Australian media got into a bit of frenzy last week when it was reported that retail giant Amazon would soft launch on Thursday ahead of a full launch on Black Friday.
For reasons yet unknown, this did not happen. Although the soft launch went ahead as planned, if you had visited the Amazon Australia site at the time of writing, you would've seen what's been there for the last few years: the old Kindle shopfront, which isn't particularly exciting. Maybe Amazon wasn't ready. Perhaps it didn't want to get lost in the fog of all the other Black Friday and Cyber Monday sales hitting the web. It could have been a strategy to build even more hype. Or journalists might have got carried away.
Amazon to launch in Australia in time for Black Friday https://t.co/vO5wbGQy0X— Financial Times (@FinancialTimes) November 22, 2017
What I'm doing when I go to bed now. 1am and no sign of Amazon Australia going live. pic.twitter.com/kqPHU70wjZ— Stacey Walker (@TheStaceyWalker) November 23, 2017
Lifehacker says that it has been in "constant correspondence" with Amazon's Australian representatives and predicts a full launch this Thursday or Friday. What does seem almost certain is that Amazon's virtual doors will be open for Christmas. So what effect will this have on Australian businesses? What drives Amazon's growth? What is the Amazon marketplace? Fifth Quadrant's Head of CX Research Steve Nuttall and Digital Sales Director Matt Hampshire from Oxygen, a DXC Technology Company, hosted a webinar last Thursday (23 November 2017) to address these questions.
What is Amazon?
Amazon is the world's largest internet retailer and provider of cloud computing services. Founded in 1994, Amazon began as an online bookstore before adding a wide range of additional products such as consumer electronics, apparel and cosmetics. In the last few years particularly, Amazon has achieved phenomenal growth with revenue increasing from USD$61 billion in 2012 to USD$138 billion in 2016.
As noted in the webinar, it's incorrect to characterize Amazon as merely a retailer. The list of services within the Amazon group spans retail, media, logistics, software and cloud services, with a very strong push towards media and advertising. "That portfolio of companies and brands really means that it can leverage its expertise and capabilities in each category and dominate in those categories," says Nuttall. This can be seen in Amazon's fairly recent foray into digital advertising, with the Amazon Media Group (AMG) generating $1.2 billion in digital advertising revenue in 2016. Whilst AMG is growing at a phenomenal rate (56% year on year compared to 2015) it is still eclipsed by both Google and Facebook, which generated USD $79 billion and USD$27 billion in 2016 respectively.
What drives Amazon's growth?
Nuttall sees the main driver in Amazon's growth is its long-running obsession with customer experience (CX). "From the beginning, our focus has been on offering our customers compelling value," Nuttall quotes from the Amazon 1998 Annual Report. "We brought them much more selection than was possible in a physical store, and presented it in a useful, easy-to-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day." A statement that continues to be echoed through each Annual Report.
Hampshire has a slightly more cynical view of this obsession. Ultimately, he sees Amazon's approach to customers as a way for the company to harvest personal data from shoppers, thus improving the bottom line. "Everything they do is driving that big data behind the scenes, giving them more knowledge about the customer in order for them to be able to grow their revenue," says Hampshire. "Not that there's anything wrong that, but you just have to be aware of it."
Another key driver for growth has been Amazon's Prime service, in which customers pay approximately USD$100 per year for free two-day shipping on orders fulfilled by Amazon as well as receiving other benefits and subscriptions for example music and TV. There are an estimated 80 million Prime Members worldwide, with 53% of American households subscribed to the service.
How do Amazon's marketplaces work?
Amazon's marketplaces consist of the buyers' side, which includes regular and Prime consumers and businesses. On the selling side, there are B2C retailers, wholesalers, Amazon's own brand of low-cost "Amazon basic" products and Amazon Business, as well as a B2B marketplace.
In 2016, its first year of operation, Amazon Business grew into a USD$1 billion business with over 800,000 customers and 30,000 sellers, and we can expect it to be a significant part of Amazon's strategy for capturing buyers in Australia. Although Amazon Business may at first struggle with more complex products that have a longer customer journey, Nuttall and Hampshire note that through big data and guided selling, this problem may soon disappear.
What effect will Amazon have on Australian businesses?
Earlier this year, ACA Research conducted research on retailers and consumers perception of Amazon's entry into the Australian market for the CommBank Retail Insights Report. In July, 89% of retailers said they knew of Amazon's arrival. Of those aware, just over half of retailers saw Amazon as a threat, and 44% admitted they had no strategy in place to compete with Amazon. Almost three-quarters of the remaining 56% of retailers who either had or were working on a strategy identified optimising CX as the most important way to compete effectively.
According to UBS research, Australian shoppers that use Amazon are most interested in buying electrical appliances, clothing, shoes and cosmetics. Many retail experts predict that for this reason, large retail stores such as Harvey Norman, JB Hi-fi, Myer and The Good Guys will feel the most pressure from Amazon's arrival.
