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How should investors prepare for Amazon's arrival?
No doubt Amazon’s highly anticipated arrival in Australia will shake up an already sluggish retail sector. So what could this mean for share prices and how should investors prepare?
Australian interest in Amazon has soared in the last 6-12 months, with over 400,000 people visiting the local site and more than 2 million flocking to the US site, where the most popular items – toys, computers and electronics (including hot products like Amazon’s own Echo Dot) – can be purchased. With Amazon expected to lead with these products in Australia, electronics retailers may be first to take a hit.
Stocks like JB Hi-Fi (ASX: JBH), Harvey Norman (HVN), Myer (MYR), The Super Retail Group (SUL), Metcash (MTS), Woolworths (WOW) and Wesfarmers (WES) could all be impacted. But with Amazon already on the ground setting-up operations in Melbourne and Sydney, much of the concern has already been factored into share prices. For example, Harvey Norman’s share price declined significantly over the past year. We now believe it’s been overdone and recently added Harvey Norman to our AMS Shares Income Portfolio.
Online shopping represents just 7% of total retail spending in Australia. However, when Amazon enters a new geographic market, online spending tends to increase significantly, driving massive investment in e-commerce from local retailers aiming to compete. Paul Taylor, Portfolio Manager of the Fidelity Australian Equities Fund, says that while the first impact of a disrupter like Amazon is easy to figure out, the subsequent effects are less clear. “We’ve got a number of retailers in Australia earning abnormal profits and they’re the ones that are going to be squeezed hard. Even if Amazon doesn’t win that business, those companies will have to get their margins down” says Paul.
Amazon’s arrival will almost certainly put pressure on prices. As prices are squeezed, Australia could experience lower inflation, which may also ensure interest rates remain low for longer. In its August interest rate commentary, the RBA already referred to the impact of increased competition from new entrants in the retail industry and its detrimental effect on inflation.
While we will continue to hear a lot more about the ‘Amazon effect’ over the coming months, the FMD Investment Committee (IC) has already considered the potential impacts and positioned our investment portfolios accordingly.
If you have any questions about how market developments may impact your investment portfolio please contact your FMD adviser.