Amazon boom is not retail’s doom

Amazon faces challenges in its entry to the Australian market that it has not had before, says Louise Grimmer

The announcement last week that Amazon had acquired the up-market organic grocer Whole Foods in the United States sent analysts into a frenzy, and saw supermarket and food retailing shares drop in the US and here in Australia.

Whole Foods operates 460 stores across 42 states in America and it is anticipated that Amazon will use the bricks and mortar stores to provide distribution locations and pick-up points for their Amazon Fresh offering.

While the deal is worth US $13.7 billion, it is important to keep the acquisition in perspective.

If we adjust the scenario to take into account Australia’s population the deal is the equivalent of just 34 stores with a $1.5 billion turnover in Australia.

Whole Foods have just a 1.2 per cent share of the US food market, so in reality Amazon have purchased a retail ‘footprint’ rather than products or logistics capability.

Amazon’s grocery aspirations are relatively modest — in the US online grocery sales still only account for two per cent of overall grocery spend.

The same applies in Australia where supermarket retailing is completely dominated by a powerful duopoly — 70 cents out of every dollar spent in Australian supermarkets is spent at Coles or Woolworths.

My prediction is it will not be all plain sailing for Amazon to set up in Australia and enjoy the same economies of scale that the behemoth commands in America, the United Kingdom and increasingly in a number of developing nations.

While Amazon captures one in every two dollars spent online in the United States, they may face an uphill battle establishing their business model in a timely and effective manner when they enter the Australian market, expected to be some time in early 2018.

First, we have a relatively small population of just 24.5 million, compared with 320 million in the United States.

Although both countries have a similar land mass, the population in Australia is much more geographically dispersed and this will make setting up an efficient distribution network a significant challenge for Amazon.

Although in larger cities such as Sydney, Melbourne and Brisbane, Amazon will find it easier to ensure their promised fast delivery, in smaller population centres and regional areas this will prove a much more difficult proposition.

It has been said that Amazon does not just disrupt retail, it disrupts logistics.

That may be so in countries with concentrated populations, but in places like Tasmania, Western Australia and Far North Queensland it is unlikely that Amazon customers will enjoy one or two day delivery for general merchandise, let alone two hour delivery.

Distribution centres need to be located close to transport routes (air, road and rail) and this will be difficult in many regions.

In terms of Amazon’s grocery delivery aspirations in Australia, it is unlikely that this will take off in many areas around the country given the vast distances to cover, and the fact that many online grocery items are perishable.

Second, Australians still only spend between seven and nine per cent on online shopping.

The most popular products purchased online are electronics, sporting and outdoor equipment, clothes, shoes and entertainment products.

Many people do not want to shop online, they prefer to shop in-store even if they may have researched products online first.

Of course the reverse is true as some shoppers head instore to appraise products prior to online purchase, but there is clearly a groundswell towards shopping locally and supporting small, independent retailers whenever possible, particularly here in Tasmania.

The final challenge is the higher cost of doing business in Australia compared with many of the other countries in which Amazon operates.

The relatively high costs for acquiring land, warehouse facilities, distribution networks, transport and logistics as well as higher wages and generous working conditions will all be significant factors for Amazon setting up in Australia.

As Tasmanians we need to think about what sort of cities and towns we want to live in, because in the end the way we choose to shop has a significant impact on the streetscape, the retail mix and the sense of community in our towns and centres.

Yes, Amazon is coming to Australia and it will mean that many products will be readily available, possibly at cheaper prices and with improved delivery times.

This will be a challenge for many of the larger established chain stores, especially those selling electronics and clothing but for many independent retailers Amazon will likely not have the impact that many are predicting.

It will be important for small retailers to continue to provide the highest levels of personalised customer service, a variety of offerings, niche and specialised products and to make the experience of shopping as enjoyable and easy for customers as possible.

This will mean that some small operators will need to become much more visible on social media and even provide products online.

Retailers have for a long time adapted to meet changing market conditions and new technologies, and the digital disruption that Amazon and other large online platforms bring to the industry mean that retailers and customers alike should be mindful of the impact we can have on the future of retailing in our state.

Dr Louise Grimmer is a retail researcher in the Tasmanian School of Business and Economics at the University of Tasmania. She has owned and managed a number of small retail businesses.