Amazon has evolved into one of the most  fascinating global companies, continuously disrupting business models and changing the way we consume everything from books through to software. Although Amazon is the largest cloud service provider in the world, this blog will focus on their retail business (of which they are the 8th largest in the world[1]) and the profound impact they have on markets they expand to.

Indian Innovations

An interesting case study is how Amazon adapted their business model to penetrate the Indian market. Undeterred by India’s low internet penetration and poor logistical infrastructure, Amazon launched their Indian website in 2013 and set out to recruit a range of suppliers, most of which had actively avoided e-commerce due to its complexities. Amazon’s first innovation was their Chai Cart program, where a team literally wheeled mobile tea carts through the cities, serving refreshments to small business owners, whilst simultaneously educating them on the benefits of having an online presence.

The next step was to actually get these businesses online, and here came innovation number 2: the Amazon Tatkal. This van, packed with a suite of products boasted the ability to get these sellers online in 60 minutes. The Amazon Tatkal travelled an astonishing 50,000 kms, visiting over 120 cities across India3. Now that Amazon had provided their suppliers with an online presence, they had to solve three key issues:

  1. The low internet penetration in India
  2. The poor logistical infrastructure coupled with a large land mass
  3. A cash based economy.

One of their solutions was to enlist small store owners as distribution partners. As these stores had an internet connection, customers could browse, order goods, pick said goods up from this location and pay  the cashier. The store would then pass this onto Amazon for a fee.

Impact on Incumbents

So what actually happened to the retail environment in India? Firstly, a price war ensued and in fiscal year 2015, 22 e-commerce companies incurred US$1.2b of losses led by incumbent Flipkart[2]. To increase the pressure on the Indian market, Amazon cut the commissions it charges to third-party merchants by up to 7%, Flipkart had to increase these by 5-6% to  temper the losses1. Having launched in 2013, Amazon has an estimated 28% market share[3],  140,000 sellers on their platform to Flipkart’s 90,000. They are also adding 180,000 products every day[4] and have over 95 million products available on their website 1,2,[5]. On top of all this, Amazon has committed an additional US$3b of capital to be deployed in India as they vie for a market leading position[6].


What has occurred in the USA is also very interesting. Although this is Amazon’s local market and competitors have had years to adjust their offering to compete with Amazon’s aggressive tactics, traditional retailers are still struggling to stem the bleeding. Below is a graph and table both sourced from FactSet, illustrating the performance of 6 US department Stores over a one-year period:

Thanksgiving Day, Black Friday and Cyber Monday (key US shopping events) all saw a material increase in online sales in 2016 (+11.5%, +21.6% and +12.1% respectively)[7] illustrating the pressure on brick and mortar retailers to quickly establish a strong online presence. Sears has since announced the closure of 150 stores (including 108 K-Marts) due to sales in November and December of 2016 being down 12% & 13% respectively in comparison to the prior year[8]; Macy’s is closing 100 stores and cutting 10,000 jobs due to poor holiday sales[9]; and finally, Kohl’s has cut their profit guidance by -5.8% to -8.8%[10]. Meanwhile, Amazon had a fantastic holiday season, controlling 37% of all online holiday shopping.

An Australian Entrance?

There has been a lot of chatter about Amazon entering Australia and from the above examples we can derive some critical lessons and make a few assumptions on what we should expect:

Geography does not deter Amazon from entering a market. One of the key arguments for Amazon avoiding Australia was its geography, having the 4th least densely populated country in the world behind Namibia, Mongolia and Greenland[11]. To that argument I refer to the below heat map of Australia’s population, clearly illustrating the concentration along the East Coast [12].


Amazon will not only incur losses for sustained periods of time in order to command a market leading position, they’ll completely change their strategy to most efficiently penetrate a market.

If Amazon were to enter Australia, I believe a few of the following things will occur in the retail market

  • A price war leading to gross margin compression;
  • Quality of service, product variety and logistics will all improve;
  • Market expansion as Amazon will increase the pie and not just steal share;
  • Capital expenditure will spike as competitors invest more heavily in e-commerce, marketing and distribution, negatively impacting free cash flow;
  • Industry consolidation as competitor’s merge to survive.

As Wesfarmer’s Managing director Richard Goyder so eloquently put it, Amazon will “eat all our breakfasts, lunches and dinners”, unless Australian retailers can become more innovative[13]. Amazon’s impact on the Australian market will be profound and widespread, impacting everything from retailers and Real Estate Investment Trusts, through to logistics and payment solution companies. So don’t rest on your laurels andkeep an eye out because Amazon could be coming to a country near you!

Roland Houghton



Disclosure of interest: Milford Funds Ltd holds shares in Amazon on behalf of clients. 

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.

[1] Forbes: The World’s largest retailers 2016

[2] Bloomberg: India’s Flipkart Has an Amazon Problem

[3] Nikkei Asian Review: Amazon Bolsters India arm to narrow gap with Flipkart

[4] Economic Times: Aggression’s on, Amazon to scale up investments in India

[5] Business Standard: Amazon.In sees 160% growth in seller base in 2016

[6] Tech Crunch: Amazon will pump $3B more into its Indian marketplace

[7] Practical Economics: Sales Report: 2016 Thanksgiving Day, Black Friday, Cyber Monday

[8] Australian Financial Review: US retailer Sears closes 150 stores, sells Craftsman brand, as Xmas sales fall 12pc

[9] Australian Financial Review: Macy’s slash 10,000 jobs after poor Christmas sales at iconic NYC retailer

[10] Wall Street Journal: Kohl’s Slashes 2016 Guidance on Volatile Holiday Sales

[11] The World Bank: Population Density

[12] Maps Mania: The Australian Population Map

[13] Sydney Morning Herald: ‘Amazon will eat our breakfast, lunch and dinner,’ says Richard Goyder