In November of 2016 the Chief Investment Officer of Watermarks Funds Management revealed a startling quote from a conversation with the person responsible for the long-anticipated rollout of Amazon here in Australia:
• We are going to destroy the retail environment in Australia.
Anticipation evolved closer to reality on 3 August 2017 when the purported slayer of bricks and mortar retail announced its plans to open a distribution centre in Melbourne, with Amazon’s Australian boss promising his new fulfilment centre will stock hundreds of thousands of products which will be available for delivery to customers across Australia when we launch our retail offering.
Short sellers wasted no time piling back in to one of their favorite targets in past days – JB Hi Fi Limited (JBH), pushing the electronics retailer back on to the ASX Top Ten Shorted Stocks List.  Another ASX retailer gracing the lists of stocks most at risk from Amazon – Myer Holdings (MYR) – has been a resident of the Top Ten Short List for some time.
Other retailers likely to suffer include a veritable “Who’s Who” of ASX stocks:
• Harvey Norman Holdings Limited (HVN)• Premier Investments Limited (PMV)• Woolworths Limited (WOW)• Wesfarmers Ltd (WES)• Super Retail Group (SUL)• RCG Corporation Ltd (ASX: RCG)• Reject Shop Ltd (ASX: TRS)
Some analysts have been sounding the alarm bells.  In December 2016 an article in the Australian Financial Review cited a projection of Amazon sales reaching $4 billion within five years of its rollout, according to the head of research at Citigroup, Craig Woolford.  
In June of this year Citigroup cut its long-term profit forecast for JBH by 40% and 30% for HVN.  The concern is the ability of these and other retailers to match Amazon’s reported goal of pricing its products by as much as 30% lower.
The earnings picture is gloomy for other retailers as well, as the following graph from Citigroup depicts.

Credit Suisse is equally pessimistic, predicting within five years of Amazon’s arrival earnings before interest and tax at department store operator Myer could fall by 55%. 
Analysts at Credit Suisse see above average risk at any retailer selling anything that can be put in a small box, pointing to JB Hi Fi’s latest acquisition – the Good Guys – facing reduced risk due to the size of its products. Others cite Harvey Norman’s furniture offerings as providing some safety against Amazon.  Those restraints appear to be falling by the wayside as on 20 July news broke that Amazon would begin offering branded Kenmore appliances in the US from once dominant US retailer Sears Roebuck.
While there may be other contributing factors, the Amazon impact on many US retailers has been devastating as Amazon has broadened its reach with improvements in logistics and supply chain management over the past three years. The following graph tracks US retail bankruptcies.

There are Australian retail experts who claim Aussie retailers can weather the storm, as have some select US retailers.  While panicked analysts and investors alike might view a brick and mortar outlet as a liability with a voracious appetite for capital, calmer experts point to physical stores as assets.
A 2016 survey from a US based commercial real estate and investment firm CBRE Group encompassing 13,000 participants between 22 and 29 years old in 12 countries found an astounding 70% preferred brick and mortar stores.  US based consulting firm Accenture Research claims in the US over 77% of Gen Z – born between the mid 90’s and early 2000’s – also prefer brick and mortar stores.
An earlier study from Business Insider Intelligence looked at consumer rationale for brick and mortar store preferences.  Here is what they found

In the early days of Amazon’s success there were those who claimed consumers were using brick and mortar stores as showrooms where they could “touch and feel” a product and then return home to buy online.  In 2012 a poll from market research firm Harris Insights & Analytics pointed to a different picture, with “reverse” showrooming where consumers check products online and then buy in store besting the showroom practice of checking out a product and then buying online.  Here are the results.

Preferences do not always reflect what consumers actually do.  Despite the surprisingly high favorabilities for brick and mortar stores, close to half of US consumers have shifted online.  Many experts tout the lower cost business model of online retailers but the most successful of all – Amazon – relied on other things to climb to the top.  
A 2012 article in Business Insider US said it all:
• Amazon is obsessed with making its customers happy.
First, the statement suggests Amazon recognizes consumers do not rely on price alone.  A 2010 study from management consulting firm McKinsey & Company identified six additional factors.

