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Amazon Australia

Amazon Australia – 18 months post launch

After years of speculation and rumours Amazon offered Australian customers a local Amazon warehouse service from 5th December 2017 (Amazon). Now, 18 months later, what has Amazon Australia achieved in the Australian grocery market?

“Focusing on customers and the long-term are key principles in Amazon’s approach to retailing,”

Rocco Braeuniger, Country Manager of Amazon Australia.

Amazon Australia Launch

Many Australians were already buying products and services from Amazon before the first warehouse in Australia opened. Generally speaking, the existing shoppers had an excellent customer experience (CX) with Amazon and were eager for the Amazon Australia warehouse to open.

Australian press reports were also generally positive about what Amazon would achieve after opening a warehouse in Australia. For example, SMH headline of “Amazon plans to smash Australia’s retail sector one toaster at a time”.

Shoppers’ past experiences and positive press reports definitely meant potential Australian shoppers had high expectations of what Amazon Australia would deliver from day one.

Amazon Australia First Warehouse Opening

5th December 2017 Amazon Australia first warehouse in Dandenong South, Victoria, was open for business for all potential customers. (Amazon)

The major criticism of Amazon Australia, during this initial phase, was a lack of communication. There were conflicting media reports that the local service would be available from September, October or November 2017. For example, ‘When Will Amazon Launch for Real?’, highlights the confusion about when the service would be available. Then other articles, e.g. ‘failure to launch’ highlighted this confusion had upset potential Amazon Australia customers.

Amazon Australia Launch – December 2017

There are conflicting reports about the success of the first day sales.

Firstly, there were many negative reports suggesting Amazon had not met customers expectations. Lifehacker detailed 6 things that they hated about the launch and a common theme in other articles was that prices were not as low as hoped, e.g. news.com.au.

Analysis by SMH suggests Amazon sales in December 2017 were approximately $16 million. In comparison (for the second half of 2017) JB Hi Fi averaged online sales of $20 million a month and Kogan averaged $36 million a month. Australian total retail sales were approximately $26.25 billion during December (ABS). These numbers again suggest the Amazon Australia launch was not successful.

Statements from Amazon suggest the launch was successful. Amazon stated first day orders on Amazon.com.au were higher than for any other launch day. For example Australian country manager, Rocco Braeuniger stated:

From early in the day, we experienced visitor numbers that far exceeded our expectations

Personally, I would label the launch a failure. I believe Australian consumers had high expectations due to the power of the Amazon brand. Australian consumers were used to low prices from Amazon.com (US site) and other international sites such as eBay and Amazon Australia did not deliver the same aggressive pricing into the Australian market. Other issues such as a limited range and slow delivery times vs the US site also hindered Amazons’ launch into the Australian marketplace.

Amazon Australia Roll Out

After a disappointing launch Amazon Australia has continued to build their business in Australia. Some of the important steps in the roll out are briefly outlined below.

FBA (fulfillment by Amazon)

February 2018 Amazon Australia launched FBA, fulfillment by Amazon. This service allows vendors to store their products in Amazons warehouse. Amazon will then pick, pack and ship the product/s to customers. The major advantages for customers is free delivery, for eligible orders over $49, and 1 to 2 day delivery times for most major cities in Australia.

“We are focused on helping Australian businesses of all sizes succeed by inventing on their behalf and making our technology available to them and FBA is a fantastic example of this. Customers shopping on amazon.com.au will be able to access an ever growing and more unique range of products accompanied by the convenience of fast delivery and Amazon’s world-class customer service.”

Amit Mahto, Head of FBA in Australia.

Amazon Prime

June 2018 Amazon Australia launched Amazon’s Prime service in Australia. This service allows Australian consumers to pay an annual fee and then be entitled to free delivery on Amazon orders. Orders should also be delivered in 2 days, to 90% of the population. Prime members also get other benefits such as access to Amazon Prime Video and Reading, Twitch Prime and exclusive deals. The annual price of $59 is very aggressive considering logistics costs in Australia. The cost in the US is USD $119, approx. AUD $164.

“We hope that Australians will love free two business day delivery on products from Amazon Australia and free international delivery on products from Amazon U.S., all available to customers on Amazon.com.au,”

Jamil Ghani, Vice President, Prime International, Amazon.

Amazon Second Australian Warehouse

August 2018 Amazon Australia opened their second warehouse in Moorebank, Western Sydney. This warehouse, 43,000 feet, is double the size of the first warehouse in Victoria.  

“This is an exciting milestone for Amazon in Australia.  The Sydney facility in Moorebank will help Amazon ensure that customers enjoy fast and reliable delivery across more areas of the country,”

Robert Bruce, Amazon Director of Operations.

Amazon Pantry Food and Drinks

October 2018 Amazon Australia launched their Pantry Food and Drinks range. The range of over 400 local and international grocery brands meant Amazon Australia now had a limited grocery offer vs other online grocery stores in Australia, e.g. Coles and Woolworths.

Amazon blocked Australian shoppers access to international sites

During May 2018 Amazon announced it would block Australian shoppers from buying product off Amazons’ overseas sites, e.g. Amazon.com in the US. The ban would commence on 1st July 2018 when the Australian governments’ new GST rules came into effect. The new GST rules are that all items bought online overseas and shipped to an Australian address had to pay GST. Some people have called this rule the ‘Amazon tax’.

Consumers response to this move was negative. For example, ABC research highlighted that Australians thought Amazons Australian site had less products and was more expensive so Amazon Australia should let them shop at international sites such as Amazon.com. Others such as The Guardian reported similar negative responses from consumers.

