Amazon is coming to Australia! If you’re a consumer this is great news as prices are about to become a whole lot cheaper. If you’re a retailer however, you should be very worried. But is there an even greater threat than Amazon potentially looming on the horizon, the correction of residential house prices?

 

If you’ve been following the news over the past few weeks you’d be mistaken for thinking that we’re about to see the end of Australian retail as we know it. Amazon has confirmed what pretty much everybody has expected. They’re rolling out their distribution and performance centres throughout Australia as early as next year (note that Amazon have actually been operating in Australia since 2012 with web services, Kindle and Audible).

Will Amazon have a significant impact on the industry? Amazon essentially competes on three things – prices, product range and delivery. So if your brand revolves around one of these strategies, then yes. Also understand the size and resources behind Amazon. Amazon sales are bigger than our 5 of our biggest retailers combined. And of equal concern is the categories Amazon are planning on entering in the future, such as grocery and delivery.

And not surprisingly everybody’s panicking. Australian retail stocks have been hammered since the announcement, especially both Harvey Norman and JB Hi-Fi. Both are now down nearly 20% from the same time 3 months ago, reflecting that the battlegrounds here will likely be first with small electronics.

Not one to miss a bit of free publicity, Gerry Harvey has announced that they will “match or beat” prices with Amazon. There’s a long list of causalities in the US who have attempted to enter a price war with Amazon and lost badly. So it’s with this that shareholders of Harvey Norman should be a little concerned, for it’s a battle that Harvey Norman is unlikely to win.

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Planning on purchasing a new TV? Hold off until 2018 and pick one up from Harvey Norman, because you’re likely to get at a significant discount. A policy to “match or beat” Amazon in the past has traditionally not ended well for retailers overseas.

Those who have taken on Amazon in the States and won have done so through providing things which Amazon can’t provide – service and in-store experience (funnily enough, neither of which I heard Harvey Norman mention).

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Whilst retailers such as Best Buy and Target have lost sales to Amazon, Dick’s Sporting Goods have bucked the trend. Building economies of scale as it grows through exclusive products, customer service and experiential retail.

But also understand that the conditions in which Amazon are entering the Australian market are different to that of the US. It’s already entering into a competitive market. Australia is also a country geographically sparse and many existing companies here have online logistic networks already setup.

However there may be an even bigger threat to Australian retailers and it could have a bigger impact than Amazon’s. A correction in residential housing prices could significantly reduce retail sales.

Australian’s have traditionally had a large percentage of assets in property so we hate to admit it, but a slowdown or correction in the housing market is starting to become a very real possibly. Like everybody else (including economists), we have no idea what house prices will do in the coming future. For every statistic published suggesting we’re not in a housing bubble we can find you there’s another statistic suggesting we are. However the issue should at least be on your radar.

Forecasts suggest we may soon see an oversupply of apartments in our major cities. Australia’s crane index which was once higher than the eastern seaboard of North America, has shown the first sign of decline in 5 years. Debt is at all time highs coupled with low wage growth, not to mention further increases in interest rates in the very near future.

To understand how a fall in household prices could potentially affect the retail industry, you need to first understand that there is a correlation between both housing sales and home improvements / renovations. Therefore any retailer that sells building supplies, furniture, appliances or hardware would likely be negatively affected.

Fund manager Roger Montgomery reports that the lag between the correlation is about 10 months. Given that the housing market has shown first signs of decline, we could see consumer demand for home alternations and additions decline over the next few months.

Indeed, if house prices come down there soon may be a perfect storm about to hit retailers.

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Author Trent Rigby

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