Standard Life Investments

Amazon navigates through Australia

October 2017

Real InSite provides our views on topics affecting global real estate markets. In the latest monthly article, we highlight how Amazon’s move into Australia will affect the country’s retail sector.

For more Real Estate articles, check out our Analysis of Real Estate issues.

Amazon navigates through Australia

  • Amazon has announced its intention to enter into the Australian market.
  • In other countries, this has spelled trouble for existing ‘bricks and mortar’ retailers.
  • However, we think Australia may be different and outline our reasons why.

Online retailer Amazon is the sword of Damocles hanging over ‘bricks and mortar’ retailers worldwide. When it has entered markets such as the US, UK, Germany, France and Japan, existing retailers have suffered. Amazon recently made clear that it intends to push aggressively into the Australian market and share prices of the country’s retailers have already fallen as a result. However, we think there is reason to believe that Australia may be different. Here, we outline three reasons why.

Transport infrastructure is relatively weak

Despite the fact that more than 60% of the population lives in its five largest cities, Australia has low population density since it is such a vast country. While several projects are underway or in the pipeline, transport infrastructure in Australia is relatively weak. Transport costs are therefore likely to be substantially higher in Australia than elsewhere – hampering a key success factor in Amazon’s business model.

Significantly, there is a strong correlation between a country’s rank on the World Bank’s Logistics Performance Index (LPI), which identifies challenges and opportunities in logistics, and the number of product categories that Amazon has launched in that country (see chart below). For example, Germany, the UK and the US rank in the top ten on the LPI and each have 16 product categories. However, Canada is an outlier, ranking 14th on the LPI but with only nine product categories. One reason for this is its vast size, which makes it difficult for Amazon to offer a full product range. Although it ranks 19th on the LPI, Australia is another vast country and it scores particularly poorly for infrastructure. This casts doubt on Amazon’s ability to offer a large product range there as well.

Retail provision is relatively low

The move to online retailing has already started to weed out the weaker retailers and poorer-quality real estate stock in Australia. Amazon’s entry may therefore cause less disruption than expected as the Australian market is already competitive. A comparison with the US in the table below demonstrates this, with shopping centre provision in Australia more than half that of the US.

The table shows there is reason to be optimistic on the demand side too. Australia has higher population and GDP growth than the US, while wealth is greater too (at current exchange rates). Importantly, there is also greater spread of wealth in Australia, meaning there are more people with money to spend.

Amazon is late to the market

A number of global online retailers with significant scale, such as eBay and Apple, are already established in Australia, while various smaller retailers also have a presence. Therefore, appetite for online retailing among Australian consumers is not a recent phenomenon. This has been facilitated by, among other things, the strong Australian dollar and proven transport systems from the larger providers. If Amazon wants to take market share, it will have to compete with these well-established players.

To sum up, Amazon’s entry into the Australian market will undoubtedly affect existing ‘bricks and mortar’ retailers and their landlords. However, for the reasons we have outlined, it may not be all doom and gloom. As a provider of retail space, we will continue to monitor the situation with great interest. As for Amazon, it’s all in the delivery!