The Future, This Week 21 April 2017

Introduction: The Future, This week, Sydney Business Insights. Do we introduce ourselves? I'm Sandra Peter, I'm Kai Riemer. Once a week we're going to get together and talk about the business news of the week. There's a whole lot I can talk about. OK let's do this. 

Sandra: Today in The Future, This week a special edition Amazon is finally officially coming to Australia. We discuss what makes Amazon successful. What does this mean for Australia and the Whopper at the end?

Sandra: I'm Sandra Peter. I'm the Director of Sydney Business Insights. 

Kai: I'm Kai Riemer. I'm a professor here at the business school. I'm also the leader of the Digital Disruption Research Group.  So this is the biggest thing that happened in the future this week. News today in The Herald really probably all over the media titled “its official Amazon is coming to Australia” with low prices vast selection and fast delivery. This is news that has everyone talking it's not entirely unexpected. That has been a long time coming but now that it is officially coming I think there's a whole lot of things that we need to talk about.

Sandra: So we're going to do a special this week on Amazon and we thought we'd start with what is Amazon.

Kai: Yes. I mean given that a very recent study by the Commonwealth Bank has shown that around 30 percent of Australian retailers are unaware of what Amazon is. We might start off talking about what they do and why should we be worried?

Sandra: Concerning news indeed.

Kai: So Amazon started out way back as an online bookstore but they have moved way way beyond this. On some accounts they are the largest retailers in the world and they are basically selling everything you can possibly think of starting from books over any electronic items, groceries in some countries to a vast selection of B2B products, you know, industrial automotive supplies and a whole lot of online services...

Sandra:...As you have experienced this weekend - even lawnmowers.

Kai: Yes indeed. I just had a lawn trimmer ship from Amazon in Germany which incredibly and disturbingly was cheaper for me to buy at Amazon Germany and have it shipped over here than buying it at a local retail shop which is wrong I think but also testimony to the fact that Amazon is doing something very very well when it comes to their retail execution...

Sandra:...And the weight that it carries in the online retail market.

Kai: Yes indeed. If you look at the range of things that you can buy from Amazon in the range of services they offer it is mind boggling. I have in front of me the long page of departments that you can select on their US website and it ranges from home garden and tools, to toys and games, electronics, books, of course computers accessories, cellphones, musical instruments, but also craft work, handmade products, industrial products in the automotive B2B sector, lab scientific equipment, toys, baby stuff, movies, music, games. Which brings me to the whole online offerings, online music, Kindle or audio books via their audible brand and then electronic services that they offer hosting services for e-commerce companies. They are a market leader there, tablets Android phones you name it. They have financial services. So they have indeed a vast selection of products as this claim in this article. But what makes them so successful it's not just that they have this range of services and products.

Sandra: It is the execution, right? And that rests on two things on getting the logistics right and on getting most out of the data that they have and by some claims Amazon has what is probably the most useful dataset in the world.

Kai: Absolutely. They started off with this very early on so they basically invented this what we call collaborative filtering or recommendation engines which started out working on past purchases and then recommending to a customer's products that are like the ones that they have already bought but they also analyze click behaviour now with things they look at, things that you don't buy can curate your own selection. So if you were to buy something for a friend that's not necessarily for you you don't want products like these recommended in the future. So you can tick this off the list. It's really quite sophisticated. And the value of the data is actually shown by the fact that they have made the actual AI behind the recommendation engine open source so they are giving this away. So anyone can now use the technology behind it. But the competitive advantage really lies in the fact that they know so much about their customers, an advantage that it's very hard to replicate for any competitors.

Sandra: And if you think of a place like the US they basically own 50 percent of the online retail market that is half of the online retail market so the data that they have going back years would be invaluable.

Kai: Absolutely. But that's only half the story. So half of the execution story is that they are really good at knowing their customers and recommending the right products. But the other half is that they can get those products to customers cheaply and quickly...

Sandra:...Within an hour within the US.