Factors like those in the McKinsey study make up what retail experts call the “value proposition” – which is nothing more than the perceived and actual value consumers get from buying from them.  What does Amazon do to make its customers happy?  
In their book, Strategy that Works, Paul Leinwand and Cesare Mainardi encapsulate the Amazon value proposition:
• Amazon is a super-aggregator of vendors and customers, giving people a compelling, one-stop online shopping experience with easy access to products, information, and friction-free delivery.
Buried in that statement is perhaps the most critical yet overlooked facet of the Amazon phenomenon – information.  Customer complaint forums are filled with gothic tales of experiences in brick and mortar stores ending with rude cashiers and beginning with wandering around the store looking for help, only to find the few sales clerks available know little if anything about what they are selling.
Amazon product reviews were the vehicle the company used to achieve the top offering retailers can add to the customer experience to increase purchases information – as seen in the graph from Business Insider (BI) Intelligence. 

Aussie retailers that can update their value propositions resulting in a customer experience superior to online browsing can survive. Simply put, retailers need to give consumers better reasons to make the trip to a brick and mortar store.  Right now, the preponderance of expert opinion appears to be leaning against electronics retailers JBH and HVN.  Here are estimates from Citi Research for Amazon market share by category.

Investors who doubt the long-term value in these two companies would be well advised to take note of the largest remaining electronics retailer in the US – Best Buy Inc. (NYSE: BBY).  
At the end of Calendar Year 2012 the BBY share price was $11.28, down from an all- time high of $53.32 set in 2006.  A co-founder of the company considered taking Best Buy private but instead brought in a new CEO, recognised for his ability to “turn things around.”  The company launched a Renew Blue campaign, taking multiple measures to enhance the overall customer experience, beginning with a “price match” guarantee, negating the Amazon advantage for directly comparable products.
BBY has an extensive online presence, where customers can buy and pick up products in-store.  Product knowledge training enhanced the value of sales clerk and the company introduced “stores within a store” featuring an array of products from a single manufacturer with knowledgeable clerks available for information.  The company improved its Geek Squad program – a collection of technically competent specialists available for in-home assistance as well as for advice, technical information, and in-store repair of any product regardless of where it was purchased. Perhaps the best evidence to support the enhanced value to consumers from the Geek Squad program is that Amazon is going to copy it.
The stock is now trading at $59.78, a 430% increase since the 2012 low and is the leading electronics retailer in the US, with Amazon in second place.
Australian brick and mortar retailers have been slow to go “omni-channel” by adding online platforms.  JBH got on board early and by 2015 was listed in the Top Ten Online Retailers in Australia.  Harvey Norman was slower to get started but won the title of Best Multi-Channel Retailer for 2016.  
JBH is enhancing its online platform with a customer database of purchases enabling targeting past customers with online deals and related products, a feature that has served Amazon very well.
JB Hi Fi already prides itself on the qualities of its staff, including product knowledge expertise and helpful attitudes.  The recent acquisition of The Good Guys appliance and electronics dealer vaults JBH ahead of rival Harvey Norman in the appliance sector with a combined 29% market share versus 24% for HVN. 
Perhaps the best hope for the JBH to survive and continue to thrive is company management.  It wasn’t that long ago that naysayers were predicting doom for the company in the face of cutthroat price competition from off-share online retailers.
Both these companies claim they can reduce prices to combat the threat of Amazon, but analysts still see an edge for Amazon as that giant can withstand low margins and no profit for some time.  However, if you believe that physical locations where consumers can touch, feel, and learn about products of interest are an advantage, HVN and JBH are worthy of a place on an investing watch list as share prices are likely to drop once Amazon begins operating. 

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