• Amazon’s Aussie expansion isn’t about selling shoes
• The boom no one is talking about
• The truth behind the Trump board

By Shae Russell in Albert Park

Unless you’ve been living under a rock, you’d know that Amazon.com, Inc. [NASDAQ:AMZN] is setting up shop in Australia.

Of course, like all hyped-up matters, no one actually knows when Amazon will have its Australian side of the business up and running.

Will it be in time for the Christmas trading period? Or will the American online behemoth wait until the new year before kicking off?

Either way, we know that Amazon won’t have to advertise to let you know when they’re operational. The mainstream media is literally providing all the free advertising Amazon needs.

Most of the information around Amazon centres on how it’s going to crush the Australian retail industry. And how it’ll supposedly leave Aussie retailers reeling in their wake.

But I don’t think that’s going to happen. In fact, I reckon we’ve misjudged Amazon’s intentions all along.

Yes, chances are they are going to dominate Australian business. But it won’t necessarily result in the retail-sector annihilation many are trumpeting. 

Perhaps Amazon’s international expansion is only for the sake of international expansion.

Take Amazon’s expansion into China. The Middle Kingdom has been quick to adopt online shopping. However, Amazon has barely been able to get more than 3% of the country’s total e-commerce market. It just can’t beat local players like Alibaba Group Holding Ltd [NYSE:BABA] and JD.Com, Inc. [NASDAQ:JD], with a 47% and 20% e-commerce market share respectively.

Then there’s Amazon’s recent play for the Mexican market. Retail sales in Mexico amounted to roughly AU$678 billion for 2016. Yet, in the US, Amazon only shipped a total of AU$315 million in orders from across the border.

Amazon setting up in Mexico is surprising when you consider that only 3% of the country shops online, compared to 10% in the US. Mexicans are overly worried about online fraud, and a large part of the population doesn’t even own a credit card.

Then there’s the Aussie retail market.

If the Enhanced Media Metrics Australia (EMMA) retail analysis is anything to go by, Aussies enjoying shopping online. The key demographic for retail consumption in Australia — women aged 25–35 — are far more likely to turn any money spending requirements into a social activity.

Furthermore, EMMA found that shoppers who spent money in-store were 50% more likely to buy online.

Surely that suggests people are likely to wander around web-malls in the future?

Not so, if recent data from American Express is any indicator. The credit card company says that 60% of Australian shoppers rarely visit more than 10 different physical and online retail shops.

Anthill Online, an Australian community for innovators and entrepreneurs, says that even 64% of tech-savvy millennials would rather shop in-store than online. Instead of just buying more stuff online for no reason, they are seeking an ‘in-store experience’ to help them buy more stuff for no reason.

Australia is tiny, even in comparison to the Mexican market. Last year, retail turnover was $243 billion and — while growing — barely more than 10% of Aussies shop online. That means Amazon is fighting over a $20-billion-odd chunk of the Aussie online market.

The point is, Amazon isn’t coming to sink Aussie retail. Consumers have already done a decent enough job of that themselves.

I have no doubt that Amazon’s presence will drastically shake up the logistics chain however. The Aussie experience with online shopping is clunky at best. In fact, Amazon could be the best thing for the retail industry. As Sam Volkering pointed out in his most recent issue of Australian Small-Cap Investigator, there’s one Aussie-listed tech stock that’s helping Amazon with aerial-mapping technology. The bet is that Amazon can make drone deliveries an acceptable practice in Australia.

That’s certainly something to look forward to.

Amazon’s Aussie expansion isn’t about selling shoes

I don’t believe Amazon will greatly impact retail in Australia. I suspect that Amazon’s international expansion is about brand awareness more than any immediate monetisation. The tech company already runs on thin margins. It’s not here to make money from buying shoes. It’s here to establish dominance through volume business. 

That was a similar attitude many tech companies had during the dotcom bubble. Worry about profits later, but create the presence first so that customers will know where to find you.

But Amazon’s arrival in Australia could be more to do with growing an integral part of the company’s business that people often overlook.

In my view, rather than retailers, it’s cloud-computing companies that should be afraid of Amazon’s arrival.

Rather than allowing cloud computing to be an infrastructure cost for the company, Amazon are taking steps to operate cloud computing as if it were a utility bill, through its Amazon Web Services (AWS) business.

The cloud-computing industry in Australia already turns over $6.5 billion per year. And AWS is primed to dominate this business locally.

Already, AWS has snapped up 10,000 Australian and New Zealand clients seeking cloud-computing services. And Amazon is keen to exert their influence in this area, not just in Australia but around the world.

Third-quarter data from Amazon showed the company turned over AU$3.99 billion of AWS sales. Much higher than the AU$2.5 billion in the corresponding quarter of the previous year. In the year to date, AWS is now contributing AU$15.2 billion in revenue for Amazon.

