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Vested EquitiesResearch
20 APRIL 2017
THEMATIC INVESTING
AMAZON’S IMPACT ON AUSTRALIAN RETAILERS
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We have fielded numerous questions about the
impact of Amazon’s imminent entry into the
Australian retail market. Given most Australian
investors will have some exposure to Australian
retailers in their portfolios (Wesfarmers,
Woolworths, Harvey Norman, JB Hi-Fi etc), we
deem it important to address the issue. In this
note we address Amazon’s impact on Australian
retailers and how investors could potentially
position their portfolios. The Amazon threat is
very real and, given the US experience (significant
job losses / earmarked store closures), we believe
some retailers are better placed than others. In
any case, we do expect redistribution of revenue
and margin pressure among the incumbents as
Amazon builds up scale, but there are also
mitigating factors which the incumbents can
utilise to buffer their businesses. Post this review,
we have maintained our key picks in the sector.
Who is Amazon? Amazon (or Amazon.com) is a US based
e-commerce company founded in 1994 by current CEO
Jeff Bezos. The Company sells a wide range of products
– beauty, electronics, jewellery, appliances, books, toys,
pet supplies etc - through its website directly to
consumers (Business-to-Consumer). Essentially, if the
product can fit in a small box and easily transported,
Amazon.com is likely to have it. Among its significant
product range, the website offers customised buyer
experience and value for money (low prices) – Amazon
prides itself on being an “obsessively” customer centric
company. The Company operates its own warehouses
and while Amazon.com sell its own products, it is also a
re-seller of other brands. That is, large and small retailers
can utilise Amazon.com as a distribution channel.
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Why is Amazon coming to Australia? Amazon already
makes between A$500-700m in revenue per annum
from Australian consumers, therefore it already has a
captured market in Australia. Additionally, Australia is
an attractive market given a high proportion of middle
class, concentrated population and increasing internet
penetration. However, it should also be highlighted that
from 1 July 2017 Australia will levy its 10% Goods and
Services Tax on online purchases made overseas.
Previously the A$1,000 personal consumption
exemption meant it was very attractive for consumers to
purchase from overseas website and not incur an
additional tax (GST). We wonder if the change in
legislation has fast tracked Amazon’s plans to protect its
existing revenue base in Australia and the maturing
penetration in its key global markets has meant it is
looking for new markets.
How will Amazon hurt the Australian retailers?
Amazon’s significant product range and focus on low
prices will likely impact the Australian retailers in three
main ways – increased competitive pricing, revenue
leakage in exposed categories and impact on margins
from negative operating leverage (high fixed costs). For
our analysis, we consider: food (WES/WOW),
clothes/accessories (PMV/MYR), electronics/bulky
goods (HVN/JBH) and auto accessories (SUL/BAP).
Unsurprisingly to most, the electronics category is the
most exposed and likely to be Amazon’s initial focus.
What is the likely response from the Australian
retailers? In our view the Australian retailers are likely
to combat Amazon at the pricing level (in the hope to
retain and even grow volumes), increased focused on
customer experiences/value add services (give
customers reasons to come in-store), increased
investment on online capabilities and perhaps adapt
their business model (that is, we wonder if an aggressive
store roll-out strategy is the best growth option going
forward?)
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Who is best placed among Australian retailers?
Vertically integrated players (Premier Investment
Group), low cost producers and larger focus on bulky
goods, in our view.
Global consumer trends...
lessons for retailers?
A recent global survey conducted by McKinsey & Company
provides interesting insights into the changing behaviour
of consumers. These insights are also relevant for the
domestic market but also provide some insights to how
incumbent retailers could approach the Amazon threat.
The Company conducted a global survey of over 22,000
consumers from around the world (26 countries) to better
understand changing consumer buying behaviour, as
relevant for retailers and packaged-goods companies.
The key findings from the survey were: (1) the new
consumer proactively searches for savings; (2) the new
consumer is loyal to particular brands but price does come
into consideration; (3) the new consumer is unlikely to
return to a particular brand once they trade down; (4) the
new consumer will splurge on certain categories; (5) the
new consumer will shop across channels.