Research from market research company Roy Morgan has shown that brands with low levels of online shopping, such as supermarkets, should be able to survive the Amazon onslaught. Roy Morgan's CEO Michele Levine said that while 25.4% of Australians said that they would buy groceries online, only 3.7% actually did. "The local, very human connection with supermarkets and their low levels of online shopping largely quarantines incumbent supermarket brands from Amazon," she said.
In the leadup to the full launch, many Australians have taken to Twitter to criticise large retailers for being unprepared for modern retail, bemoaning limited e-commerce options, high prices and poor CX.
Amazon making landfall, and suddenly this sleepy retail industry is running around like headless chickens. Worst are calls for regulation. Truth is that retail industry in Australia is lightyears behind rest of world & lacks competition. Logistics particularly bad.— Ralph Holz (@ralphholz) November 23, 2017
@BaramulStud (Gerry Harvey) still dangerously out of touch with reality of what shoppers want and what is already a reality for millions in the US get from Amazon, much better service than any retailer I've dealt with in Australia and fast delivery! #amazon #retail— Peppermint_Duck (@peppermint_duck) November 23, 2017
#Amazon: welcome to #Australia. Most #retailers probably hate the fact you've launched here but in time they will be thankful. You will drive them to better focus on the needs of their #customers. In the end, everyone will win. You'll see.— Customer Romance (@CustomerRomance) November 23, 2017
So from this 2011 article Gerry Harvey runs his online games store from HN Ireland in order to avoid paying GST, yet calls for GST to be added to all internet purchases in Australia? Talk about hypocrisy https://t.co/aM1YWxc0GT— Kelvin Lam (@EckZaKel) November 26, 2017
In what may be some good news for retailers, Deutsche Bank did a quick analysis of the products in Amazon's soft launch and found the prices were typically higher on Amazon than local stores. “However, it may be too early to draw any conclusions as at full launch, Amazon may present a more competitive offer than what we saw today," the analysts added.
#amazon #australia prices as per below doesn't look as attractive as it was expected. May be too early to comment. This was suppose to happen if you let online sellers sell their products how would amazon sell for less? (Same as ebay) More than other online sellers #disappointed pic.twitter.com/EdWgGNYzvL— Chintan Parmar (@chintanparmar11) November 23, 2017
It is highly unlikely that these prices are indicative of the pricing we'll see at full launch as Amazon is predicted to offer consumers very low prices in the runup to the holiday season. Scott Kilmartin, who produced a documentary about Amazon's entry into Australia, told ABC News that Australian retailers won’t be able to win a Christmas price war with Amazon. "You're effectively competing with a company that has more money and the ability to drive down prices for a longer period of time," he said.
It is also possible that smaller retailers see some benefits in using the Amazon Marketplace. Although Amazon takes a cut ($49.95 per month and 6 to 15 percent commission on sales), it may be well worth it for smaller retailers, especially if they have a basic website with unsophisticated e-commerce features.
Amazon has been a runaway success in the U.S and done well in the U.K, but success in Australia is not guaranteed. Kilmartin and others have pointed out that Amazon hasn't done so well in Canada, due to the combination of a small population and large geographical distances – similar to Australia. As pointed out in the webinar, Amazon's sales in Canada only increased by USD$1.3 billion from 2007 to 2016. In the same time period, U.S sales went up USD$94.1 billion. Amazon may also run afoul of Australian regulatory authorities if it tries to avoid paying taxes or uses unfair pricing practices. For now, Amazon won’t have to worry about the Australian Competition and Consumer Commission (ACCC), which earlier this month granted Amazon the go ahead to set low prices in order to win business. "In terms of misuse of market power, if you open a store in a new town and you set a common price point, you are going to lose money initially if you don't have scale," ACCC Chairman Rod Sims told The Australian Financial Review. "Eventually if you get your business plan right you will make money at that price point, that is in no way illegal."
Sims said he was skeptical that Amazon would come in and be an automatic success but did acknowledge it would lower prices and provoke an aggressive response from other large retailers. "Everyone is assuming that Amazon is going to be a screaming success and they will put everyone else out of business. That may not happen," he said. Sims added that the ACCC would keep an eye on Amazon for other competition issues including consumer refunds and guarantees.
Amazon is no doubt aware of the geographical and logistical challenges in Australia. For now, Amazon has one fulfilment centre, a 24,000 square metre facility in Melbourne's Dandenong South and according to BusinessInsider on 29 November, has purchased land in Sydney valued at AUD$7 million. It is unclear what approach the company will take to product delivery, for example using its own courier service or third parties such as Australia Post. Hampshire notes that the company is more than willing to innovate and has used "gig economy" methods similar to Uber for deliveries. "It may take them some time to really get going in terms of their full capacity," says Nuttall. "We'll clearly need a broader range of centres to meet the needs of Australian customers."
Sean Sands, associate professor of marketing at Swinburne University of Technology, told The Australian Financial Review that competing with Amazon would come back to providing better CX. "With Amazon imminent … it's important to take stock and realise that only one retailer can be the cheapest. If you are trying to compete on price, you are likely thinking about the wrong point of difference. You need to think about experience. Give people a reason to come into your store."