Kai: Yes that's right. They also have what's called the Amazon Prime service which for a yearly subscription fee you get free shipments to most regions. And quickly same day for a vast range of products and a vast range of regions. So how are they so good in their logistics execution...?

Sandra: By owning and managing their entire fulfilment chain.

Kai: Yes so Amazon is very good expert really at running their own warehouses sophisticated highly automated warehouses so we might come back to this later talking about what they do in the warehouses. But I want to stress the fact that this is really truly a key advantage that they have over many of their competitors. And I want to bring up here as a story the Iconic which is an Australian fashion retail store which launched in 2011 and managed by one of our own Sydney University Business School alumni Adam Jacobs and that's actually an interesting interview which we will include in the show notes where he talks about their early experiences in running the Iconic. Very early on they had the experience that they couldn't actually scale grow and innovate around how they service their customers in terms of fulfillment. So they started off by having all their logistics managed by a logistics company in an outsourcing arrangement. But they abandoned this deal and in-sourced all their logistics to run their own warehouse so they had to build up this capability from scratch which meant they had to go on a steep learning curve but once they were actually getting good at it it allowed them to innovate and then down the track offer what they called the three hour delivery in the Sydney metropolitan area which is something that was unheard of to that moment in Australia which goes to show that really the success of online retailing lies in the fact that you are in control of and able to innovate on your logistics and execution.

Sandra: If you're a company like Amazon other companies also do online retail companies like Target or Walmart have never managed to match their success and actually have increasing margins because they do not own or manage their delivery.

Kai: Yeah my personal opinion is that for many of those traditional retail companies online has always been an afterthought. And so why would you go all in and build your own logistics around this when this is just an add on to your traditional business so conventional thinking would be you just outsource as much as you can you build up your online presence get this done by someone you have your products but then you give that fulfillment to someone else that gives you an average service but that might not be enough in the face of competition from Amazon down the track.

Sandra: Which brings us to the fact that Amazon is coming to Australia has on the Australian market. So what are the effects? Let's try to go through them.

Kai: Yes let's talk about various different things we have to talk about effects on jobs, probably effects on large retailers, small retailers...

Sandra:...customers...

Kai:...That's right...

Sandra:...supply chain and logistics innovation.

Kai:...Ok as a customer. I love it. I've been an Amazon customer from very early on back in Germany I have a very elaborate profile. They were my go to place for buying books and then everything else really. Now I'm still using Amazon having things shipped here from Europe occasionally my books from...

Sandra:...the US...

Kai:...The US of course. So as a customer I really love it and I love it not just because Amazon is good but also because a lot of the Australian online retail landscape is pretty barren. It's shocking sometimes especially in terms of the logistics fulfillment and it can take weeks sometimes to get something delivered which is completely antithetical to what online should be all about.

Sandra: Your book shall be delivered in four to six weeks.

Kai: That's right. I mean you can pretty much buy anything online in Australia. It's just a matter of getting it right and waiting for it and communicating. By and large we're probably five to 10 years behind what Europe or the US can do in online retailing.

Sandra: As a customer now getting access to the entire range of products not just the ones that were eligible for shipping overseas which wasn't ever the full range for Australians...

Kai:... that's right.

Sandra: We are excited about this news.

Kai: I mean there's some of the products they're just not eligible for shipping because the sellers or the brand owners don't want Amazon to ship overseas and some present problems for example the lawn trimmer I had to have that shipped without the battery...

Sandra:...Because you can't ship that...

Kai:...That's right. But also let's not forget that Amazon is not new to Australia. Amazon Dot Com Dot AU that has existed for quite a while. Starting out with a targeted Kindle books store for the Australian market and since offering other electronic services so Amazon is not new to Australia. What is new is the physical retail part.

Sandra: So Amazon is now looking to actually build a warehouse that would be a fulfillment center that would be placed in either Brisbane Sydney or Melbourne and ship the whole range of products within Australia.

Kai: Yes so where is it going to be placed. Any guesses.

