Coles and Woolworths face a hulking gorilla
For years Woolworths and the now Wesfarmers-owned Coles have only needed to look one way when assessing their competition; at each other. While both have tried valiantly to label independent supermarkets, green grocers, butchers and, more recently, Aldi as significant competition, few really bought the argument that grocery retail isn’t a two-horse race.
However, the latest rival spruiked as a major challenger by Wesfarmers’ boss Richard Goyder, Amazon, is likely a rare exception and worth paying close attention to over the next decade.
On the surface it seemed a minor show of paranoia for Goyder to last month brand the US-based online retailer, which burst onto the scene over a decade ago with the promise of cheap books, as the “big gorilla on our doorstep”. It appeared particularly paranoid given the newly operational amazon.com.au is currently focused only on Kindle e-reader sales, with Australian shoppers using its US website for most other orders.
But the real Amazon, the one Walmart and the like are confronting in the US, is a far different beast to the one glimpsed by its Aussie competitors and justifiably offers Goyder and his Woolworths counterpart, Grant O’Brien, cause for a sleepless night or three. Not to mention their smaller rivals and the entire retail sector, as Goyder implied in his speech. Wesfarmers’ retail division, after all, goes much deeper than Coles to other potential Amazon rivals in Target, Kmart and Officeworks.
Such is the rate of change at Amazon, which now sells everything from TVs to furniture, clothing and dry groceries as well as offering a Netflix-like streaming service, that it is hard to pinpoint the catalyst for Goyder’s statements.
Perhaps he had noticed the roll-out of the company’s fresh grocery service in Seattle and Los Angeles and mulled the implications for Coles down the line. More likely, however, is the probability he had caught wind of the imminent launch of amazon.com.au, which started operation last week by offering Kindle-related products.
For many, this represents the start of the company taking the Australian market more seriously and a consequent expansion. For retailers, it means a sense of trepidation and they only need look at bookstores to understand the damage Amazon can wreak.
Next stop is likely to be a local fulfilment centre and although strong rumours last year of a search for a suitable warehouse site in Australia by Amazon executives have so far come to naught, the local website could speed up this process.
The big problem for Australian retailers is that by the time Amazon launches a full-scale assault here, the online retailer will have further fine-tuned its supply chain strategies.
A fresh sign of this was news in October of Amazon teaming with consumer goods manufacturer Procter & Gamble in a deal that allows the retailer to set-up shop within P&G warehouses. The Seattle-based group is also reportedly involved in, or nearing, similar arrangements with several other firms including Kimberly Clark.
It remains to be seen whether the strategy will actually work, as the cost reductions from reduced transport and the saving of more space in its warehouses for higher margin goods may be outweighed by an increase in the number of packages required to fulfil orders, but it does highlight the retailer’s unabashed ambition to one day dominate the dry grocery sector. Importantly, it also signifies strong relationships with key suppliers.
The same can’t be considered a strong point for Coles and Woolworths in recent years, despite progress with the signing of a grocery code of conduct this week.
Consumer goods makers in Australia have long been hurt by the bottleneck at the end of the supply chain, which means that if you’re not at Coles and Woolworths, you have little chance of any significant market share in your category.
Amazon has the potential to shake that situation up and capitalise on the tension within the supply chain.
It doesn’t, however, mean the online retailer is ready to burst onto the local scene and reap substantial profits, though that won’t worry the Jeff Bezos-run group. With cumulative profits over its lifetime of just $US2 billion, Amazon has never shown fear about not making a profit in the near-term. And that arguably makes it the scariest competitor out there.
The lack of definitive signs of rapid expansion in Australia, however, could see the Amazon gorilla on our doorstep for a few years before it tries to crash through. In the meantime, Goyder will be hoping his barricades hold.