I’ve been reading a lot about Amazon and trying to work out what the impact could be for businesses in Australia as they build out a presence in distribution and potentially retail that could rival even the largest of our local brands.
There has been speculation about Amazon setting up distribution warehouses in Australia since 2012 (ref: SMH) but it looks like it will happen within the next 12 months. Is 2017 the year that it is finally going to happen?
What does Amazon coming to Australia mean for local businesses?
It was reported thatby early 2018. Smart Office have hinted that ” and that retailers are preparing for the inevitable competition from Amazon.
This quote from Justin Braitling in the Australian Financial Review article sets the scene really well.
Justin is chief investment officer at Watermark Funds Management, is well informed about Amazon’s plans, thanks to a special briefing in the past week from the Amazon person responsible for rolling out the Australian strategy.
“They [Amazon] will be dropping distribution centres and performance centres in every state next year,” Braitling said.
“They will be doing general merchandise and they will be doing fresh as well.
“They will also be putting physical stores on the ground which I don’t think anyone knows about.
“These will mainly be in regional areas because fulfilment is a lot harder in regional areas than in the cities.
“We spoke to the guy rolling out Amazon’s business here in Australia and in his words: ‘We are going to destroy the retail environment in Australia’.”
Amazon has $US1 of every $US2 of e-commerce sales in the US and their market share is growing 20 years after it was founded by Jeff Bezos.
E-commerce is set to reach 20 per cent of sales in the US in 10 years and by that time Amazon will account for 10 per cent of all US retail sales, according to data prepared by Watermark.
Amazon is building a technology platform specifically for the Australian market which is designed to integrate with its international operations, according to the research undertaken by Watermark.
The Amazon platform will be under the online brands used elsewhere called Prime, Prime Now and Prime Fresh.
Watermark’s understanding is that prior to turning on its system, Amazon will go through and collect price-points on everything before setting prices at a 30 per cent discount.
The fund manager has been told that Amazon sees enormous potential in Australia because it believes prices are way too high. Amazon’s motto in relation to Australia is along the following lines: “Your margin is our opportunity”.
If you have investments in retail business stocks like Wesfarmers then I would really suggest you read the full article on the AFR.
Then come back to find out how I think this could be both an opportunity and a challenge to small business and online sales in Australia.
So now you have an idea of generally what to expect lets look at some key ways that Amazon can disrupt retail and online sales in Australia and the reasons why you are going to find it the most convenient and amazing service you have ever signed up for.
Amazon is hiring top level staff in Australia
Amazon has a data centre in Australia and has been hiring all sorts of experienced business experts to work in their local office. At the time of writing there are 107 positions with a range of qualifications and expertise in retail, networking, sales, executives, system engineers and more, ref: linkedin.
Online sales in Australia
Australia is a great market to tap, we have a country with a lot of gainfully employed people with houses and expenditure. We spend plenty of money with Coles, Woolworths, Aldi, Harvey Norman, Office Works, JB Hifi, Bunnings and others.
in 2016 Australians spent about 20bn online. Which is about 7% of the total retail sales. ref: AFR.
Online sales are growing by over 10% annually. It could easily be the case that by 2020 online sales in Australia could be over 30bn with 1/3 of that spending through Amazon.
Amazon they have a known level of demand by people in Australia to buy stuff on amazon.com. I’d speculate that there would be thousands of incomplete orders a month on Amazon by people in Australia who stop once they realise what the shipping cost would be.
Delivery and international shipping
Amazon has a marvellous history of incomplete orders that Australians have made and never completed the purchase of on account of the shipping costs to Australia.
Getting free or cheap delivery with Amazon is pretty easy. Either you join Amazon prime or you qualify for free because of the dollar value of an order. We can use the UK as an example of how Amazon deals with a country and distribution zone outside of the USA. ref: Amazon UK delivery costs.
Super efficient warehousing and distribution
Amazon is all about efficient distribution and delivery. A mesh of humans, robots and precision systems takes warehousing to a level of productivity that other businesses can only dream about. If you want to see how an Amazon fulfilment centre looks watch this video:
Amazon Prime is brilliant driver for repeat purchases with Amazon. In essence you get free fast delivery for a reasonable annual fee and there are some other benefits. Think about that for a second. It can take a lot to shift peoples purchase habits but when you can order a $5 item on Amazon as many times as you like and get free delivery that could change the way you think of online.
From a hands on perspective I already have this mindset towards ebay. If I’m looking for something on ebay I am generally not considering delivery cost as something I will have to pay. The cost is built in to the product and so it’s easy to forget that it is a cost.
This aspect of the Amazon services alone has an opportunity to create a big disruption for retail in Australia.
Look forward to the ‘Black Friday’ and ‘Cyber Monday’ sales taking off in a big way once Amazon has these events for Australian shoppers.
