Amazon Research, A WakeUpCallFor Retailers [Online]. Channel news. [Accessed 18/12/17 2017].

RITALA, P., GOLNAM, A. & WEGMANN, A. 2014. Coopetition-based business models: The case of Amazon.com. Industrial Marketing Management, 43, 236-249.

ROY, S. K. & CHAKRABORTI, R. 2014. Case Study 6: Junglee. com: Amazon’s Entry in India. Marketing Cases from Emerging Markets. Springer.

SALMAN, S. 2017. Amazon’s loss jumps to $936 million in September quarter on India business [Online]. Livemint. Available: http://www.livemint.com/Companies/7uHnnB7jS7aUk4i4V2adSO/Amazons-loss-jump-to-936-million-in-September-quarter-on-I.html [Accessed 18/12/17 2017].

SHAW, H. 2017. e a more 'pressing threat' for Canadian retailers than its Whole Foods acquisition: BMO [Online]. Financial Post. Available: http://business.financialpost.com/news/retail-marketing/amazons-prime-a-more-pressing-threat-for-canadian-retailers-than-its-whole-foods-acquisition-bmo [Accessed 18/12/17 2017].

SPECOMMERCE 2017. eCommerce in Australia: 10 key insights. eMarketer.

STONE, B. 2013. The everything store: Jeff Bezos and the age of Amazon, Random House.

STURGEON, J. 2015. Amazon isn't keeping Canada's big retailers up at night: report [Online]. Gloabl News. Available: https://globalnews.ca/news/2313023/amazon-isnt-keeping-canadas-big-retailers-up-at-night-report/ [Accessed 18/12/17 2017].

Developed for the Practice and Portfolio Program for the Associate Degrees, University College, Robert Lewis, 26th January 2018.

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