News that U.S. online retailing giant Amazon Inc. intends to open physical warehouse space or "fulfillment centres" in Australia to provide super-fast delivery of common consumer staple and discretionary retail goods should have Australian retailers and their shareholders worried.
Amazon's business model has long been to sell goods cheaper than its rivals and in so doing decimates their margins which means Aussie retailers from supermarkets business Woolworths Limited (ASX: WOW) to electronic goods operator JB Hi-Fi Limited (ASX: JBH), or furniture business Harvey Norman Holdings Limited (ASX: HVN) could be facing a profit crunch, market share loss, or most likely both.
Amazon has not provided a timetable as to when it expects to start rolling out its product offerings, although within the next year is likely and member services such as Amazon Prime could quickly take market share from Australian retailers.
Amazon Prime is the group's membership service that offers subscribers around 50 million available items or products to order online at cheap prices with free delivery. It also offers music and video entertainment streaming, cloud services, or other features that build a powerful network effect to attract consumers.
Other retailers vulnerable to the Amazon effect include department store operators Myer Holdings Ltd (ASX: MYR), retail conglomerate Wesfarmers Ltd (ASX: WES) or fast-fashion business Premier Investments Limited (ASX: PMV).
Given the success of Amazon's business model in entering more competitive overseas retail markets than Australia like Germany, the UK, and Japan I expect it will damage Australian retailers already feeling margin pressure from rising overseas competition.
If you want to own a single retail stock over the next 5-10 years I would suggest opening an international brokerage account and jumping on the Amazon bandwagon with a parcel of shares.
Of course some Australian retailers will also do well over the next few years, but they may be the exception to the rule across an industry facing toughening competition.