The cost to deliver products is one of the key impediments to sales for Australian businesses.
You can see the details of what Amazon Prime includes for the UK below:
Amazon Prime membership includes a variety of delivery benefits, including several delivery upgrades if you need to expedite your delivery.
|Delivery Speed||Amazon Prime Member Price|
|One-Day Delivery*||No extra cost|
|Priority Delivery||No extra cost|
|Standard Delivery||No extra cost|
|Expedited Delivery||No extra cost|
|Same-Day (Evening Delivery) (to eligible postcodes)||No extra cost|
|No-Rush Delivery||No extra cost, includes a promotional credit.|
|Express Delivery||£4.49 per item|
|Nominated Day Delivery||No extra cost|
As you can see on the Amazon UK site. Most products that aren’t oversized or for other reasons difficult to ship are available to Amazon Prime members.
Cost of Amazon Prime
The USA and UK can signup for Amazon Prime. An annual fee that covers shipping of whatever you want. In the USA is about $99USD/yr and the UK is £79 pounds per year.
Australia is a big country so maybe there will be some difference between states or areas that are excluded. Perhaps there will be a three tier pricing like: $100/yr in metro, $150 in regional, $250/yr in remote or something of that sort.
Whatever the cost is they will have figured out the optimum acceptable amount that will cover as much of the expected shipping cost as possible but still be within the range of $10 -$15/mo for most of the population.
Competition and opportunities for local businesses
It would be easy to underestimate the seismic shift that Amazon setting up in Australia could have in Australia ecommerce.
You might already be familiar with FBA, Fulfilment by Amazon. A business can ship their goods to amazon and for a reasonable fee Amazon will warehouse, pack, deliver and handle returns for items. You can see how it works here: services.amazon.com/fulfillment-by-amazon/how-it-works.htm
There is a huge industry in the USA that has built up around FBA where manufacturers, wholesalers and their resellers are sending truckloads of product to Amazon warehouses so that it can be sold on Amazon.com.
Opportunity with Fulfilment by Amazon
For businesses in Australia the presence of Amazon at scale presents a huge opportunity and potential risk.
An opportunity is that distribution can be done without hiring staff and stuffing things in boxes yourself and potentially you could be exporting via Amazon.
This is a real and limiting factor that I have personally seen in some businesses. They get stuck at the point of needing to hire extra staff to handle packing and shipping. If that barrier to growth was removed and if they product suited distribution by Amazon that could be huge for such a business.
Not every product can be fulfilled like that. in fact there are lots of custom, made to order products that have to be made when the order arrives. For such businesses they have a defendable position because what they do is in some ways bespoke for each client.
Increasing trade between AU and NZ?
It’s not a stretch to think that Amazon will work out some fulfilment centre in the North and South Islands of New Zealand in the coming years.
Hopping from or too NZ as part of a transport route gives access to additional retail spending by people in NZ.
Much like Emirates fly from Dubai to Christchurch via Sydney and the reverse what if Amazon operated cargo planes that did something similar?
Imagine a cargo plane brimming with products from Amazons warehouses in Asia, Europe, Japan and USA bound for Australia and NZ.
Could Amazon reduce the cost of imports and exports?
Presumably a certain amount of stuff is going to be sent by cargo plane to Australia from the other Amazon distribution centres in the world. It’s hard to imagine that Amazon would expect you to shop on the Australian version of their website and not be able to buy anything that isn’t located in a warehouse in Australia.
If such cargo planes (or shipping containers) exist and they are delivering products to buyers in Australia from the USA then they have to fly back to the USA. Sending them empty would be expensive and costly.
Amazon could open up an export market to hundreds of millions of shoppers that would buy Australian (and New Zealand) products with free or cheap delivery (on Amazon Prime).
Lowering the cost of overseas distribution for businesses
What if Amazon create a low cost, super efficient distribution option for businesses to get products in and out of Australia?
They’ve done that in other countries so why not here?
Businesses in Australia could be competing more directly with products being sold on Amazon.
That could be great for everyone who buys things.
Look forward to the cost of everything from electronics to groceries being cheaper next year with Amazon.
Right now though the cost to order something from the USA and freight it to Australia makes the overall purchase price uncompetitive compared to local choices in most cases.
Especially since the Australian Dollar collapsed back to well under parity with the USD.
So it’s pretty likely that importing to Australia will be cheaper but what about exporting?
Exporting products with Amazon?
If Amazon provides Australian businesses with reasonable delivery cost options to send products to other Amazon distribution points in the world there is a new and potential lucrative export market for Australian businesses on the horizon.
The cost to send products overseas from Australia is a seriously limiting factor to the quantity of goods that small businesses are able to export.