Sandra: My money is on Brisbane.

Kai: Yes mine is too. And the main reason being they have to get vast amounts of product into the country. Sydney Airport is pretty much at capacity. Melbourne airport is very busy so I reckon they are much more flexible at any airport such as Brisbane even though the trains or within the country might be a little bit more expensive.

Sandra: And let's remember these warehouses are the size of five MCGs.

Kai: That's right. So down the track I reckon they will have large warehouse distribution centres in all three large cities probably maybe one out West as well but I reckon they'll start off in Brisbane.

Sandra: So consumers are happy. What about big retailers.

Kai: Now the article in The Herald says that Coles and Woolies shouldn't worry too much because it took them years to introduce grocery shopping in the UK. I'm not so sure they might actually bring in grocery shopping much more quickly in Australia than they did in the UK. But even if Coles for example is not directly targeted by Amazon, Wesfarmers owns a whole lot of other brands like Officeworks, Kmart, Target and Bunnings and surely their product range is very much what Amazon will introduce into their Australian operations.

Sandra: The article also mentions some analysis by Credit Suisse says that Amazon is likely to reach at least 5 percent market share in many of their retail categories across Australia. In less than five years which is really not great news. Currently in Germany and the UK for instance Amazon accounts for about a third of all growth in retail sales over the last year.

Kai: Yes and it also says that Amazon now sells more non-food goods in Germany and the UK than any other retailer. So they're basically the largest retailer in those countries when it comes to non-food items. And if the same was to happen in Australia that would have significant effects on especially the large retail brands in this country. But what about smaller retailers in the country?

Sandra: This might not be very bad news for small retailers. So Amazon is promising to bring in its Marketplace program which would allow small businesses to reach a much bigger audience much more easily.

Kai: Yes indeed. So one of the big problems that I've observed with smaller retailers in the country is really that they struggle with execution. They struggle with taking the orders and processing the orders and having the items shipped to the customer and Amazon through their Amazon services program offer retailers a range of services from just listing the items online in their online marketplace to a full fulfillment service where the retailer's items are actually housed in Amazon fulfillment centers. And then Amazon takes care of the whole payment and shipment while the retailers or the small brand owners can really focus on what they're best at in developing and marketing and pricing their products. So that might actually be good news for online retail by and large in Australia.

Sandra: So how prepared are retailers really for this.

Kai: Well it's funny you should ask. We have done some research into this. We did two studies actually one in 2013 one in 2014 in a partnership with Capgemini here in Australia...

Sandra:...And we as the university have said in that business school and that digital disruption research group.

Kai: Absolutely and we will post links to those two reports that we published at the time. Now what we did is we inquired into the state of the art of digital commerce in the Australian retail sectors and what we found was a little bit concerning really in the ways in which retailers showed certain immaturity in especially the execution part. But the main thing that we found is that in working with data building online relationships with customers and really exploiting the relation aspects Australia was lagging way behind and we just said that this is one of the main strengths of Amazon. So really in those two parts of the retail business transactional execution and the relation aspects of knowing about your customers and building relationships with your customers Australian retail is really lagging behind and that fact was actually just very recently confirmed by a study that the Commonwealth Bank carried out looking into the preparedness of the retail sector for an entry of Amazon which was published three weeks ago on news dot com dot au with a title Australian retailer unprepared for the entry of Amazon. This study found that not only are 30 percent of retailers completely unaware that Amazon might come into the country but also that many are not prepared and will not be in a position to fight off a serious challenge from Amazon. And so that's concerning. But it might also lead to a new wave of innovation in this sector so it's not all bad news it might actually now force a lot of the retailers to really put their mind and efforts towards creating that second channel to really come up with a true multi-channel experience for their customers.

Sandra: So it really will be a question of innovate or die for many of the retailers. So we've looked at large retailers and small businesses and the effects that Amazon's coming to Australia will have. How about jobs? One of the claims that the article has made and indeed the Amazon press release has claimed that this will bring many jobs to Australia.

