Amazon recently sent a letter to a number vendors on its first-party (1P) platform informing them they would move to third-party (3P). What’s the change and why?  Under 1P, Amazon takes the inventory and price risk. Under 3P, the vendor (brand owner) takes these risks. Australian retail profit margins are generally higher than five years ago with gross margins better than feared. In our view, a key reason is that online retailers are less aggressive on price. Amazon’s shift is a good example of the shift in mindset. We expect retailers to sustain higher gross margins. The problem is their sales growth may remain underwhelming relative to operating cost growth.

This chart pack provides a range of insights about the online market in Australia including market size by category and penetration rates for a wide range of retailers. Three key insights from our analysis are – 1) Online retail growth is moderating, with the step down to single-digit growth impacting our forecasts for long-term share of sales. 2) Online retailers have shifted their focus to profitability, reducing the consumer appeal of online. 3) Amazon is continuing to take share from other marketplaces, now at 10% of all online retail in Australia.

Woolworths has provided a trading update to flag COVID-19 costs have had a bigger drag on earnings. Sales trends are solid, but even underlying cost growth looks elevated to us. We expect three-quarters of the one-off costs of $255 million to unwind, but we are concerned that online is creating a bigger drag on margins. Big W also has lower sales and margins.