Preparing for Amazon

Retail is changing fast
In a few short years, more than 60% of all purchases will be online

 

 

Change in retail is accelerating

Over the last few months we have written on a number of different topics related to the Australian retail landscape.

This month's opinion piece digs a little deeper into the potential impact of Amazon hysteria in Australia.

Much of what is written on Amazon's likely impact upon Australian retail can be regarded as premature, ill-informed, journalistic sensationalism. The kind designed to grab headlines and eyeballs.

Now that Amazon has announced it's first distribution centre in Dandenong South, VIC and commenced the recruitment process, the story of Amazon's arrival has shifted onto the next stage - commentary on how our local leading retail kings are preparing to combat a future invasion by "Amazon-proofing" their businesses.

Whilst part of what's reported is indeed accurate - how the likes of Aldi, Woolworths, Wesfarmers and other high profile retailers have their dedicated war-rooms with teams and scaled versions of their future store designs and layouts. Fact is, there is nothing unusual about this approach as it's been used in retail for a long time - modelling various scenarios by testing optimal floor plans and product displays, searching for that unique point of distinction.

Everyone remains quite polarised on what categories are likely to fall first, e.g. consumer electronics, toys, entertainment, etc. but we think the most profound immedite effect of Amazon's arrival will be in the realm of logistics - improving speed at which goods arrive.

For almost a decade, we have advocated for greater competition and choice in Australian logistics - an cosy industry that has managed to remain stagnant in terms of efficiency and effectiveness. Run an online store and you soon see first hand the appalling performance of logistics companies in Australia.

It's remarkable that we operate in some of the world's most liveable cities, yet we have to cope every day with slow, expensive, reckless, dishonest and unjust terms from logistics providers with a collective sense of indifference towards their merchant customers and parcel recipients.

If merchants dare try to improve outcomes for their own customers, whether it's service, time or price, the arrogance of freight providers is astounding "take it or leave it.........you need us more than we need you". It almost defies belief.

Amazon will build intelligent distribution that provides "best point sourcing" to enable rapid fulfilment. For our business we are not quite sure on how this will work given the freshness and volatility of our finished products, but we will find a way to play the game and target faster and cheaper delivery outcomes for our customers. Amazon are working on this exact problem at the moment with their enormous moves into Organic foods and groceries in the US.

Beyond the transformation of logistics, one of the more fascinating features of watching the influence of a pending Amazon arrival in has been trying to understand the strategies of the retail shopping centre giants and their attempts to Amazon-proof expensive, coveted infrastructure.

Interestingly, Shopping Centre operators believe the future lies in lifestyle experiences - so they are installing more food/cafes, hairdressers, movies and services that typically can't easily be replicated over the internet.

Shopping Centre operators have developed these so-called strategies based upon statistical analysis of monitoring tenant's turnover - measuring year on year growth by category. However, the stats are missing an important element - a growing tidal wave of angry food operators becoming more and more frustrated by the increased number of same category outlets opening in these centres.

Modest foot traffic rises don't stack up when food outlet tenants have increased by 20+% in many centres. The pie is only so big and it's getting cut into smaller slices.

Recently, a growing number of franchise brands have been turning away from Shopping Centres entirely, or applying pressure to renegotiate the terms of their lease based on the changing landscape of Centre tenants. Some have taken more drastic steps by  placing unprofitable outlets into liquidation so they can exit the lease altogether.

Apparently, this rising level of frustration amongst food outlets in Shopping Centres is not worrying the landlords - they seem to have a constant line of prospective tenants, mostly naive franchisees happy to fill spaces.

So Shopping Centres are ditching or downsizing Department stores - Myers, David Jones's and electronics and instead looking to bulk up on more services, cinema, food and Tesla cars.

A couple of years ago in preliminary enquiries on a high profile Shopping Centre lease, the Centre's operator had the audacity to demand a cut from all our online sales despite having never invested in building up that business, nor contributing to it's ongoing expenses. You see, they attempted to draw a rather lame reference between a theory that customers do all their research online (probably valid) and then pick up in-store, hence they felt entitled to their "slice" of the online sales, regardless of whether the order involved delivery or collection. One of the best things we did was walk away from that and a few other onerous traps.

Shopping Centres will always perform well during sustained periods of population and real estate growth. New estates that have limited amenity are the hunting grounds for large Shopping complexes as there is literally no alternative.

Established suburban shopping strips will continue to struggle as rising rents and diminishing availability of parking all contribute to force changes in the usage of spaces - often leading to a re-development of apartments above with minimal/basic retail service on the ground level. In many cases, the retail downstairs is a token gesture to achieve planning approval.

It will take considerable time for Amazon to materially disrupt Australian retail, but the changes will be profound and lasting.

The best strategy to prepare for competition is to focus on the customer experience and manage costs astutely.