Techcrunch recently reported that Amazon is planning to enter Singapore in the first quarter of 2017. Their sources said that “Amazon is fully focused on expanding into Singapore at this point”. Amazon has already leased a 100,000sqft storage facility in Jurong East and is reportedly trying to hire 100 people to help them launch the operation. Both Amazon Prime and AmazonFresh grocery services will be offered from day 1.
In my view, the implications on the Singaporean e-commerce market will be huge. Amazon has dominated practically all the regions it has entered and I believe that Singapore will be no exception. The company’s customer focus is legendary. Since a few years back, Singaporeans have been able to buy products from the US website at no shipping fee as long as the cost is above US$125, but delivery takes weeks, some of the products on the US website are not sold internationally and US warranties typically don’t extend to Singapore. Amazon.sg will solve all these problems.
Singapore is a modern city, but the e-commerce revolution hasn’t extended to the island yet. Going to Orchard Road on a Sunday feels like travelling back in time. Department stores are packed with people, noise levels are high and queues can be long. It’s not for a lack of retail space – there are more than 100 malls across the island, of which 40 are along Orchard Road. The reason why malls are packed is because there is no alternative. If you want to buy a certain piece of apparel, you have to go to Orchard Road. With e-commerce competition heating up, this situation is now changing.
Prices in shops tend to be very high. High rents is one of the contributing factors. Another factor is that leases tend to be three years long rather than say the 15 years in the UK or Australia. If you build a successful outlet, chances are that landlords will raise prices at the next point of renegotiation. This higher risk for tenants translates into higher prices for customers.
E-commerce sales as % of total retail sales in Singapore is only 2.1% – lower than practically any other developed market. The average globally is 7.4% and the global average is expected to reach 13.0% by 2019. Singapore’s closest peers may be Japan and South Korea, whose average e-commerce sales as % of total retail sales is 7.6% – almost 4x higher than in Singapore.
Blue bars: regions where Amazon.com has a presence
The impact of e-commerce
There are a number of benefits from buying products in physical stores:
- To get a specific job done, such as buying shoes or a book
- To give you inspiration on what you might want to buy
- Excitement: something to do when you are bored
- A social venue: somewhere to meet you friends
- A physical store gives you assurance that the product is real
E-commerce is fantastic at solving the first need, and perhaps also the second one. Websites such as Amazon offer much lower prices, one-click shopping and direct delivery. The website also offers reviews and product suggestions using clever algorithms to give inspiration on what you might want to buy next. But e-commerce cannot fully replace the value of physical retail as a place to meet friends, to excitement of browsing for new products and assurance that the product is real.
The impact from e-commerce in my mind, will therefore be the greatest for products that are low-ticket items, commoditised and perhaps even somewhat boring. No-one is excited about spending one hour to go buy ink for a printer or Wilson tennis balls. A high-end watch or a Chanel bag may be best to buy in a brand-name store, just to make sure that it is genuine.
The actual experience of online shoppers in countries such as the United States corroborate this view: commoditised products such as fashion, books, stationary, travel, consumer electronics and beauty products dominate online retail.
Inevitably, physical stores will have to move away from merely keeping inventory to offer entertainment in various forms. The retail market of tomorrow will be characterised by:
- Commoditised & small-scale items mostly sold online, while bulkier items that need inspection before buying will still be sold in physical stores. Home Depot and Lowe’s are doing well in America for example, while electronics and apparel stores are suffering.
- Lifestyle malls focusing on entertaining rather than keeping inventory of goods for sale. And hence restaurants, cinemas, cafés will be key in attracting foot traffic
- Brands using flagship stores for marketing rather than for storage space
- First-tier malls (>$500psf) doing great while second tier malls suffer
- The anchor tenant phenomenon dying out as shoppers increasingly demand variety
- Pop-up stores become more common, as a cheap way for smaller brands to gain recognition without signing up for long-term leases
There are already quite a number of e-commerce sites in Singapore: Alibaba’s AliExpress as well as its Lazada and Zalora websites, previously owned by Germany’s Rocket Internet are popular. South Korea’s eBay clone Qoo10.sg is big, as is Japan’s e-commerce giant Rakuten.