The main message from this survey is the desire for “value
for money”. The global financial crisis has forced
consumers to become more frugal; exposed structurally
challenged industries (and therefore jobs); and reshaped
others to become more efficient (mostly through the
adoption of technology). In our view, the implications from
the key findings of McKinsey & Company’s survey are
already being played out in the retail industry. Key points
for consideration:
Competition has significantly increased since the GFC,
as retailers are competing for a more money conscience
consumer. That is, “sales” or “mark downs” is now an all
year around phenomena. Price comparison across
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channels (and geographical boundaries) has meant that
consumers are more switched on to being charged
premium prices for overseas brands. The once very
strong Australian dollar meant overseas websites
offered much better value for the same product than in
Australian stores. However, even the decline of the
Australia dollar has not deterred consumers from
websites like Amazon to purchase certain items. This
has meant price deflation across many categories is now
a norm. We believe incumbents in Australia will likely
need to match Amazon on price (or increase the value
proposition) to compete effectively.
Consumers have considerably shifted their spending
towards online (some just pure online plays) – both for
getting the best deals but also convenience. Companies
must have a credible online presence and offering to
compete in the world of the new consumer.
“Generic” retailers no longer work. That is retailers must
have a very clear value proposition and know exactly
who their target consumer is. This also means investing
significant amount of resources (e.g. have established
analytical and revenue analysis teams) to understand
the attributes and behaviour of their target consumer.
Brands matter but at reasonable price. The survey
indicates consumers are not necessarily shy of paying
up, but they need to see value. If the price is not justified,
then as the survey indicates, once consumers trade
down (or to an alternative) companies will find it difficult
to bring them back.
Who is Amazon?
Amazon (or Amazon.com) is a US based e-commerce
company founded in 1994 by current CEO Jeff Bezos. The
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Company sells a wide range of products – beauty,
electronics, jewellery, appliances, books, toys, pet supplies
etc - through its website directly to consumer (Business-to-
Consumer…B2C). Essentially, if the product can fit in a
small box and easily transported, Amazon.com can sell it.
Among its significant product range, the website offers
customised buyer experience and value for money (low
prices). The Company operates its own warehouses and
while Amazon.com sell its own products, it is also a re-
seller of other brands. That is, large and small retailers can
utilise Amazon.com as a distribution channel.
Figure 1: Amazon business model
Source: Digital Business Models Guru, Business Model Canvas
Amazon receives a commission on each sale – between 10
to 15% - and can also charge additional listing or
subscription fees.
Why Australia? In our view, the following reasons are the
main drivers why Amazon is interested in Australia (much
of these shouldn’t come as a surprise to most investors):
High internet penetration and increasing penetration of
online sales. Further access to high speed internet
connection also helps drive online traffic.
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High disposable income. Relative to other parts of the
world, Australia has a healthy middle class and
disposable incomes remain attractive.
Population is concentrated around key coastal cities.
This helps companies which require distribution
channels to move their products. Hence Amazon can get
maximum leverage from fewer distribution warehouses.
Amazon already derives revenue from Australia.
Australian consumers are already warm to online
shopping and Amazon already has a following in the
local market. It has been reported, Amazon already
makes between A$500-700m in revenue per annum
from Australian consumers.
Australians are already shopping on Amazon.com. It is
worth reminding investors, Amazon already makes
between A$500-700m in revenue per annum from
Australian consumers. A recent survey conducted by
Neilson of ~1,500 Australians, indicated 27% of respondents
were aware of Amazon Prime (online video streaming
service) and 38% of respondents were aware of Amazon.
Further, 75% of the respondents said that they were
interested in Amazon Australia and 56% are likely to
purchase from this site.
Electronic goods appear to be the most likely impacted
category from Amazon’s move into Australia. According to
the survey, products which are most likely to be bought on
Amazon’s Australia site are: electronics (67%), books (61%),
clothes (59%), shoes (42%), music (36%), videos (32%),
packaged groceries (18%), fresh vegetables (9%) and fresh
meat (7%).