November 2018 Amazon Australia reversed this decision. As reported by news.com.au;

“As a result of customer feedback, from November 22 Amazon customers will be able to ship eligible items from Amazon.com to Australian delivery addresses,” an Amazon spokeswoman said.

Amazon Australia Today

Today, 18 months after opening their first warehouse in Australia. Amazon Australia has grown to offer 100 million products in 29 categories.

Financials

As reported by AFR, Amazon Commercial Services operates the Australian e-commerce business. Topline financial results include:

For the 12 months ending December 2018 sales grew to $292M vs $17M in 2017. This is a logical result as the Australian warehouse was only open for a short period in 2017 vs a full 12 months trading in 2018. Average monthly sales of $24M in 2018 is still low number for a business offering 100 million products. In comparison Woolworths Australian supermarkets averaged approx. $3,315M a month for the 6 months ending December 2018.

Interestingly, Amazon Australia marketing spend increased from $1.7M in 2017 to $68M in 2018 (SMH).

Google Trends

Another indicator of shoppers interest in a site is how often it is Googled.

Amazon Australia Google Trends Chart
Google Trends Chart for Australia – “Amazon”

The Google trends chart (above) highlights that since the soft launch and first warehouse opening Australians have not been googling ‘Amazon’ as much. This result suggests that Australian customers looked at the offer and then decided it was not strong enough. When a business is growing it is normal that more people will Google it. The ‘blips’ in July and November 2018 were due to promotions. These promotions regularly receive media attention in Australia, e.g. news.com.au. Again these major sales event generated less interest than the launch suggesting Amazon Australia is struggling to engage with customers.

Amazon International Grocery Offer

The preceding analysis has highlighted that Amazon Australia is facing numerous challenges in Australia, including in online grocery (Amazon Pantry). A very quick overview of some of Amazons’ international grocery operations highlight similar issues.

Amazon USA

In the USA Amazon bought an organic supermarket chain, Whole Foods, for US $13.7B in 2017 (CNBC). 12 months after buying Whole Foods Amazons’ quarterly results (Q4, FY 18) highlighted sales in physical stores had declined 3% vs Q4, FY 17 (Bisnow). The declining in store sales, could have been partly due to aggressive pricing and Amazon Prime customers ordering online. Other analysis, such as Panos Mourdoukoutas from Forbes, suggests that Whole Foods aggressive pricing is further eroding Whole Foods profit. Panos suggests the underlying issues with Whole Foods is competition and market saturation. Numerous other articles, including Bloomberg, question whether the purchase of Whole Foods was the correct strategy for Amazon. These results highlight the challenges Amazon USA face in entering the grocery market.

Amazon UK

In the UK Amazon launched in 1998 (Amazon). In 2010 they launched their Grocery Store section on their main website. The Grocery Store sells about 200,000 household essentials, from baby food to cleaning products. Then in 2015 they launched their Pantry service, originally a next day delivery service, now a 1 hour delivery service in some regions. A local supermarket, Morrisons, agreed to supply Amazon their grocery items (BBC). Then in 2016 they launched their Fresh service in London. Fresh offers same day delivery for items from local shops and markets around London.

Despite the investment by Amazon into the UK market place, over several years, the greatest growth in market share in the UK grocery market has been by hard discounters, Aldi and Lidl. According to Statista, between 2012 and 2018 Aldi grew their share from 3.0% to 7.6% and Lidl grew their share from 2.8% to 5.5%. (Statista time periods 12 w/e 12/08/18 vs 12 w/e 19/08/12). For the same time periods Morrisons, that supplies Amazon grocery items, share decreased from 11.5% to 10.4%. This result highlights that Amazon has had a limited impact on the UK grocery market since launching. The ‘big 4’ UK full service supermarkets have been fighting the hard discounters.

Importantly the UK market highlights that, after many years of offering an online grocery service, Amazon is still yet to compete successfully with the traditional grocery retailers (full-service and hard discounters).

“The ecommerce giant fares less well in offline markets, where customers often attach an emotional element to their experiences. We found that Amazon’s brand has its limits.”

Henry Stott, Director of Decision Technology

Competition in Australia

Partly due to launch of Amazon in Australia local grocery retailers, e.g. Coles and Woolworths, have improved their online offer. Some of the changes include:

  • Coles and Woolworths offer ‘click and collect’ in more stores. Amazon Australia does not offer this service.
  • Decreased delivery times. For example, Woolworths moving from next day to same day delivery (for larger orders) and even 2 hour delivery in some regions.
  • Strategic partnerships. For example, Coles is trialling using UberEats for delivery, utilising Ocado software for online orders and selling products on eBay.

These changes have improved the overall customer experience for Australian online grocery shoppers.

Summation

When Amazon launched in Australia many local shoppers had high expectations. Amazon had strong brand awareness, positive press support and significant financial resources. Unfortunately, Amazon Australia did not meet local shoppers’ expectations.

Since launching in Australia Amazon have improved their offer, e.g. FBA and Prime. The major issue is that they are not building a positive relationship with Australian shoppers. This was highlighted by Australian shoppers’ reaction to Amazon blocking Australian shoppers from international Amazon sites in July 2018.

Local grocery retailers, e.g. Coles and Woolworths, have improved their online offer and now offer a service that beats Amazon. For example, they offer click and collect and due to their store networks they are able to offer faster delivery times. Internationally, US and UK, Amazon has also struggled to develop a business model that competes with the traditional grocery retailers.     

Amazon may argue they are playing a long game but unless they can improve the customer experience for Australian shoppers’ they may not be able to compete with other grocery retailers in Australia.

The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.

Thank you,

Tim Bowen