COMMENT: Why the OP sector is 'spooked' by Amazon
Wesfarmers denies it but there is a strong feeling around town that the company’s decision to sell off its profitable Officeworks division has been prompted by the impending full-on assault in the Australian market by Amazon.
Despite Officeworks’ long run of quarterly sales and profit increases, it is felt that the big stationery retailer will lose momentum under pressure from Amazon, so it is best to cash in now and use the $1.5 billion or so from the sale to bolster the high-stakes Coles supermarket business or invest in the newly-purchased hardware group in the UK.
Coles and arch rival Woolworths have plenty to worry about with a pumped up Amazon, which is unquestionably the king of online shopping.
Analysts believe Amazon will skim as much as $4 billion in sales from entrenched Australian retailers thanks to shopping tools such as the Amazon Dash Button.
In the US, Amazon is building a whole eco-system of artificial intelligence-driven home gadgets, designed to make it as easy as possible for customers to shop.
Significantly, Amazon Prime members in the US are increasingly using the Dash Button to order everyday essentials – such as office supplies – with order frequency doubling, now taking place over twice a minute. In fact, for popular items such as a pack of paper towels and a canister of ground coffee, more than half of Amazon orders are now made via Dash Button. Also, in just three months, total Dash Button orders grew by 70 per cent.
Dash Buttons are available to Prime members in the US for US$4.99, and they’re essentially free – with the first order through a Dash Button members receive a US$4.99 credit to their Amazon account. If a customer is running low on an everyday essential, they can simply press a Dash Button to automatically re-order the item at the same low prices they find on Amazon online.
And Amazon isn’t just operating in the online space.
It has also moved into bricks-and-mortar with Amazon Go, a small-format concept supermarket in Seattle that has no cashiers and no check-outs.
Customers simply pick up what they want and walk out. Amazon’s sensors and artificial intelligence know who they are and what they’re buying.
The bottom line is that Amazon literally has hundreds of millions of products to choose from – from janitorial products to stationery. And they are readily accessible via Amazon Business, which is also open to Amazon prime members.
Amazon has separate retail websites for the United States, the UK (where it just launched Amazon Business) and Ireland, France, Canada, Germany, Italy, Spain, Netherlands, Brazil, Japan, China, India and Mexico. In Australia, Amazon’s local website is largely devoted to the Kindle electronic book business.
In a report released late last year, Citi analyst Craig Woolford said Australians already spend between $500 million and $700 million on various Amazon websites, and that that will grow as more services and platforms are offered.
Woolford said Amazon’s impact on Australian retailers would be diverse, given the magnitude of its product range. The greatest impact would be felt by electronics retailers given Amazon’s product range and the branded nature of these products.
Citi estimated that Amazon could snare two per cent of the Australian office supplies market, which equates to around $240 million in sales.
While some suppliers may benefit from these transactions, office supplies retailers, dealer groups and contract players may feel the heat from customers who may want to test the Amazon experience.
Understandably, Amazon was the hot topic last year’s OPI global office products forum in Chicago, with suppliers, retailers and dealer groups debating the short and long-term impact of Amazon on the OP sector.
How Amazon manages the logistics side of a full online retail offering in Australia will be exposed later this year and there are some doubts over the company's ability to conquer the ‘tyranny of distance’ in Australia.
However, Amazon’s successful track record of innovation should help it overcome any distribution hurdles.