When is Amazon likely to open in Australia? We have done
some snooping around (e.g. industry experts, consultants
carrying out potential impact studies) to gauge an entry
date, but at present any date appears to be speculative
(most investors would have heard by now how Amazon is
“hiring hundreds of people”). In our view, it is safe to
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assume at the earliest it will be December 2017 (the all-
important Christmas shopping period), however it is more
likely to be sometime in 2018.
How will Amazon hurt
Australian retailers?
Amazon’s significant product range and focus on low
prices will likely impact the Australian retailers in three
main ways – increased competitive pricing, revenue
leakage in exposed categories and impact on margins from
negative operating leverage (high fixed costs). For our
analysis, we consider: food (WES / WOW),
clothes/accessories (PMV / MYR), electronics/bulky goods
(HVN / JBH) and auto accessories (SUL / BAP).
What is consensus presently forecasting? While there are
many moving parts to these numbers (acquisition impacts,
non-discretionary business mix, one-offs etc), what we
want to highlight as a key takeaway is that neither margins
or revenue is expected to fall off the cliff – particularly for
the stocks we cover or are positive on. HVN is the only
stock for which consensus expects revenue to go
backwards in FY19e, by which time Amazon is likely to be
in advanced stages of cementing its Australian operations.
Figure 2: Consensus estimates for selected retailers
Source: Bloomberg, BTIG
Category specific comments and our rating of exposure to
the Amazon threat (High / Medium / Low):
Current EBIT Margin EPS Growth Revenue Growth
Select Australian Retailers Price FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
JB HI-FI LTD 25.05 5.4% 5.2% 5.3% 22.5% 10.4% 6.7% 41.4% 21.3% 4.8%
HARVEY NORMAN HOLDINGS LTD 4.36 17.7% 18.3% 19.0% 18.0% 3.2% 1.7% 76.4% 2.8% -1.2%
MYER HOLDINGS LTD 1.19 3.6% 3.9% 4.1% 3.4% 11.0% 5.9% 17.1% 0.9% 1.1%
PREMIER INVESTMENTS LTD 14.20 12.5% 13.2% 14.0% 8.4% 13.8% 13.9% 6.1% 8.7% 9.2%
SUPER RETAIL GROUP LTD 9.92 8.3% 8.7% 9.0% 21.9% 13.5% 11.2% 0.9% 6.3% 6.1%
BAPCOR LTD 5.39 9.5% 9.7% 10.2% 36.9% 26.2% 13.4% 56.2% 34.7% 4.5%
WOOLWORTHS LTD 26.47 4.2% 4.5% 4.7% -45.3% 10.6% 6.9% -1.5% 2.4% 3.2%
WESFARMERS LTD 45.14 6.5% 6.3% 6.3% 30.4% 0.8% 4.9% 5.1% 4.0% 4.3%
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Electronics, books & media (HIGH). These categories are
typically Amazon’s go to segments when entering most
markets. In this regard, JB Hi-Fi and other electronics
retailers are most exposed. Harvey Norman also has a
substantial electronics’ offering. We expect price
competition to increase within this category, as
consumers will likely shop for value and compare price
discrepancies across channels.
Bulky goods (LOW). In our view, the least exposed to the
Amazon threat is the bulky goods category. Not only are
these much harder to transport, they also require
significant distribution channels. Also, given the price
point for these products tend to be higher relative to
other categories, in our view, consumers generally want
to ‘look and feel’ before purchasing. With its recent
acquisition of The Good Guys, JB Hi-Fi is well placed.
Discount Department Stores (DDS) (MEDIUM). We think
the impact to DDS will be mixed and will come down to
value proposition. We note most DDS have moved to
everyday low price business model (such as Target, Big
W and Kmart) and, in our view, are not over-earning. We
see companies such as Myer (MYR) at greater risk –
especially in the cosmetics category (which is a higher
margin) – who don’t own all their brands but act more
like a brick and mortar ‘marketplace’. Myer introduced
Myer Exclusive Brands (MEB) for this very reason,
however we note at its 1H17 results, MEB sales were
down 11.6%. Further, the Company has struggled to get its
online offering right and remains less than 5% of group
revenue.
