Never has a new tenant aroused so much curiosity.
At No. 2 Park St in Sydney's CBD, employees of major companies such as Citigroup, QBE Insurance and Unilever have been watching with interest as US retailer Amazon gradually colonises the building.
The first Amazon Web Services staff arrived six months ago and by January the $US360 billion ($495 billion) company will occupy five floors of the 47-storey tower.
For a market jumping at shadows and trying to second guess Amazon's next move, it's the first concrete evidence the retail behemoth has big ambitions for the $222 billion Australian retail sector.
Whether Amazon launches its full range of services in 2017, as Watermark Funds Management chief investment officer Justin Braitling has claimed, or whether its arrival will be postponed until 2018 or 2019 – only after it has conquered more lucrative markets in India and China – remains to be seen.
"It could be a Trojan horse but at some point it will be true," says Alphinity Asset Management portfolio manager Bruce Smith, who holds shares in several retailers likely to feel Amazon's heat.
"There have been rumours for the last 10 years – this time it looks more credible, but what form it takes is unknown."
Importing food
One Amazon insider says the company will roll out Amazon Prime Now in 2017, gradually increase the number of items and launch Amazon Fresh six to eight months later, initially importing food from an Amazon facility in Singapore before signing agreements with local suppliers and leasing its own warehouse.
Amazon Fresh bricks and mortar stores would follow in 2018.
Whatever the timing (Amazon is keeping mum), the impact on online and bricks and mortar retailers, suppliers, retail landlords, retail jobs, transport and logistics providers and consumers will be as disruptive as the advent of online retailing itself, a second wave of upheaval that will create winners and losers.
Australian consumers currently spend between $500 million and $700 million a year on Amazon sites, less than they do at Woolworths' or Wesfarmers' online stores.
Citigroup's head of research, Craig Woolford, believes Amazon could capture sales of at least $4 billion within five years of rolling out its services. That represents 14 per cent of all online spending and just 1.1 per cent of total retail spending. But, as with the arrival of global chains Zara and H&M;, it will skim the icing off the cake for local retailers.
Woolford believes Amazon is unlikely to establish a full physical presence in Australia for another two years, citing the need to set up fulfilment centres and sorting centres and to secure Australian brands.
"The drums are beating but there are not many smoking guns," Woolford says. "We don't see any evidence that they've lined up the supply chain or suppliers for Australian-based brands, which would make it hard to launch in 2017."
Overtaking established chains
In the US, Amazon now accounts for one quarter of total retail sales growth and 50 per cent of all US online sales. It is the second largest retailer of consumer electronics in the world, behind Best Buy, and is poised to become the largest apparel retailer in the US, overtaking established chains such as Saks, Nordstrom and Macy's, whose sales and earnings have tanked.
A study earlier this year by Civic Economics and the American Booksellers Association concluded that Amazon caused a net national loss of 135,973 retail jobs in 2015 as established bricks and mortar chains closed stores and laid off staff.
Amazon has deep pockets, doesn't appear to be in a rush to make money and is happy to allow its web services business to subsidise its consumer businesses, which includes Amazon Prime, its subscription-based streaming service, Prime Now (one-hour delivery) and online grocery offer Amazon Fresh.
Citigroup estimates that profits at retailers such as JB Hi-Fi, Harvey Norman, Myer and Super Retail Group could fall around 20 per cent as sales shift to Amazon, triggering negative operating leverage, and gross margins come under pressure as prices fall. Amazon is reportedly planning to undercut local prices by as much as 30 per cent.
Some retailers, such as Woolworths, Wesfarmers and Myer, have been preparing for Amazon's arrival for months if not years. Woolworths, for example, has established a separate unit to respond to the Amazon threat, while Wesfarmers is drawing on resources from across the group to come up with ways to speed up distribution, improve bricks and mortar and online stores, and secure long-term agreements with suppliers.
Others, says Bain and Company partner Mel Sanders, are complacent and significantly under-prepared.
"My sense in looking at the offerings of our retailers is they have lots to do to even get the basics right, let alone match Amazon Dash [an electronic gadget that enables customers to reorder groceries at the touch of a button]," says Sanders, citing clunky e-commerce sites and high home-delivery fees for online grocery orders.
"I don't think our retailers are particularly well equipped and nor have they had to be – that may be all about to change."
Ten-year journey
Bain and Co, which is believed to be advising several major retailers, expects Amazon's Australian entry to mirror the pattern in the US and the UK, in which case Australia is already one or two years into what will likely be a 10-year journey.