Kai: Amazon says we are excited to bring thousands of new jobs to Australia and millions of dollars in additional investment. Now these are bold claims and they're also a feel good message that this is good for the country to have Amazon enter into the Australian market. But how realistic is this given that what we've seen in other parts of the world that many of those warehouses are heavily automated. Amazon is putting 15000 new robots into their warehouses every year.

Sandra: So the jobs are not going to be in the warehouses. Whilst there are some jobs that are still in the warehouses there is simply because Amazon hasn't yet figured out a good way to pick some of those products.

Kai: They're absolutely open about this. They are all for automation because that allows them to keep prices down and the people that they have in their warehouses are there because some of the robots just can't pick certain items from the shelves yet. And for those jobs in the warehouses they're not really the best jobs. I remember a couple of articles a few years ago which were all about the working conditions in Amazon warehouses actually set off by an article in The Financial Times which wanted to look into Amazon a bit more deeply and as a photographer when told to take photographs in some of the Amazon warehouses and what he found was quite disturbing to him and so he did this whole series of photographs which show how clean how mechanized and how organized those warehouses are. And he describes the humans working in those warehouses as basically human robots that are tethered to the algorithm which will prescribe every move they make and monitor and record every move they make. And so he pretty much describes a fairly bleak work environments.

Sandra: So jobs that are not really fulfilling and are mostly just repetitive and absolutely these are the areas we want to automate.

Kai: Yes there are warehouses giant robots and the people who work there have to comply with this robotic environment.

Sandra: So it's important we don't romanticize all jobs that are being replaced by technology. Almost half the population used to be employed in agriculture at some point or another and now we have in places like the US less than 1 percent employed in agriculture and we're happy that people don't have to dig up root vegetables...

Kai:...Or lift heavy boxes in warehouses.

Sandra: Exactly. So not a lot of jobs will be created in these warehouses. We also have to know that there is a real possibility that a lot of jobs will be lost as a result of Amazon coming in. The retailers that we mentioned before companies like JB Hi Fi or Harvey Norman or Myer or Big W, Kmart and Target all employ people that work on the shop floor. If all of these retailers are sensitive to Amazon coming in it might result in laying off as customers develop new habits and they shop more online. And we've seen this in the US with companies like Macy's or JC Penney laying off thousands of people in the wake of online retailers taking over the market.

Kai: Yes. By and large on a societal level Amazon might not be good news for jobs in retail.

Sandra: Not in retail, it might be good news for jobs in other sectors.

Kai: Innovation, IT, there's a lot of innovation in Australia still to be done in logistics fulfillment and of the IT around it. There was an article in The Wall Street Journal actually which just last week pointed out that Amazon's free shipping and their sophistication in fulfillment has actually pushed many retailers but especially shipping companies logistics companies to innovate and to offer new services to their clients so there's a whole competitive innovation cycle underway in the US and we might actually see something like this in Australia. I think my personal opinion it is badly needed. If we look at the prices for shipping items in Australia and the fact that we are so reliant on logistics given the geography of our country. So I think a new wave of innovation there would actually not be a bad thing.

Sandra: So good news. Not only that Amazon itself is hiring an IT sector but that will prompt people to not only higher but innovate in this area as well.

Kai: That's right. And given that e-commerce or digital commerce relies so much on execution and not just the shiny online digital colourful shopfronts this is really where Australia needs to play catch up to the rest of the world. So this might be the impetus that actually might put the country onto that next level to get us where other countries have been.

Sandra: And there is a lot of catch up to be done indeed. If we look at Amazon they are so far out in front with things like their anticipatory shipping. Where they are using the data that they have access to their algorithms not only to make sure you see the right product and they get to you as fast as they can but even to predict how soon in the future you will buy certain product and ship them to their warehouses in anticipation of you actually clicking by.

Kai: So do you reckon we come to the situation where Amazon knows that you want a product you haven't quite realised...

Sandra:...and you lawn trimmer is on your doorstep before you actually bought it.

