Australia focus
Retailers already feeling the impact of Amazon
US retail giant Amazon is a few months away from starting in Australia, but its impact is already being felt. Last week the float of stationery retailer Officeworks was pulled because of fears about the potential impact of Amazon on that company.
Officeworks’ owner, Perth-based conglomerate Wesfarmers, had hoped to raise about A$1.5 billion from the float, but was told by fund managers that price was overly optimistic. Wesfarmers has done a very good job growing the business, but fund managers were worried about how it would fare once Amazon entered the market.
After months of refusing to comment on speculation, Amazon confirmed the worst fears of retailers last month when it said it would roll out its full retail offering in Australia over the coming years.
It will move into electronics, clothing and shoes, sports and outdoors goods, as well as fresh food and is searching for warehouse space.
The Australian version of its website carries the words: “Amazon Marketplace is coming soon to Australia. Sign up to learn more about how you can start selling to millions of Australians with Amazon.”
It’s not clear exactly when Amazon will start its wider retail offering in Australia, but it’s likely to be a matter of months. This scares retailers and investors and, crucially for Officeworks and Wesfarmers, it will also be selling office supplies.
Officeworks has performed will since Wesfarmers acquired it a decade ago, doubling its annual earnings. Analysts believe it is on track to lift earnings by at least 6 per cent to $142 million this year and by 8 per cent to $153m in 2018. It also has a strong online offering, with free same-day deliveries for orders made before 11.30am.
The question is how much Amazon will eat into these earnings. Once shoppers are on the Amazon site, will they flip over to Officeworks or stick with the convenience of the single retail offering?
Another problem with the float is that it comes at a time of weak discretionary consumer spending, thanks to record low wages growth and higher living costs, which has spread through the retail sector.
Retail stocks across the sharemarket have fallen in recent weeks, prompting fund managers to further question the Officeworks pricing.
Wesfarmers and its advisers were placing a total value on Officeworks of 15 times its annual earnings (the price-to-earnings ratio). But following the recent declines in retail shares, investors were asking why they would pay 15 times for Officeworks when a retail star such as JB Hi-Fi is available at a share price equal to 12 times earnings.
Investors were also suspicious of Wesfarmers’ motives. The firm has a reputation as an astute trader of assets, buying low and selling high. And the company had no particular reason to sell. It certainly doesn’t need the cash, so there wasn’t a sense in the market that anyone would be getting a bargain. Retail stocks will bounce back from the poor sentiment so paying a bit too much for a quality asset needn’t be a disaster for longterm shareholders. But the prospect of Amazon entering the market poses a more worrying threat. It will revolutionise retail like nothing that has gone before it and investors are right to be wary.
Fairfax takeover
Two US private equity giants are fighting it out for control of media group Fairfax, throwing the future of its newspaper assets into doubt.
Late last week Hellman & Friedman offered between A$1.22 and A$1.25 a share for the company, topping the A$1.20 a share offered by TPG Capital.
Both companies want to get their hands on Domain, the online property listings group that is worth about A$2 billion and makes up the major part of the A$2.87b TPG is offering to Fairfax.
As a profitable and growing business, Domain had the potential to keep Fairfax afloat as its newspapers made the difficult transition from print to digital. Now, instead of saving Fairfax, Domain might now be the cause of its downfall.
Joel Thickens, the local Australian boss of TPG, told a Senate committee on the Future of Public Interest Journalism that he was committed to journalism and committed to the Fairfax mastheads, including the Sydney Morning Herald, the Melbourne Age and the Australian Financial Review. (Fairfax also owns newspapers in New Zealand, but these never get a mention in debates about the importance of viable journalism, which goes to show what happens when a foreign company buys key media assets.)
However, experience tells us that private equity is committed to profit and profit only. It is hard to imagine they would hold on to a part of the company which, for all of the public good it might do, doesn’t make a profit.
TPG says it would hold Fairfax for four or five years, the same amount of time it holds other investments, and then sell the company, presumably for a profit. Whether it still has newspapers and mastheads to be sold remains to be seen.