Amazon poses a double threat to Australian retailers

Amazon is a low-margin retailer sitting on other higher-margin businesses.
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David Bond, University of Technology Sydney

E-commerce giant Amazon has struck a deal to acquire Whole Foods Market, an American supermarket chain with more than 400 stores. The move has put even more pressure on Australian retailers as Amazon sets up shop in Australia.

But the real threat to Australian retail lies in Amazon’s business model. It is a low-margin retailer that owns several other highly profitable and fast-growing businesses, such as cloud services. These other businesses can and do cross-subsidise its retail operations.

JB Hi-Fi and Harvey Norman have suggested they will compete with Amazon on price, but given the cost structure of Australian retailers this may not be possible.

Amazon is very lean

While Amazon is extremely large, it is very lean. In 2016 alone, Amazon sold US$94.7 billion of product globally. But the cost of buying (or manufacturing) these products was US$88.3 billion, leading to a gross profit of just US$6.4 billion.

This means the mark-up Amazon puts on its products is very small. For example, in 2016 Amazon’s gross profit margin (gross profit divided by sales revenue) was just 6.8%. JB Hi-Fi had a margin of 21.9%, Woolworths 26.8%, Wesfarmers 31.0%, Harvey Norman 31.4%, Myer 42.1% and Super Retail Group a whopping 43.4%.

But Australian retailers also face high operational costs (wages, advertising, marketing and leases). The two largest, Wesfarmers and Woolworths, both have operating expenses in excess of 24.0% of sales revenue, while Myer, Super Retail Group and Harvey Norman are all around 40.0%. JB Hi-Fi is an outlier at just 16.3%.

Another important measure to consider is the net profit margin. This shows what percentage of each dollar of sales the company ultimately earns after all costs (including tax) are factored in. Net margin is calculated by dividing net profit after tax by sales revenue.

The net profit margins for Australian retailers are, for the most part, quite low – around 2-3%. This means they don’t have much room to move on price. If they drop prices, many will become unprofitable. So even if Amazon doesn’t start a price war in Australia, its business model is such that prices will be extremely competitive.

Amazon has other businesses

Most Australian retailers are only retailers. Some of the larger groups, such as Myer and Wesfarmers, operate across a few industries. But they ultimately still earn nearly all their revenue from buying and then re-selling physical products.

Amazon, on the other hand, has a profitable and booming services business. Its “services sales” represents about US$41.3 billion in sales, or 30% of its revenue. This covers third-party seller fees (Amazon charges other companies for access to its marketplace and warehouses), Amazon Web Services (a fast-growing provider of cloud services), digital subscriptions, advertising services and co-branded credit card fees.

In its 2016 annual report, Amazon reported US$12.2 billion in revenue from Amazon Web Services alone. The scariest thing for Australian retailers is that this has increased four-fold since 2013, and is responsible for nearly 75% of Amazon’s operating profit.

Amazon, then, not only has a large, low-margin online retail offering, but is supported by a fast-growing, high-margin cloud service.

Finding new ways to compete

Most Australian retailers will need to look at other ways of saving costs if they are to remain competitive with Amazon. For example, Coles and Woolworths can put even more pressure on suppliers to reduce their costs. Coles has recently signalled that it will pursue this strategy. And all of our retailers can try to reduce the cost of leases, and shift or reduce staff.

The small margins of most Australian retailers mean reducing prices alone isn’t a viable long-term strategy, especially as Amazon Web Services gains steam and Amazon is profitable in other countries.

Not every retailer will come under the same pressure, though. In the short term at least, groceries are still likely to be purchased in stores. But the same can’t be said of clothing and electronics. This means Woolworths and Wesfarmers should not be as concerned as Myer, Super Retail Group and JB Hi-Fi.

The answer for retailers may be to look past price and compete on other aspects of the shopping experience, such as convenience or customer service. But only time will tell if that’s what the Australian public wants.

David Bond, Senior Lecturer, Accounting Discipline Group, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

Christmas commercialism combated by "Advent Conspiracy"

A growing number of Christian churches are joining forces with a grass-roots movement known as the Advent Conspiracy, which is seeking to "do away with the frenzied activity and extravagant gift-giving of a commercial Christmas," reports Thaddeus M. Baklinski, LifeSiteNews.com.

The group was founded by Portland pastor Rick McKinley, who with a group of fellow pastors realized that their own, and their congregations’, focus during the time of Advent revolved more around secular consumerism than preparing to celebrate the birth of Christ.

"What was once a time to celebrate the birth of a savior has somehow turned into a season of stress, traffic jams, and shopping lists," McKinley observed.

"And when it’s all over, many of us are left with presents to return, looming debt that will take months to pay off, and this empty feeling of missed purpose. Is this what we really want out of Christmas?"

"None of us like Christmas," McKinley said in a Time.com report, adding, "That’s sort of bad if you’re a pastor. It’s the shopping, the going into debt, the worrying that if I don’t spend enough money, someone will think I don’t love them."

McKinley, whose church donates money to dig wells in developing countries through Living Water International and other organizations, saw that a fraction of the money Americans spend at retailers in the month of December could supply the entire world with clean water.

As a result he and his friends embarked on a plan to urge their congregations to spend less on presents for friends and family, and to consider donating the money they saved to support practical and tangible charitable works.

"If more Christians changed how they thought about giving at Christmas," he argued, "the holiday could be transformative in a religious and practical sense."

McKinley observed that at first church members were uncertain. "Some people were terrified," McKinley recalled. "They said, ‘My gosh, you’re ruining Christmas. What do we tell our kids?’"

Soon though, the idea caught on and McKinley found that not only were people "relieved to be given permission to slow down and buy less" but were "expressing their love through something more meaningful than a gift card. Once church members adjusted to this new conception of Christmas, they found that they loved it."

According to the Time.com report the Advent Conspiracy movement has exploded, counting hundreds of churches on four continents and in at least 17 countries as participants.

The Advent Conspiracy video has been viewed more than a million times on YouTube and the movement boasts nearly 45,000 fans on Facebook.

To find out more about the Advent Conspiracy, click here.

Report from the Christian Telegraph