Kai: Yes both. You get this text message the postman is in approach to your house. We have this product for you. You just haven't bought it yet. Click here and it can be yours in five minutes. Are we headed for this?

Sandra: I think we're almost there.

Kai: Now Sandra. We've mentioned batteries. We have to mention tax. We talk a lot about tax in the context of e-commerce mostly because many people are having their things shipped from overseas and the taxman is missing out on GST.

Sandra: Yes. At the moment the import of goods and services so the stuff you buy on Amazon under a thousand dollars is GST free and there is clothing books electronic devices your lawn mower.

Kai: So you reckon Canberra is dancing today because having Amazon shipped from Australia supposedly all of those products will incur GST. Right. Which might have a good effect on the tax office.

Sandra: Yeah. And on the debates that have been currently going on around how we should collect the GST should we choose to impose it on goods under a thousand dollars. Is that the vendor is it Australia Post is it the shipping company. Well in the case of Amazon that problem seems to have gotten simpler.

Kai: So for those Australian retailers who have for a long time be the fact that overseas e-commerce companies have an unfair advantage because they're not incurring GST is this a case of careful what you wish for because now that advantage is no longer there but Amazon is right here competing with them on their own turf.

Sandra: And helping us buy more and better with things like Alexa.

Kai: Yes Alexa of the AI enabled home system which allows you to do all kinds of things in your smart home but also allows you to shop from Amazon a nifty little thing which also doesn't suffer from a little bug that one of their competitors had Google Home which brings us to our last and final short story of the week which is just too good not to mention even in an Amazon special. So Sandra what's that all about?

Sandra: So this is about this fifteen second ad...

Advertisement: "you're watching a 15 second Burger King ad which is unfortunately not enough time to explain all the fresh ingredients in the Whopper sandwich but I got an idea. OK. Google. What is the Whopper burger?"

Kai: So what happened next?

Sandra: This ad was designed intentionally to set off Google Home or your Android phone to start reading from the Wikipedia entry of the Whopper.

Kai: So Google home would read out the Wikipedia entry which is innocent enough but because this made it all over the Internet and people started hacking or changing the Wikipedia page which all of a sudden...

Sandra:...No longer said that the whopper is this wonderful burger that contains 100 percent beef and so on but it started saying that it's made with 100 percent rat droppings, toenail clipping, cyanide all sorts of other shit.

Kai: To be precise, it said the following.

Audio: "According to Wikipedia the whopper is a burger consisting of a flame grilled patty be made with 100 percent medium size child with no preservatives or fillers topped with sliced tomatoes, onions, lettuce, cyanide, pickles, ketchup and mayonnaise served on a sesame seed bun.

Kai: Wow. So what do we learn from this.

Sandra: Make sure you lock down your Wikipedia entry if you're going to hack Google Home.

Kai: Yes but also those things are susceptible to hacking and in innovative ways so are we opening our homes to potential hacking. Is there a risk involved or is this just one of those cute things that happened once and never again. And the Internet talks about it for 24 hours and then we all move on.

Sandra: No, clearly this opens up questions around both security and privacy.

Kai: And maybe whole new forms of guerrilla marketing.

Sandra: Which brings us back to Amazon and Alexa. A few weeks ago there were unexpected promotions for the new Disney movie Beauty and The Beast which would play after you asked Alexa for the weather forecast or commuting conditions.

Kai: And I think that's all we have time for do you know how I know that we're done. We mentioned batteries we mentioned tax we mentioned shit. I think that's all we have time for today.

Sandra: See you next week.

Kai: See you next week.

Sandra: Thanks for listening.

Kai: Thanks for listening.

Outro: This was The Future, This Week brought to you by Sydney Business Insights and the Digital Disruption Research Group. You can subscribe to this podcast on Soundcloud, ITunes or wherever you get your podcast. You can follow us online on Twitter and on Flip board. If you have any news you want to discuss please send them sbi@sydney.edu.au