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The Australian department store market could be shrinking even more quickly than previously thought, as Amazon’s disruption becomes more pronounced and consumers shift away from traditional spending habits.

Morningstar analysts believe tough times for Australian department stores are unlikely to subside soon, and say the sector will be 30 per cent smaller this year than previous estimates.

Shrinking market size and intensifying competition will reduce the department store sector to $17.5 billion in fiscal 2017 compared to Morningstar’s previous estimate of $24 billion, and to $16.7 billion by 2027, the equity firm said.

Despite Amazon’s underwhelming arrival last week, Morningstar still expects the e-commerce giant to be just as disruptive to Australian retailers as it was in the US.

‘We expect the structurally declining department store sector’s woes will be exacerbated by the extraction of sales by Amazon Australia,’ Morningstar said in a note.

‘We forecast these headwinds will have a detrimental impact on the overall size of the department store sector, to a magnitude we believe the market is underestimating.’

Morning star believes Amazon will seize $2.3 billion of annual sales from the retail sector by fiscal 2027.

‘While we forecast this strong online retail growth to be partially captured by the incumbent department stores’ own websites . . . Amazon Australia will pursue its piece of the pie, leading to a decline in the size of the sector’s addressable market,’ it said.

The equity firm said the market was also ‘underestimating’ the magnitude of continued sector decline as customers shift their spending habits to entertainment, leisure and boutique shops.

These headwinds would reduce the sector’s share of the retail market to 4.4 per cent in Australia by fiscal 2027 from six per cent this year, Morningstar said.

Despite this, the equity firm insisted that all department store chains would survive as they work to reduce their floorspace and turn their focus to omni-channel platforms.

Morningstar believes Kmart is in the strongest position to withstand online competition, due to its low pricing point, while Myer and David Jones will go head-to-head in defending market share.