\n-Amazon most disruptive in first party supply of well-known brands as well as toys, video games and small appliances
\n-Slowing housing market adds to the earnings risk for homewares retailers
\n-Further drop in the savings rate required to maintain current level of retail sales growth<\/strong>
\n <\/p>\n
By Eva Brocklehurst<\/p>\n
Amazon Australia is improving, fast. The company's Prime launch, ahead of expectations, is expected to change the game for retailing across the country. Morgan Stanley suggests the low $59 annual Prime fee supports a long-term investment horizon and shows the company is confident in its delivery.<\/p>\n
Amazon is offering two business days delivery to nearly 90% of the population and is available to consumers outside of major metropolitan areas. Morgan Stanley also considers the price for Prime is cheap versus the US, UK, Germany and Canada.<\/p>\n
While Australian delivery times are slower on average, they still compare well with others. The US offer includes two-day delivery to nearly all addresses and Morgan Stanley estimates around 37% of Canadian addresses are eligible for two-day delivery.![](\"https:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/Retailing\/General\/Amazon%20box.jpg\")
<\/p>\n
The Prime offer at this stage includes video and excludes music and cloud. Penetration will expand as more products are brought online for free delivery and incremental services are added.<\/p>\n
As Australian retailers tend to charge between $5-10 for delivery this implies the number of purchases required to pay back the Prime fee is low at 6-12 annually.<\/p>\n
Prime subscription fees are below Citi's expectations and appear to be targeting higher subscription uptake, which potentially reflects a limited offering. Amazon is offering subscribers free 2-day delivery in Australia and free delivery on Amazon US orders over $49.<\/p>\n
While users will have access to Amazon Original content such as videos and e-books Citi does not envisage this as a catalyst to drive membership, given the competitors in the Australian market such as Netflix and Stan.<\/p>\n
Rather, Citi suggests, like any retail business, attractive prices, ranges and good service will determine Prime's success. At this stage Amazon is considered to be most disruptive in the first-party supply of well-known brands and most advanced in toys, video games and small kitchen appliances. First party supplies are limited in shoes and apparel.<\/p>\n
In the broker's view the largest risk exists for electronics retailers. Combined with a slowing housing market and elevated price competition Citi flags significant earnings risks for JB Hi-Fi<\/strong> ((JBH)) and Harvey Norman<\/strong> ((HVN)).<\/p>\n In terms of retail exposure, Morgan Stanley believes the category killers such as JB Hi-Fi are relatively well insulated, while department stores are most exposed. The broker suspects the market underestimates the impact most in the case of Wesfarmers<\/strong> ((WES)).<\/p>\n Housing<\/u><\/p>\n The outlook for housing is not expected to support retail and UBS has become more cautious. House prices are expected to fall more than -5% over the next year because of credit tightening. Consumption growth estimates are circa 2.2% in FY19, benefiting from accelerating disposable income growth and housing starts.<\/p>\n The main risk to the broker's forecast is contained in the savings rate. If this rises around 100 basis points, i.e. to 2.7%, consumption growth could fall around -1.2% in FY19.<\/p>\n This would create significant risk to listed retail forecasts. Furthermore, a further -50 basis points drop in the savings rate is required to maintain the current level of retail sales growth, which UBS suggests could be optimistic.<\/p>\n As the risk is firmly weighted to the downside and the headwinds are building, the broker trims estimates for Harvey Norman and JB Hi-Fi, as these retailers having high historical correlations to a slowdown in housing.<\/p>\n UBS downgrades Super Retail<\/strong> ((SUL)) to Neutral from Buy. The broker's estimates for Bunnings and Metcash<\/strong> ((MTS)) hardware are unchanged, given the upside via market share gains.<\/p>\n The broker favours companies with lower exposure to the macro environment and the housing slowdown, such as Woolworths<\/strong> ((WOW), and upside from international expansion such as Costa Group<\/strong> ((CGC)) and Domino's Pizza<\/strong> ((DMP)).<\/p>\n A second derived negative impact from the housing slowdown is via the wealth affect and this includes Myer<\/strong> ((MYR)) and Super Retail. Still, despite a muted outlook for consumption, UBS believes discretionary retailer valuations are not demanding and are pricing in the softer outlook.<\/p>\n<\/p>\n