Disruption is clearly the current buzzword of choice. Commentators, analysts and investors appear mesmerised by the seismic changes which are presently being forecast and the dislocation that will follow. Forecasting the direction of change is often easy (e.g. shift to electronic payments) but the rate of change and the destination is more challenging.
At the risk of being labelled a member of the Flat Earth Society, I genuinely believe investors are over-reacting to the ‘Amazon effect’. Some context which we feel is too often lost in the analysis:
- Amazon has operated in the US for 20 years and over that period has grown to 4% retail market share (i.e. 96% of retail sales are not on Amazon, 90% are still via bricks and mortar shops), it has been a steady build as services were offered and Prime got traction;
- In Canada (close to home base for Amazon, with similar demographics and density to Australia) it took six years to build to $1bn annual revenue which would represent approximately 0.25% of Australian retail sales.
Our sense is that while Amazon is likely to be a ‘success’ in Australia, it will not result in the immediate destruction of all incumbents. Indeed, we believe the significant underperformance of discretionary retailers (down 27% vs ASX 200 since Sept 2016) represents an opportunity and we have recently added JB Hi-Fi to our portfolios.
When thinking about the pace of change, and the disruption of traditional industry structures, it’s worth bearing in mind that email was invented in 1972, Microsoft Office was first launched in 1990 and yet Australia Post still delivers 3 billion letters per year, which is 150 per capita (for people >14 y.o).
The sector we believe is now finally and profoundly being ‘disrupted’ is the Telco sector. While change is slow – the NBN was announced 10 years ago and was forecast to already be complete (only out by 5 years and $20bn+) – we believe the fallout (disruption!) in Telecommunications resulting from NBN will become apparent over the next 2-3 years, with significant market share shifts (away from Telstra) and margin compression (especially in the mobile phone segment).
We believe Telecommunications companies who have invested for growth are well positioned to outperform and we currently have overweight positions in both TPG and Vocus.