Amazon's Australian Meteorite Spares Some Retail Species

(Bloomberg Gadfly) -- Could Amazon.com Inc.'s anticipated meteorite-hit to Australia's beleaguered retail industry have burned up on entry?

That was certainly the popular reaction to its arrival. Within hours of the e-commerce giant's online store finally going live in the country on Tuesday, shoppers were close to despair. The store was "ripping off Australian consumers with high prices," "so underwhelming" or "a total bust," judging by comments on social media.

That looks partly the result of impossible expectations. Even Amazon won't guarantee that every one of the 573 million-odd products on its platform is cheaper than the competition. It may be embarrassing to find a local office-supplies chain selling Kindles for less than Amazon itself was initially asking, but the huge discounts on some high-profile items -- A$100 ($76) off an Xbox, a Lego Star Wars set at about two-thirds the price of rivals -- show the sort of muscle that Jeff Bezos is prepared to deploy.

High prices are baked into the cake of discretionary retail in Australia. A geographically remote, if affluent, market of 24 million that's not a member of any major free-trade bloc and whose currency has swung from $0.60 to $1.10 over the past decade, it's simply too small and challenging for many international retailers to play hard in.

That's been the bane of Australian shoppers since 1790, when one of the first shops to set up in the newly established convict settlement found trouble selling its stock of grocery, glass, millinery, perfume and stationery at prices sufficient to cover its costs. Subsequent players have encountered similar issues: The local affiliate of Britain's Topshop went into administration earlier this year six years after arriving, while invasion attempts by Inditex SA's Zara and Forever 21 Inc. have also struggled.

Nonetheless, Amazon has some substantial advantages that local stores can't match. There's the famed fulfillment and logistics operation, which will really come into its own with the anticipated launch of Amazon Prime next year.

More importantly, there's scale: Estee Lauder Cos.' $12 billion in annual revenue looks enormous next to the A$2.6 billion of homegrown department store Myer Holdings Ltd., so Myer is playing a weak hand if it tries to negotiate a good local price on MAC foundation. Amazon, with $161 billion of revenue, has enough market power to set its own terms -- and that's even before it starts undercutting branded suppliers with its own private-label goods.

The real question for local rivals is whether Bezos chooses to wreak the damage he certainly could. For more than two decades, Australia was ignored by Seattle as the Amazon juggernaut flattened more and more sectors of its core markets, rather than expanding into new ones. Between 2000 and 2013, the only major attempt at opening up a geographic market outside the European Union and Nafta was an unsuccessful bridgehead into China

Its more aggressive expansions since then -- into India and Brazil but particularly the more marginal locations like Singapore and Australia -- can be read as attempts to knock out Alibaba Group Holding Ltd. before it establishes a foothold. Should Jack Ma's attention remain on his home market, as seems likely, Amazon may find it has bigger fish to fry than laying waste to Australia's rag trade.

In the meantime, the best way to play the end of the world for antipodean retail is probably to focus on the sectors where Amazon's impact has traditionally been weaker. Electrical goods stores like JB Hi-Fi Ltd. and Harvey Norman Ltd. have rightly sold off over the past year while car dealerships such as AP Eagers Ltd. and Automotive Holdings Group Ltd. have been more immune.

Nick Scali Ltd. and Super Retail Group Ltd. have slumped in line with the electronics stores. Given their focus on sectors like furniture, outdoor goods and hardware, where Amazon has hitherto been less destructive, that might be an overreaction. Even the most devastating meteorite impact leaves a few species intact.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

1. Kindle has had a virtual store in Australia since

2. To be sure, it's not only foreign players that have been caught by Australia's retail sector. OrotonGroup Ltd., which once aspired to be a local answer to luxury handbag maker Coach and ran the Gap Inc.'s local franchise, collapsed into administration just last week.

To contact the author of this story: David Fickling in Sydney at dfickling@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.

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