Retailers to lift e-commerce spend as Amazon ramps up

Australian retailers need to step up investment in e-commerce, supply chain, data analysis and fulfilment to keep pace with Amazon as the online behemoth prepares to ramp up its local online retail offer.

Retailers such as Woolworths, Super Retail Group, JB Hi-Fi and Premier Investmentshave been investing heavily in e-commerce over the last two years to better compete with pure-play online retailers and satisfy customer demand for more convenience.

That investment has helped underpin strong online sales growth and offset weak sales in bricks and mortar stores, with UBS estimating that e-commerce accounted for more than 45 per cent of incremental sales growth across listed retailers in 2018.

However, the additional spending took a toll on margins and most retailers believe that delivering online purchases is still margin-dilutive, while click and collect, which accounts for more than 20 per cent of online sales at many omni-channel retailers, is margin-neutral.

UBS retail analyst Ben Gilbert says retailers will need to keep spending on websites, supply chain automation, last-mile delivery and data analysis while investing in price to keep pace as the shift to online accelerates.

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"The retailers here are doing a better job but I'd argue there are still opportunities to improve," Mr Gilbert told The Australian Financial Review.

"If you compare local websites with those overseas there is still room for improvement.

"The risk is some may be under-investing ... they don't need to spend less money than they're spending today."

Woolworths, for example, spent an extra $130 million last year on a new data and digital centre, WooliesX, IT and supply chain, including a new $350 million automated distribution centre, and a cloud-based back-end IT system. Wesfarmers has said it plans to double its investment in digital and data.

Distribution questions

Retailers were also taking differing approaches to distribution – with Super Retail Group, for example, distributing from a centralised distribution centre and JB Hi-Fi delivering direct to stores – and the most efficient model had yet to be proven.

Last-mile delivery was proving to be particularly difficult in Australia because of the tyranny of distance and low population density.

"If Amazon is leading the way there and local retailers can't piggyback off that ... there is a risk they'll need to invest more in distribution to improve their capabilities," Mr Gilbert said.

JPMorgan analyst Shaun Cousins said established retailers had lifted their online game but there was more work to do as Amazon brought its Australian offer up to speed.

"Amazon will have a better Christmas this year than last year, and key events will get better each year," Mr Cousins said.

"But it's a slow grind rather than something that has radically changed the landscape.

"And the impact continues to vary by category, with the supply chain of food, especially fresh food, an impediment to its impact in that category."

Amazon growing

After a generally underwhelming launch last December, Amazon has increased its Australian wholesale lighters product range four-fold to about 80 million stock keeping units and has launched its subscription based free delivery service Amazon Prime, Fulfilment by Amazon, Amazon Music and Echo voice-activated speakers, powered by the company's cloud-based voice service Alexa.

Earlier this month, Amazon added three new categories to its range – luggage and travel goods including outdoor clothing, automotive products and pet supplies – taking the number of categories to 26.

The online retailer is expected to add more categories and services before Christmas and in 2019 while speeding up delivery times, increasing competition for local pure play and online retailers.

Bain & Co believes Amazon could become Australia's sixth-largest retailer within five to 10 years – behind Woolworths, Coles, Bunnings, Aldi and Metcash's IGA network, but ahead of Harvey Norman, Kmart and JB Hi-Fi – with revenues of $8 billion to $10 billion, compared with estimated revenue of $1 billion in 2017.

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