In 1892 General Electric Co was created and through its interests in the likes of rail, motor vehicles, and electricity, it shaped the industrial revolution.
Now there is a new revolution underway - just as significant to the last - and it comes in the form of ecommerce behemoths Amazon.com Inc, Alibaba Group, Zalando SE, MercadoLibre Inc and even to a lesser extent, eBay Inc., according to AMP Capital Investment Manager Global Equities Andy Gardner.
“These companies are a bit like GE in the Industrial Age,” Gardner told a recent AMP Capital Insights Forum. “They sit at the heart of some the world’s biggest consumer and enterprise shifts.”
From perceived retail category killers to much broader enterprises that now fight for logistics properties, information technology including artificial intelligence, and even more recently healthcare - these style of companies have the world on watch.
“It’s important to understand these are not just ecommerce companies,” says Gardner. “They are the providers of infrastructure, whether it be the logistics platforms to power retail or the data platforms to manage the world’s information.”
Their growing strength is so topical Gardner has been asked to present on the matter to AMP Capital’s biggest CIO clients.
“These kinds of new companies affect a variety of sectors,” says Gardner. “Most industries can be impacted; basically any industry that has logistics or data at the heart of its operating model.”
Even the Googles of the world are on notice, with its CEO Eric Schmidt saying back in 2014 that he expects Amazon will be the company’s biggest advertising competitor.
“A quick comparison between US and China validates Eric’s concern,” says Gardner. “You can easily see what is really different here. It is Alibaba and Amazon and how they monetise. Marketing is the mainstay of Alibaba’s model.”
Alibaba in 17 years has already grabbed 29 percent of China’s advertising spend, whereas Amazon has only 1 percent of the US market, lagging Google on 41 percent and Facebook on 17 percent. Although Amazon is catching up quickly, with an 80 percent jump in 2016.
Far from being the retail category killer, though, Amazon’s retail business has experienced 25 percent growth per annum compared with the US retail sector growing at just 2 percent per annum. AMP Capital Business Performance Manager Colin Mackay says these businesses are squeezing the margins of traditional retailers and driving change, but not always for the negative.
“It’s time to turn down the noise,” Mackay told the Capital Insights Forum. “Amazon is not the death of physical retail but will force retailers and landlords to adapt and evolve.”
Mackay believes that much like in the US, China, Europe and South America where the above mentioned companies are headquartered, lower quality retail assets will be more impacted than top tier assets.
Increasingly, Mackay predicts, shopping centres will need to shift towards food and experiences. They will need to create ‘sticky’ destinations that resonate with shoppers and increase dwell time.
This trend can be seen in China where a former online retail executive has set up Hema Xiansheng grocery store, of which Alibaba was an early investor.
In a recent CLSA research report, one of its analysts described a walk-through of the part-physical, part-online grocery store. He describes it as a Whole Foods-style business with a focus on freshness and where people can eat in, but with overhead conveyor belts transporting food ordered online. The online business caters to consumers and as a warehouse centre for sales through its mobile app.
The likes of Amazon, Alibaba and other ecommerce operators will be drivers of change in the Australian market, agrees AMP Capital Head of Real Estate Research Luke Dixon.
Retail will see sales levels in select sectors fall due to increased competition dragging down net operating income by an estimated 0.5 percent by 2020. However, industrial will see strong gross take up. Our house view is estimating 300-400,000 square metres of gross take up by Amazon alone, says Dixon. He predicts this will spur a further 300,000 square metres of take up from local competitors in the next two to three years.
“No asset class will be immune to their impacts,” Dixon says. “There will be drawbacks but also wins.”
And all the while, these companies are investing heavily in innovation.
Currently Amazon is well known for its one click ordering but it believes in the future of zero click ordering through its voice-command Echo device. The system’s software ‘Alexa’ just sits in the corner of a room responding to requests to order takeaway, buy household goods, play music or TV. In voice, like everything else, Amazon’s market share is already significant, ahead of Google Home, which Gardner says reinforces its competitive advantage through data and iterative learning.
Many people believe the future of the world is voice not screens and China is showing the way in intelligent voice and speech technology, according to Gardner. It’s not surprising he says, as Chinese characters were hardly designed with tiny touch screens in mind.
Development of voice is a big threat to brands,” Gardner says. The business model of brands was to “develop ok product, wrap it in enormous marketing and branding budgets, and then stuff the channel with it”. Now, he says, shelf space is infinite, it is very easy to list a product on Amazon.com and advertise it on Instagram. The barriers to entry have dropped massively.
The insights of Microsoft Inc co-founder Bill Gates are valid here: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.”
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