Exporting with Amazon FBA
There are plenty of businesses in Australia that could capitalise on the opportunity of Fulfilment By Amazon (FBA) if it were made available to them at a reasonable cost.
Just to quickly recap on what FBA is.
A business sends their products to be stored in distribution centres owned by Amazon.
When people buy your product, Amazon packages and delivers your product to the customers.
Amazon handles customer support and returns.
And Amazon keep your inventory secure and insured in case of loss or damage.
It’s a pretty cool system for Amazon because they get products to sell without having to pay for them.
For a business it means distribution is no longer limited by the number of people who are hired to pack boxes.
We don’t know exactly how FBA would be applied to Australia. There is some documentation for the way it works in Japan, Canada, Europe and Mexico.
Even if it wasn’t as easy as sending products to Amazon Sydney and they get sold to the USA the fact that you could send a shipping container or pallet of goods to the USA and have Amazon distribute them once you already have those products selling well on Amazon Australia and have reviews and feedback and figured out the profit margins could lead to an uptick in exports.
Businesses in the UK sell with Amazon FBA
Amazon sellers from more than 130 different countries around the world used FBA to fulfil orders to customers in 185 countries, with over 2 billion items shipped globally in 2016. As well as driving domestic sales, FBA helps sellers export to customers across the world. In the UK alone, businesses selling on Amazon Marketplace achieved export sales of more than £1.8 billion in 2016, up 29% year-on-year.
“It is great to see UK businesses going from strength to strength, and our role is to continue to support their growth and success,” said Simon Johnson, Director of Seller Services UK. “By being part of FBA, Marketplace sellers scale their business and boost sales abroad, while incurring lower costs than if they invested in their own warehousing and logistical solutions.”
In the UK, the number of businesses taking advantage of FBA has increased by more than 70% in the last year.
Ref: Amazon Blog.
Overcoming high export shipping costs as a barrier to sales
We have clients that ship products to the USA, NZ, Europe, Singapore and a range of other countries. Right now if they want to send a parcel or box to the USA it might cost $30 – 230 depending on the size and weight.
Such ecommerce stores do still get purchases from other countries but the demand is curbed because of the shipping fees charged by Australia Post or the couriers. However if those fees were dramatically reduced you could see an effect like the internet has on information transfer. It costs basically nothing to ship information to the USA, what a remarkable change it would make if products could be sent with much lower costs.
It could be really exciting and very quickly result in some considerable shifts in the way businesses in Australia and New Zealand look at their markets, no longer mainly local with a few overseas sales but riding on the platform of Fulfilment By Amazon for a properly international distribution.
This is something Amazon already offer to some of their sellers. Ref: Amazon.
A good general place to start if you want to learn more about selling on Amazon is their business services page: services.amazon.com
It’s going to be interesting to see how this plays out
Amazon is big and it’s going to mean some big changes to online shopping in Australia.
I reached out to Inside Amazon for their thoughts on Amazon in Australia.
Amazon expert William Tjernlund, who had this to say:
“I consulted for an Australian business a couple of years ago, and they warned me that If Amazon ever made a large push into Australia that it would be met with major resistance. The local economy is held very dearly by many Australians, and Amazon looks like a disrupter.
A top US retail analyst says that when Amazon comes to Australia, we can expect some second tier shopping centers to become ‘white elephants,’ as commercial property falls,’ according to The Financial Review.
Though most of the press about Amazon coming to Australia seems to be negative, I do believe there will be a lot of unforeseen benefits. Many of these brick and mortar retailers will end up supplementing their income by selling on Amazon as a 3rd Party seller. Many brick and mortar retailers will now have a new logistics arm added to their business model and will be able to expand their customer base in ways they never thought possible.”
Whatever happens it will be interesting to see everything unfold and as a shopper in Australia the future looks bright!
Most small businesses will have time to adjust and they will likely be increasing the service component of their business and the experience the customer gets will be ever more important.
Much as they have already been doing to compete with online shopping.
The businesses in Australia the most likely to worry right now I expect are going to be the electronics, electrical and business products vendors that have big shops and a lot of warehouse space to keep it stocked.
Think like Office Works, JB Hifi, Bing Lee etc.
They would be well into their plans for how to deal with it though, this will not be a surprise to them.
Purchases for stuff in boxes are going to continue to move online because they are predictable, the product quality is known in advance and there isn’t really much need to ‘window shop’ because you know what you want already.
For smaller businesses it really depends on how unique the products being sold are, whether they are bespoke and customised for each customer and if there is an export opportunity that would otherwise be difficult to achieve.
Many of our clients would fit into the customised to the buyer kind of product or service because they have found a niche that is profitable and allows for some creativity and ingenuity that suits their desire to run a business and create items of value and desire.
Will 2017 or 2018 be the year we see highly efficient warehousing operations in Australia like this one in the UK?
We’re going to find out very soon!