Amazon entered the UK in 1995, shipping books initially from the US before moving into other digital services such as streaming and cloud services.
A few years later it established fulfilment centres and expanded into general merchandise, starting with electronics and toys, then tools and hardware, followed by homewares, sporting and outdoor goods, jewellery, watches, shoes, health and beauty, and office supplies, dry groceries and, finally, fresh foods.
"That journey [in the UK] took some years," Sanders says. "But based on that, the retailers that are most at risk [in Australia] in the near term ... will be the discount department stores and the mass retailers."
For some retailers Amazon's expansion represents an opportunity.
Smaller retailers will gain a new and powerful channel to market through Amazon's Marketplace and there is scope for Amazon to partner with a local wholesaler or retailer – such as Metcash or Harris Farm Markets – to accelerate the roll-out of Amazon Fresh, along the lines of its partnership with UK food retailer Morrisons.
"Playing fresh successfully is quite hard with a concentrated grocery sector. You need to have long-term supply arrangements, you need a good proposition to the shopper, and that will be hard for them to achieve," says Sanders. "They had to go to Morrison's to get that capability and I can't imagine it will be that different in Australia. Doing it on their own organically would be a very difficult way to go."
Lucrative for suppliers
For suppliers, the arrival of Amazon could be as lucrative as that of Aldi 16 years ago or Costco in 2009, providing a new route to consumers outside the grocery duopoly or the troubled discount department store sector.
"Suppliers will treat this very seriously but they'll have to be very thoughtful about channel conflict," says Sanders. "If you're supplying Woolworths and Coles and offer the same products at the same prices to a competitor that could strain your relationship. Suppliers will need to think about providing unique SKUs that don't put you in conflict with your current customers."
Suppliers will also have to be prepared to face tough price negotiations.
"A fundamental part of Amazon customer value proposition is price and they are generally very competitive when you benchmark them on key lines or key traffic drivers," Sanders says.
"Amazon, more than any bricks and mortar retailer, has incredibly rich data on what customers are buying and putting into their baskets and they use advanced analytics to work out which categories they should get into and how to price dynamically.
"They have sophisticated pricing engines where they'll move prices to get the best revenue yield – no-one in Australia is doing that, not even close. They'll change prices five times a day."
Amazon also represents an opportunity and a threat for distribution, freight and logistics providers.
In the US, Amazon has teamed up with third-party logistics partners such as FedEx, UPS and Toll while building its own fleet of trucks and cargo planes and developing a network of fulfilment centres, sorting centres and delivery stations to guarantee a superior service and take greater control over the "last mile".
Amazon is expected to adopt a similar strategy in Australia – initially partnering with local players such as Toll, Australia Post, Singapore Post's Couriers Please or Aramex's Fastway Couriers – before eventually developing its own end-to-end supply chain.
"By owning the supply chain in Australia Amazon is more likely to gain traction with consumers and differentiate itself from competitors on service, rather than just on price," says Woolford.
Retail experts say retailers, suppliers and logistics providers need to be prepared so they can take advantage of opportunities and minimise the risks.
"Any competitor that comes into market is going to have an impact on existing businesses," says EY's managing partner in consumer and industrial products, Glenn Carmody. "If existing businesses are not focused on where the competition is coming from they're missing an opportunity to prepare for that and respond to that."
Daily deals pioneer
One online retailer that has started to tweak its business model is pioneering daily deals site Catch Group, which is boosting its retail capabilities and adding thousands of new products to encourage customers to make multiple purchases rather than snapping up the deal of the day.
New chief executive Nati Harpaz says the changes are aimed at accelerating Catch Group's sales growth and making the 10-year-old retailer more sustainable, rather than a response to Amazon.
"We sat down and nutted out how to take the business to the next level – it's got nothing to do with Amazon, Amazon is already here," says Harpaz.
He says the US retailer's Australian expansion may not be all smooth sailing. Transport and logistics costs in Australia are much higher than those overseas – $25 an hour for warehouse labour compared with $US9 ($12.40) an hour in the US – and Amazon could struggle to secure local suppliers.
"Running Amazon Prime Now and Amazon Fresh and free delivery is going to be very hard for anyone to execute," he says, suggesting it would be cheaper for Amazon to ship from Singapore instead of opening Australian warehouses.
Online retailers such as Catch Group which sell third-party brands are likely to be most exposed to Amazon, but Harpaz suggests that high-margin bricks and mortar chains and digital marketplaces such as eBay will have more to lose.
"Online will grow significantly across the board. While we think Amazon will be competition it will be healthy competition – it's going to help us grow."