Salesforce.com, Inc. [NYSE:CRM], the world’s largest software as a service (SaaS) company, has declared AWS as their preferred ‘public cloud’. That sort of recommendation is hard to beat.

Already Amazon’s cloud-computing business has secured a contract with the Australian Tax Office (ATO).

In 2013, antivirus software company VMware chief executive Pat Gelsinger said: ‘If a workload goes to Amazon, you lose and we have lost forever.’

Last year, Gelsinger stood by AWS CEO Andy Jess side and announced a strategic partnership where VMware’s complete software-defined data centre would run on the AWS public cloud.

Aussie retailers don’t need to fear Amazon, but small cloud-computing companies should.

Regards,

Shae Russell,
Editor, Markets & Money

The Boom No One Is Talking About
Matt Hibbard, Editor, Total Income

The current market must have day traders pulling their hair out. Just as they start rubbing their hands together in anticipation of a nice little payday, it all turns abruptly the other way.

No flitting away for a weekend away for them. Nor fancy dinners in an upmarket restaurant. Instead the harsh truth that there was little money to be had this week. And even more pointedly, the doubt that things are likely to change anytime soon.

Since June, the major market index has traded sideways, in an ever-tightening band. Go back to the start of the year, and the story is the same. In a little under nine months, the index has barely nudged at all.

It’s easy to look at a market like this and see little to no opportunity.

The banks? Maybe… But where will their next stage of growth come from? Plus, you can’t go a day without someone calling for the so-called property ‘bubble’ to burst.

And the bulk mining stocks? Yep, they’ve been running again over the last few months. But again, can they go on with it?

Look at the other heavyweight stocks. Like supermarket behemoth Woolworths Ltd [ASX:WOW] and its arch-rival — the Wesfarmers-owned Coles. You’re unlikely to find any positive news in this space.

All you ever read about is price deflation. And that Aldi continues to erode both their market share. Plus, the impending arrival of Amazon is keeping investors away.

It’s little wonder that the index — which reflects these mega-cop stocks — can find any momentum at all.

Hidden among the also-rans

While some of the big-cap stocks struggled, the reporting season uncovered some positive results.

At the small-cap end, online electrical retailer Kogan.com Ltd [ASX:KGN] gained 50% after its results. Its share price has now doubled in less than three months.

And at the bigger end, shares in global wine player Treasury Wine Estates Ltd [ASX:TWE] also jumped. TWE shares have gained over 15% in the last month.

Those investors who bought into TWE five or six years ago will be patting themselves on the back. They have watched its share price increase four times over. TWE is now a $10 billion company, and ranks 33^rd on the ASX.

Hidden among the other results, though, was a stock that received little attention. Perhaps that’s because its results didn’t — on the surface — knock it out of the park.

The stock, Sydney Airport Holdings Pty Ltd [ASX:SYD], announced traffic growth of 3.6%. Perhaps nothing to get too excited about. However, this translated into a near 8% increase in revenue.

Sydney Airport also had good news for its income-hungry investors. Next year it expects its distributions to grow by over 11%, to a total of 34.5 cents for the year.

With passenger growth of just 3.6%, how could Sydney Airport increase its distribution by that much?

The sector growing at 10%

The answer is international tourists. Australia is going through a tourist boom, yet you’d be hard-pressed to find anyone talking about it.

Sydney Airport levies higher fees on its international passengers. And with Sydney Airport quoting a near 10% growth in inbound tourism, this flowed through into its results.

But where are all these international travelers coming from?

In the main, from China, India and Japan. Nothing too surprising there. However, Australia is also a popular destination for those from other Asian countries. Like the Philippines, Indonesia and Vietnam.

Often with China, the focus tends to be on our export markets. That is, products like coal and iron ore, through to dairy and baby products. Plus, there’s the Chinese investment in property, both residential and rural.

However, there are millions more tourists coming to Australia to enjoy our sun, beaches, food and wine. Tourism Australia and the ABS estimate the number of Chinese tourists will reach two million by 2025. That’s nearly double the 1.2 million that travelled here last year.

And within this boom has been a massive growth of international students. The government put the number of international students at around 565,000 as of July this year. That’s a 15% jump since last year.

With the rising Asian middle class looking to include travel as part of their spending, more of this money is finding its way into the Australian economy.

Back in the broader market, many of the big cap stocks are slugging it out to ratchet up minimal growth. However, there are other less well-known companies that have been investing to capture this growth in international tourists.

One of which, I recently added to the Total Income buy-list. To find out which company that is, plus a broad analysis of the tourism sector, you can trial the Total Income service by clicking here.

All the best,

Matt Hibbard,
Editor, Total Income

The Truth Behind the Trump Board
By Bill Bonner in Ile D’Yeu, France

Today, we climb a hill and have a look around.

