The “Amazon effect”, an increasingly mystical and omnipotent threat to every retail operation in Australia is on its way. Judging by share price action both Harvey Norman (HVN) and JB HiFi (JBJ) are particularly vulnerable. Yet just as the track record of Australian companies expanding overseas is less than glittering, the local landscape can and does trip up international operations expanding in Australia.
In the 1980’s many lessons were dished to young traders in Australia’s newly opened money markets. Market structures and practices were new and fluid. The standard transaction size in foreign exchange markets was $1 million. In an attempt to dominate the market, one of the newly arrived US banks boasted they would “do the world in ten”. That is, they would make forex prices to buy or sell $10 million to anyone who cared to ask.
That was a stunning upping of the ante, and many local traders feared for the outlook for Australian participants, worried this big North American outfit would take over the forex markets. However it’s clear in hindsight there was a profound cultural misunderstanding. Locals had (and still have) a particular disdain for big-headed show ponies. Every trader sought to pick off the braggarts. Within six months the Big American had downgraded its Australian operations and sent the head forex trader off to Hong Kong.
Australians sometimes place too much emphasis on commonality with other English speaking nations, and forget there are very real cultural differences. Starbucks’ experience in Australia is a case in point. After stellar success in the USA over the 80’s and 90’s, it started an international expansion. In 2000 Starbucks arrived in Australia.
Many feared for the 6,000 plus independent cafes in Australia. However again there was a cultural misunderstanding. Starbucks success in the USA was at least in part due to the previously widespread sale of fairly ordinary drip filtered coffee, and Starbucks’ revolutionary use of espresso coffee. The situation in Australia was very different. Waves of post-war European immigration brought with them a more sophisticated coffee culture.
Starbucks initially expanded to almost 300 stores. However Australians knew what good coffee tasted like and the strategy didn’t work. Starbucks started selling stores. In 2014 a final shedding reduced Starbucks’ presence in Australia to 22 stores, with accumulated losses greater than $140 million. Despite stupendous success in other markets, Starbucks’ Australian venture was a failure.
The idea that Amazon is about to sweep the Australian retail landscape clean is the extreme – the reality will take longer, and likely have less impact than the extremists think. It may even fail. This brings us to the sell down in JBH and HVN. Both of these groups have demonstrated their capability and adaptability over decades. The recent 20% plus sell off in both stocks brings their P/E ratios down to 12-13x. and both stocks are sitting on share price support levels.
In short, there are top quality retailers at attractive valuations. This sort of window rarely stays open for long.
(This article originally appeared on the Switzer Report)