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Australian retailers resilient as they face down 'Amazon effect'

The threat of Amazon’s growth in Australia is spooking investors.
The threat of Amazon’s growth in Australia is spooking investors. Photograph: Aaron Chown/PA

Three months after the launch of Amazon in Australia, local competitors say they are still waiting for the dreaded “Amazon effect” to hit their sales.

Analysts, and some of the retailers themselves, say they are still as profitable as before Amazon’s “underwhelming” launch – for now.

On the stock market, where investors tend to have one eye firmly on the future, it’s a different story.

On Monday, high-performing local retailer JB Hi-Fi released a half-yearly update: growing profits, a steady market share, a drop in profit margins and disappointing results in New Zealand. As a result, its stock dropped 7.5% in the first three hours of trading – the company’s biggest volume of stock traded since 2016.

The day illustrated the fears investors have about the Amazon effect, despite the resilience of local retailers’ sales figures.

Kim Do, a senior industry analyst at Ibisworld, said the global giant had not yet actually affected retailers, with an undeveloped supply chain holding prices high enough to keep customers away.

Amazon launched just three months ago and has only one fulfilment facility, or warehouse, in Dandenong in Victoria.

“Amazon is not directly affecting retailers as yet,” Do said. “We believe that it can hurt share prices more than earnings performance.”

She said the threat of Amazon’s growth in the future was spooking investors and dampening stock prices, while not affecting sales.

On Monday, JB Hi-Fi announced its net profit grew 21% over the six months between July and December last year, with online sales surging 40%.

But its chief executive, Richard Murray, said the company was consciously discounting its products in order to stay competitive with Amazon. As profits rose in total, the profit margins dropped 20 basis points, which Murray said was a result of selling more low-profit items such as computers and phones and less high-margin DVDs, CDs and software.

“There is a lot happening in our market, so we just want to make sure we’ve got the firepower to remain competitive,” he said. “We’re aware of Amazon and others and what they’re doing in the market and we want to put our best foot forward.”

Do said this had caused the slide despite JB’s good performance.

“They’ve been employing a discounting strategy to continue growing at the pace they’re at. This may concern some investors who might believe this is not a sustainable way to grow.”

JB Hi-Fi
JB Hi-Fi has been discounting its products in order to stay competitive with Amazon. Photograph: Dean Lewins/AAP

JB Hi-Fi’s stock dropped to a low of $25.86 on Monday, before recovering slightly. However, the stock had risen 16% since Christmas after strong holiday sales.

In the hardware sector, the Australian reported on Monday that suppliers currently tied to Bunnings Warehouse were asking the company if they could also begin supplying Amazon.

The chief executive of Bunnings, Michael Schneider, told the paper he “welcomed” the “highly competitive environment”.

“We view our supplier relationships as a partnership … we appreciate and understand they have their own business plans and respect any decisions they make as part of this.”

Do said the future impact of Amazon was difficult to predict, due to how little time it had spent in Australia, and hinged on its ability to set up supply chains.

“The biggest challenge will be adapting to the Australian market in terms of distribution,” she said. “Our population is very dispersed, unlike the home market in the US, where distribution costs are much lower.

“It’s really uncertain at the moment. We are expecting them to open a lot more fulfilment centres by mid to late this year.”

Amazon told Guardian Australia it could not provide any figures for the company’s current market share, sales or profits in Australia, or plans for the future.

This article titled "Australian retailers resilient as they face down 'Amazon effect'" was written by Naaman Zhou, for theguardian.com on Tuesday 13 February 2018 11.19pm

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