PwC conducts a yearly survey of what people prioritise when they shop online. According to this survey, customers primarily focus on: 1) low prices 2) wide inventory of goods available 3) fast/easy delivery.
How will Amazon.sg score on these three dimensions – price, delivery times and inventory?
Here is a comparison between the prices of certain products at Amazon’s US website vs local online and offline competitors. If Amazon.sg is even close to matching prices on its US website, it will be incredibly competitive.
Amazon’s delivery times and shipping fees are comparable to Lazada but better than the rest.
It is too early to tell whether Amazon’s product selection will be broader than those of competitors. But Lazada is mostly used to purchase electronics and Zalora only sells fashion. The rest tend to ship from their respective countries, so while the selection of goods is wide you will have to wait for weeks to get the products delivered.
Another factor worth mentioning is Germany’s Rocket Internet recently sold their majority stake in Lazada and Zalora to China’s Alibaba. Given Alibaba’s stated goal of internationalising its business, it is a safe bet that competition between them Lazada/Zalora and Amazon will intensify, rather than subside.
Amazon entered India in 2014 and is set for a market share of 28% by the end of 2016. It is now offering 80 million products on its Amazon.in website, compared to 80 million for competitor FlipKart and 50 million for competitor Snapdeal. It is still early days, but analysts are attributing Amazon’s success in India to low prices, free shipping and the option for 1-day delivery.
On the other hand, Amazon has not done well in China, where its market share is still just 3%. Alibaba’s Taobao/Tmall’s has 58% of the market and JD.com 20%. Amazon entered China in 2004 via the acquisition of online bookseller Joyo.com. Analysts are attributing Amazon’s failure to widespread counterfeiting and intense competition. Even though Amazon’s customer satisfaction levels are great, Amazon is still regarded as a bookseller rather than an “Everything store”. Taobao has 800 million product listings and cutthroat prices, while JD.com has excellent service quality and is operating on thin margins to push growth.
Overall though, Amazon has done very well in the markets it has entered. Given that Amazon is expanding into Singapore organically, that its Singaporean competitors are weak and that cultural barriers are low I believe it is a safe bet that Amazon will do very well.
There are four categories of listed stocks that might be affected by Amazon’s entry: retail REITs, retailers, logistics companies and e-commerce competitors.
The impact on REITs is likely to be long-term. Long-term contracts gives landlords visibility in where rents are going. So dividends may not be cut in the immediate future. Among the retail REITs, SPH and Fraser Centrepoint Trust’s shopping malls are of somewhat worse quality than those of CapitaLand Mall Trust and Suntec REIT.
Among Singapore-listed retailers, electronics retailers such as Harvey Norman, Courts Asia and Challenger Technologies will be hit the hardest. Department stores such as Isetan (Singapore) are also at risk of disruption. Watch and jewellery retailing is likely to do better given the perceived dangers of buying luxury goods over the Internet. You would not buy a Patek Philippe on Amazon.com.
Global Logistics Properties is a massive logistics company that is well run, and increasingly shareholder friendly – but it won’t be impacted by Amazon in a major way. Cache Logistic Trust’s business is suffering from an oversupply of logistics properties in Singapore. On the other hand, demand is on a secular uptrend. After last year’s investment revaluation losses, the share price has dropped significantly and the company’s free cash flow yield has become very attractive. With regards to Singapore Post, I believe the company will benefit initially from higher package volumes, but over the long-run lose its competitive edge. In the UK, Amazon now delivers over half of its packages directly to customers in its own vans rather than via Royal Mail. Why would Singapore be different in this respect? As the legacy letter business shrink, Singapore Post will increasingly face cutthroat competition.
Given that Rocket Internet has already sold its majority stake in Lazada/Zalora to Alibaba, they will not be impacted in a major way. The same goes for the investment company Kinnevik. Alibaba is too big of a company to be affected in a major way by the fluctuation in the value of a SG$1 billion investment.
It is still early days. Stock prices have not started to reflect the high likelihood that Amazon will dominate Singaporean e-commerce. The best opportunities in my view are in shorting consumer electronics retailers such as Challenger Technologies, Courts Asia and Harvey Norman as well as Singapore Post and second-tier retail REITs.