Why Amazon Will Make this the Worst Sector to Invest in on the ASX
It’s perhaps the most frightening event to happen to the Australian economy in decades.
And it’s got nothing to do with interest rates, deficits or government.
It’s also not frightening for you. It’s frightening for any retail business that operates in Australia today. It’s frightening for Kmart, Harvey Norman, Target, JB Hi-Fi, Officeworks, and anyone else with a retail presence.
Greg Canavan wrote about it yesterday, and today we’ll expand on it more.
Yesterday Greg wrote,
‘But with Amazon about to set up shop in Australia, you have to wonder whether structural forces are about to squeeze the share price [of Westfield] even more.
‘So if you’re invested in Westfield, or retail-based real estate trusts in particular, keep a close eye on them. This is the next sector to potentially suffer at the hands of the new “information economy”.’
‘Suffer’ is the right word. Amazon is going to land with full force. And it’ll singlehandedly change the Australian economy.
Many people know of Amazon in Australia. But not many people in Australia really understand just how dominant it’s going to be. Ignorance is bliss, we guess. It’s not until you begin to use Amazon — immerse yourself in all things Amazon — that you start to truly understand its reach.
And yes, it does get most of its revenues from product sales. But in our view, that’s just the beginning. You see, Amazon has done what no one else before it has done. It has pioneered its own future.
If it doesn’t exist, then make it
Amazon started life in 1994. Guess what else started in 1994? The ‘World Wide Web’. That was also the year the PlayStation arrived. It was also one year prior to the invention of the DVD…so we were all still using VHS.
And remember what it was like when you wanted to watch a movie? You went to that shop known as ‘Blockbuster’.
But yes, it’s true this was when Jeff Bezos started Amazon. And Amazon’s intention from day one was to be the world’s biggest online store. It started with books. Today, it sells just about everything.
You want a new TV? Get it on Amazon. You want some groceries? Get them on Amazon. You want to watch a movie, listen to some music? Do it on Amazon. And then if you do want something and you buy it, Amazon can get it to you the next day. Sometimes even the same day.
Amazon’s longer term goals are to get it to you within 30 minutes…maybe faster. It wants to deliver your goods as fast as it takes for you to order them. It sells and delivers goods cheaper and faster than anyone else on Earth.
It does this because of the internet and its ever-expanding logistics stranglehold. But why it’s been able to grow so aggressively, and continue to do so, is because it owns crucial parts of the internet.
Do the clouds spell out AMZN?
You should know what the ‘cloud’ is by now. If you don’t, it’s remote servers that connect online services around the world. Most apps you use exist in the cloud.
Like Airbnb. Airbnb enables you to book accommodation at people’s homes around the world. Airbnb’s services exist in the cloud so that no matter where you are in the world, you can use them.
But do you know whose cloud services Airbnb uses?
The cloud is a real, tangible thing. It’s hardware. It’s servers. It’s data centres. And for the most part, the cloud is Amazon.
Amazon Web Services (AWS) is the single biggest cloud services provider in the world. It holds around a 40% market share of the cloud. The next biggest competitors are IBM, Microsoft and Google. If you combine those three, you get around a 20% market share. The next 10 biggest after them hold around 17%. And then there are all the others.
Amazon’s cloud services are bigger than IBM, Google and Microsoft’s combined. It’s incredible to think, considering Amazon is mainly an online store. But it’s because it’s an online store that it’s so dominant in the cloud.
When Amazon started, it knew that in order to grow, it had to do so online. Its size was inextricably linked to the speed and widespread use of the internet. The simple problem was the more people that could access Amazon.com, the more it would grow.
But remember, the cloud didn’t exist in 1994. In 1999, Salesforce.com pioneered the ability for companies to deliver applications over the internet — pioneering the cloud.
However, the first real cloud-based storage, computations and delivery was Amazon Web Services in 2002. Amazon decided that if it could build and own the cloud, it could have a direct impact on its own growth.
So it went about building the infrastructure that now holds a 40% market share of cloud services. Here’s a quick roll call of some companies that rely on AWS: Amaysim [ASX:AYS], Atlassian [NASDAQ:TEAM], ESuperfund, Fairfax Media [ASX:FXJ], Goodman Group [ASX:GMG], ME Bank, Nearmap [ASX:NEA], News Corp [ASX:NWS], REA Group [ASX:REA] and MYOB [ASX:MYO].
Sorry for the long list. But that’s a small fraction of companies that use AWS. But as you can see, some of them are Australia’s biggest companies. The point is that many Australian companies are already reliant on Amazon, even though it hasn’t landed its online retail offering with a bang just yet.
That’s one giant to-do list!
Amazon already dominates the cloud around the world. That includes Australia. And when it lands its online retail, it’ll dominate that too.
Look at the events unfolding in Aussie retail right now. National retailers like Marcs, David Lawrence, Pumpkin Patch, Allphones, Dick Smith, Howard’s Storage World, Victoria Station, Masters, Rhodes & Beckett…all going bust. And this is before Amazon comes in and rips up the retail market.
Have a look at the stock price movement of OrotonGroup Ltd [ASX:ORL], Specialty Fashion Group Ltd [ASX:SFH] and Harvey Norman [ASX:HVN] in the last year. They’re down 55.71%, 32.81% and 17.38% respectively.
That’s not just due to Amazon coming, of course. But when Amazon does…these companies — which operate thousands of physical retail stores — are doomed. They won’t be able to compete on price. Or if they do, their margins will be so small that they’ll never make a profit again.
They’ll have to dramatically change their business or they will end up on an administrator’s to-do list.
When Amazon lands, you’ll see how incredible it is. For consumers, it’s the best thing that’s going to happen in Aussie retail. For existing companies…it’s the worst. But that’s the world we live in and that’s the way it’s going.
If you own Aussie retail stocks today, we think you should seriously consider your investment going forward. You have no idea how devastating Amazon will be to many of these companies.
The worst sector in Australia to invest in today, in our view, is Aussie retail. Avoid it like the plague.
Editor, Money Morning