Amazon to undercut local retailers by 15 per cent


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AMAZON’S arrival in Australia will kick off an “electronics storm”, forcing local retailers to drop their prices by 10 per cent on average to remain competitive, according to Citi.

But Australian retailers offer surprisingly good prices and are often cheaper than Amazon on recently released, category-leading products such as the Samsung Galaxy S8 — which is actually 10 per cent cheaper at JB Hi-Fi — the investment bank said in a note on Wednesday.

A price survey by Citi found electronics on Amazon were 15 per cent cheaper on average, with the biggest discounts available on older, sub-premium products and lower-profile brands typically sold by third-party sellers.

“In our view, average sale prices need to contract by 10 per cent to narrow this gap to 5 per cent,” Citi analysts Bryan Raymond, Craig Woolford and Lokesh Gusain wrote. “This will likely drive 7 per cent to 11 per cent declines in sales productivity and 180-250 basis point declines in EBIT margins over three to four years.”

Based on the experience of other markets such as the UK, Amazon’s entry is “not a terminal decline for retailers”. “Retailers typically see margins begin to recover five or more years after Amazon launches Prime,” they wrote.

Citi predicts Amazon will take 8 per cent market share over five years and reach 11 per cent in a decade, largely at the expense of smaller retailers, regional electronics retail networks, and general retailers which sell electronics such as department and discount stores.

Combined, these groups currently hold 58 per cent of the market, meaning market share for Harvey Norman, JB Hi-Fi and The Good Guys will remain broadly stable.

After years of speculation, Amazon last month broke its silence, officially confirming it was heading Down Under, prompting a pledge by Gerry Harvey to “match or beat” its prices.

A report by Macquarie estimated that by 2025 Amazon could take one quarter of online retail sales — which would at that point account for 12.5 per cent of total retail sales — equating to revenue of $14.5 billion.

Globally Amazon has annual sales of more than $133 billion ($US100 billion), and in February reported a 22 per cent rise in revenue to $58.2 billion ($US43.7 billion) for the fourth quarter.

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