Amazon is coming to town.

Australia's retailers are putting on a brave face, but the looming arrival of the US online retail behemoth next year is undoubtedly a huge threat.

Amazon plans to open distribution centres in capital cities around Australia next year that would enable it to deliver goods to customers and allow customers to pick up the goods, from what it calls "fulfilment centres".

Many Australians are already familiar with Amazon as a book retailer, but in the US and other markets it sells general merchandise such as electronics, clothing and sports and outdoor goods, and it looks like this is what it will start selling in Australia.


And in an ominous sign for the supermarkets, it is also planning to move into fresh food.

One unnamed Amazon executive has reportedly said: "We are going to destroy the retail environment in Australia."

The company is believed to be on the hunt for warehousing space in Western Sydney ahead of its expected launch here in September next year.

In the US, Amazon has one dollar for every two dollars of online sales. What's more astounding is that by some estimates e-commerce will hit 20 per cent of total sales in a decade's time - which will mean that Amazon will account for 10 per cent of total retail sales in the US.

Its entry into Australia has the potential to hurt a slew of Australian retailers from JB Hi-Fi and Harvey Norman, department and clothing stores such as Myer, and the supermarkets.
Coles and Woolworths are clearly concerned.

Wesfarmers, which owns Coles, Bunnings and Officeworks, has been preparing for Amazon's entry and will use technology to cut costs and ensure its goods arrive faster and fresher in stores, and improve its bricks and mortar stores.

The company is putting on a brave face now, but perhaps the words of chief executive Richard Goyder at a speech back in March are more apt. US online retail behemoth Amazon will "eat all our breakfasts, lunches and dinners", unless Australian retailers become more innovative and barriers to competition are removed, he said.

Goyder is particularly concerned that online retailers can operate seven days a week, 24 hours a day, while the operating hours of brick and mortar retailers are limited by governments.


Woolworths has set up a separate unit to respond to the US retail giant's entry. The supermarket chain believes that while Amazon is a competitor in the online space, it won't be able to replicate the network of stores in prime locations that Woolworths has around Australia.

That sounds like wishful thinking. The point is, that maybe a network of stores won't be so necessary in future. Some people will always want to buy their own groceries and there will always be a demand from people who need their groceries right now. But the move into fresh food could seriously damage the supermarkets in the years to come.

If the internet has demonstrated one thing, it is that when a cheaper, better or faster solution comes along, customers will jump to it.

Alongside the ease of online ordering 24 hours a day and having your goods delivered to you - or picking them up at a fulfilment centre - Amazon has something else to offer customers.

In the US, UK and France, it offers a membership service known as Prime.

For an annual fee of US$100, consumers get free two-day shipping on most purchases, discounts on some goods, and a Netflix-style streaming television service and a streaming music service.

Amazon haven't confirmed that they'll launch Prime in Australia (in fact, they haven't confirmed much at all) but it would be a strange move to launch here without this key part of the puzzle.

Prime is a very attractive offering and costs about the same as a standalone pay TV service. It will help Amazon build a huge base of loyal customers who will make it their first port of call when they need to buy something.

Amazon has a market capitalisation of around US$350 billion and deep pockets. It is already a well-known brand in Australia and is willing and able to make long-term investments to establish a market presence.

Citi estimates that Australians spend about A$700 million a year on Amazon. That could rise to US$4 billion if Amazon starts selling a wider range of goods here, according to analysis by Citigroup. Much of that extra cash would come out of the sale of existing retailers.

According to one report, Amazon sees huge potential in entering the Australia market because it believes prices of retail goods are too high here. If local retailers want to retain market share, they will have to respond by cutting their prices - and their profits.
Australian retailers are in for a tough few years.