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Amazon takes scalp even before Aussie launch as rival pulls IPO

Wednesday, May 17, 2017 - 13:59

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Even before Amazon sets up shop in Australia, the online giant is hurting its biggest rivals.

[SYDNEY] Even before Amazon sets up shop in Australia, the online giant is hurting its biggest rivals.

Wesfarmers, the supermarkets-to-hardware conglomerate that's Australia's biggest private employer, on Wednesday scrapped a A$1.5 billion (S$1.55 billion) initial public offering of its office-supplies business. With analysts almost halving profit forecasts for some local retailers before Amazon.com Inc.'s arrival, Wesfarmers could't get the price it wanted for Officeworks.

Amazon has become Australia's most anticipated new entrant of the internet era. The Seattle-based company ended months of speculation in April when it unveiled plans to launch retail operations in Australia, appealing to small suppliers to sell their goods online alongside Amazon products. Amazon didn't say when it would start up.

There's little doubt that Officeworks, which sells everything from printers and phones to paper and pens, will suffer because its products are so suitable for online purchasing, said Ric Spooner, chief market analyst at CMC Markets in Sydney.

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"It seems highly likely that Amazon will take share and put downward pressure on margins," said Mr Spooner. "Once people know what they want, it's a matter of replenishing your existing stocks. And they'd have it delivered."

Citigroup Inc last week slashed long-term profit forecasts at Australian electronics retailers JB Hi-Fi and Harvey Norman Holdings by more than 40 per cent and 30 per cent, respectively, following the expected start of Amazon Prime in 2019. The bank warned of a "material earnings decline" for the domestic industry.

Wesfarmers announced it was considering a possible IPO of Officeworks in February. In Wednesday's statement, the company said a listing "would not realize appropriate value and would not be in the best interests of its shareholders." It blamed "current equity market conditions" and didn't mention Amazon.

A spokeswoman for Wesfarmers declined to comment on the effect of Amazon on the value of Officeworks.

Wesfarmers shares fell 1.3 per cent to A$43.35 at 1.54pm in Sydney, paring this year's gain to 2.9 per cent.

Amazon said last month it already has almost 1,000 workers in Australia. On its website, the company is looking to fill 158 positions such as account managers and software engineers in Sydney, Melbourne and Brisbane.

In the Citigroup report, analysts led by Bryan Raymond analyzed US, UK and German retailer performance around the market entry of Amazon Prime. They found retailers typically see margins begin to recover only after five or more years.

Amazon could win 25 per cent of online sales in Australia by 2025 as internet purchases grow into a larger share of total shopping, Macquarie Group said in a report in March.

To be sure, other factors are weighing on Australian companies. The S&P/ASX 200 retailing index, which includes JB Hi-Fi and Harvey Norman, has dropped 14 per cent this year while the country's benchmark is up 2.2 per cent.

Retail sales unexpectedly dropped in March, the third decline in four months, amid concerns about record household debt and low wage growth.

"There's definitely been a downturn in discretionary spending in Australia," said Ben Clark, a fund manager at Sydney-based TMS Capital Pty, which oversees A$370 million including Wesfarmers shares. "That's not Amazon."

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