Down below is a hidden cove on Île d’Yeu:

The hidden cove on the French island of Île d’Yeu
[Click to enlarge]

But let’s get serious…

$700 billion boondoggle

Out to our left, under dark clouds, is the political situation.

For the first 16 years of our daily commentary, we hardly bothered to look.

Through the Clinton, Bush, and Obama administrations, nothing much changed.

Then Donald J Trump brought fresh air…or an ill wind…depending on how you looked at it.

We guessed (but were unsure) that this new breeze would be little different from the prevailing winds of the previous 20 years.

It took a few months to tell the tale, but now we know: We were right. Instead of draining the swamp, as promised, the Trump team adds more slimy liquidity.

For example, the junta generals — Mattis, McMaster, and Kelly — and their cronies got a big payday this week. Seven hundred billion dollars went into the swamp. Reports The New York Times:

‘The Senate has overwhelmingly approved a sweeping defense policy bill that would pump $700 billion into the military, putting the U.S. armed forces on track for a budget greater than at any time during the decade-plus wars in Iraq and Afghanistan…

‘The 1,215-page measure defies a number of White House objections, but President Donald Trump hasn’t threatened to veto it. The bill helps him honour a pledge to rebuild an American military that he said had become depleted on former President Barack Obama’s watch.’

That’s right: 1,215 pages of boondoggles, designed and written by industry lobbyists.

Secretary of Defense Mattis wanted to save a paltry $10 billion by closing unneeded bases.

No way!

Every puddle of the swamp will be treated like an endangered wildlife habitat — preserved, protected, and promoted.

Mythical aura

The genius of Mr Trump was to realise — perhaps instinctively — that political parties, ideologies, and practical policies don’t matter.

He didn’t know the Donbass from the Hindu Kush…and neither do most voters.

What matters is the Trump brand…and that he could use the same techniques in his run for the White House that he used to build his business empire.

A brand is different from a product, as leftist writer Naomi Klein, of No Logo fame, has described.

Marlboro, for example, sold its cigarettes not by promising a better taste, but by peddling a myth — that the smoker of its cigarettes would become more like the Marlboro Man.

And Chinese tourists do not line up in front of the Louis Vuitton store in Paris to pay $500 for a handbag because of the quality of the product. They buy because it makes them feel part of the ‘One Percent’.

Often, consumers buy the brand-name product simply because they’ve heard of it. But real branding goes further. It establishes a mythical aura that is largely independent of the product.

The cowboy in the Marlboro ads, for example, had nothing to do with the cigarette. The product — often indistinguishable from its competitors — is almost irrelevant.

So it was that Mr Trump positioned himself as a brand, not as a bearer of policies or ideology.

His brand was reliably crass. Dependably in your face. Inevitably mischievous. And a great number of voters, who were fed up with the more conventional humbugs, found him appealing.

Since then, the president has demonstrated another phenomenon from modern marketing: brand loyalty.

Recent polls show that his fans are sticking with him. They like the brand; the product — ideas and policies — scarcely matter.

Mr Trump’s supporters even seem to invent reasons to approve of his recent move to make common cause with the Democrats. ‘It helps him get things done,’ they say.

Thunderheads gather

With this novel political situation on the horizon to our left, we turn to look at the money world on the right.

There, too, dark thunderheads gather.

As we saw yesterday, key indicators of US economic health are flat. Corporate sales and profits…along with wages — after accounting for inflation, they’ve barely budged over the last 17 years.

The reason?

We have only to turn our head back to the left — to politics — to see why: So many resources get sucked into the swamp.

Myth and marketing

A society only gets richer by saving money and investing it.

If the investments are successful, output increases. This extra production is what makes us wealthier.

But it only works if: (a) the savings are real, in the sense that they represent real resources, not just phony-baloney pieces of paper or empty Fed credit, and (b) the investments are win-win. That is, they must be made by real investors with ‘skin in the game.’

When the feds say they are ‘investing’ in our future…or ‘investing’ in a fairer society…or ‘investing’ to stimulate the economy — it is all claptrap.

They have no skin in the game…no real money to invest…and no reason to care if the investments pay off or not.

Often, as we explained yesterday, they prefer for them to fail, since that only encourages them to do more.

In the end, what they are doing is shifting real resources out of the productive economy toward the win-lose parasitic economy…where wealth is consumed and wasted, not produced.

Mr Trump’s appeal, such as it was, was that he seemed ballsy enough to ‘Drain the Swamp’, letting resources go back to where they belong: the productive Main Street economy.

His brand was to defy the Deep State, the insiders, Congress, the Establishment, and the powers that be.

But it was all myth and marketing. Behind the brand advertising, Mr Trump is a self-promoter, not a revolutionary.

He has instincts — some good, some bad — about how an economy works, but no coherent theory.

And without a compass to guide him, he is like a cruise ship lost in a hurricane… pushed by the winds and waves…

…right into the swamp.

Regards,

Bill Bonner,
For Markets & Money

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