Consumer staples – food (LOW). In our view, this
category is less exposed to the Amazon threat. It is our
understanding that Amazon will look to offer packaged
groceries and eventually move into the fresh segment.
However, the survey conducted by Neilson indicated
that there was less enthusiasm from consumers to
purchase these products from the Amazon Australia
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website – packaged groceries (18% of respondent said
likely to buy online), fresh vegetables (9% of
respondents) and fresh meat (7% of respondents).
Further, we note the major supermarkets have a strong
loyalty and fuel card programs, which provided some
buffer.
Auto-parts (MEDIUM). We are not totally convinced that
all auto-part retailers (including aftermarket parts &
accessories) are equally exposed to this threat. In the
case of Bapcor, which derives a large part of its business
from trade sales (that is selling parts to mechanics) the
ability to talk to an expert on specific parts over the
phone and then have them delivered within hours is a
highly complex distribution model. Further, the costs of
these parts are a straight pass-through to the client,
hence the cost of the part is a not a major consideration
in the purchasing decision.
How will Australian retailers
respond to Amazon?
Amazon’s significant product range and focus on low
prices will likely impact the Australian retailers in three
main ways – increased competitive pricing, revenue
leakage in exposed categories and impact on margins from
negative operating leverage (high fixed costs). We discuss
each below.
Increase / improve respective online offering. Online retail
penetration remains very low in Australia relative to other
key markets. Australia has penetration of less than 4%,
which is much lower than 14% for the U.K. and 12% in
China. Within our coverage, JB Hi-Fi’s online penetration is
actually equivalent to the national average.
Figure 3: Online retail penetration for key regions (%)
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Source: BTIG, Bloomberg
Adapting business model for the new world. Many
retailers supplement organic growth (like-for-like sales)
with a store roll-out strategy. In our view, the Amazon
threat should provide management teams of incumbents
to re-evaluate indiscriminate “land-grab” strategy. As we
are now finding in the US, household names such as
Macy’s is looking to shed 10,000 jobs and close hundreds of
stores as consumer shift online. We expect local retailers to
take a proactive approach to store network rationalisation,
rather than a (forced) reactive one.
Strong sourcing capabilities. In our view the better placed
retailers already have strong product sourcing teams in
place.
Who is best placed among
Australian retailers?
In our view, companies which are vertically integrated
players (Premier Investment Group), low cost producers
and more focus on bulky goods (The Good Guys) should be
well placed to weather an increased competitive
environment. However, we note they will not be completely
immune.
Vertically integrated. That is, companies who manufacture
and market their own brands are better placed to withstand
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increased competition, such as Premier Investment Group
(PMV). PMV’s management pointed out that they believe
they are well placed relative to peers for the imminent
entry of Amazon to the domestic market. They noted that
PMV designs, sources and supplies all its own brands.
Therefore, it will all come down to its brand power. Further,
PMV has a growing global exposure (away from Australia)
which should also provide it with some buffer. PMV already
competes with Amazon, given the Company’s strong
online sales growth in Smiggle in the UK where Amazon
has a strong market position. PMV sells its strong market
brands of Smiggle and Peter Alexander via its distribution
channels (and not eBay or Amazon), which should provide
buffer to the Company.
Strong loyalty program / value added services. Incumbents
must consider strong loyalty programs and increased
value-add services to attract (or even keep) consumers. As
noted above, we highlight as an example the strong loyalty
/ fuel discount program the major supermarkets
(Wesfarmers) operate.
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PE-multiples charts for key
retailers – is the Amazon
effect in the price?
Figure 5: JBH PE-multiple vs long-term average
Figure 6: HVN PE-multiple vs long-term average
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Figure 7: PMV PE-multiple vs long-term average
Figure 8: MYR PE-multiple vs long-term average
Source: Bloomberg, BTIG
Figure 9: SUL PE-multiple vs long-term average
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Figure 10: BAP PE-multiple vs long-term average
Figure 11: WES PE-multiple vs long-term average
Figure 12: WOW PE-multiple vs long-term average
Source: Bloomberg, BTIG
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