Amazon to hit Wesfarmers hardest: report

kmartAmazon poses the biggest threat to Wesfarmers’ discount department stores Kmart and Target rather than specialty retailers like JB Hi-Fi, investment bank Morgan Stanley warns.

A report by Morgan Stantley analysts says Wesfarmers could lose $400 million in earnings to the e-commerce giant by the 2026 financial year.

“We see Wesfarmers as the most impacted by Amazon’s arrival in Australia,” the Morgan Stanley report says.
“We believe that Wesfarmers’ department store businesses are particularly susceptible as Amazon rolls out its first-party product and its Prime offer (membership program).”

The report also said that while the market had been selling off speciality retailers ahead of Amazon’s arrival, investors had underestimated Wesfarmers’ exposure.

“We think the market is mispricing the impact of Amazon’s entry in Australia, by selling the category killers rather than Wesfarmers, which we view as most exposed via its department store businesses.”

Wesfarmers was “over-owned” and had benefited from the housing boom and a weak Woolworths – two tailwinds that were fading, it said.

Shares in Wesfarmers fell $1.33 or 3.1 per cent to close at $41.37 on Thursday, after plumbing an intra-day low of $4.70.

Amazon, which has been selling books, e-readers and digital content in Australia since 2015, confirmed in April that it would roll out its full offering Down Under but failed to say when.

However, Morgan Stanley analysts said they expect Amazon’s expansion in Australia will begin later this year and that the e-commerce retailer will set up a large local distribution centre during 2018.

They also expect the business to grow in a similar way to what it did in the US and UK, starting with televisions, electronics, apparel followed by dry goods, fresh food and auto parts.

They estimate Amazon will generate $12 billion in sales in Australia by the 2026 financial year.

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  1. Brad Shefelbine posted on June 2, 2017

    Clever use of differentiation could create an opportunity for a Target revitalization. By providing a semi-serviced model with broader range in contrast to Kmart's low/no service, narrow range they could capitalize on the desire to see & touch product before buying (yes, that is still the majority of the market), something Kmart can't do with a limited range. I'm calling it: Kmart's salad days are over and turning Target into Kmart will only further damage Wesfarmers; closing or selling it will open up for competitors to stream in damaging Kmart too. Trading on price only is a short-medium benefit strategy at best, especially when competitors like Amazon are poised to deliver via a lower cost model that, coincidentally, is not where they make the majority of their profit (hint: it's in services) and can accept lower margins.

    • Dave posted on June 5, 2017

      Over-simplistic and based on assumption. Most shop by price because they have to so aren't short or medium term benefits. Service comes at a cost that not even the hallowed Amazon can afford to ignore.

      • Brad Shefelbine posted on June 5, 2017

        Respectfully, price has always been a factor since retail was invented so this is nothing new. Good retailers prove that it is not everything and those that trade only on price find themselves in need of "reinvention" (and the accompanying MD change, years of profit write-down and share damage) after following the spiral hits bottom. Trends are showing that an experience is beginning to count for more than before and those that deliver this well are set to benefit/bulwark against price as the primary factor. The Amazon services that i'm referring to are IT based (cloud computing primarily) which accounts for the majority of their profits. Most US retailers have been at least dabbling in these types of services for some time. Welcome your insight and comment!

        • Dave posted on June 6, 2017

          The need for reinvention is not as a result of low prices but poor range selection and in losing touch with target markets. Amazon will have their work and profit cut out for them in a very different market. Their time will come when the need for sustainability supersedes growth.

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