Australian Retail: Amazon Ready or Not

17 March 2017
Asia Pacific/Australia
Equity Research
Retailing
Australian Retail
Research Analysts
THEME
Grant Saligari
61 3 9280 1720
grant.saligari@credit-suisse.com Amazon ready or not
Troy O'Dwyer
61 3 9280 1669 There has been increasing speculation about Amazon's entry to Australia in
troy.odwyer@credit-suisse.com 2017 and retailers seem to be taking the probability seriously. Here, we
speculate on the potential impacts of that entry. We note lessons from other
markets, risks to Australian retailers and present scenarios to highlight
potential financial impacts. We focus on the discretionary retail sector.
■ Lessons for Australian retailers. Have globally competitive sourcing,
remove excess gross margins and be low cost. Expect pricing to be more
competitive, two-day Prime delivery to switch short lead-time purchases
from stores to online and shopping centre traffic to reduce. Opportunities
exist for globally competitive retailers to increase distribution using
Amazon's Market Place. Conversely, incumbent distribution advantages
are likely to be weakened. Expect competitive intensity to increase through
the impact of Amazon and Market Place.
■ Risks. Amazon customers have high engagement with electrical, home,
sporting goods, clothing and children's toys. Big, bulky and limited
distribution products tend to be less impacted. Companies with high gross
margins and costs of doing business are vulnerable. Our risk analysis
shows upper quartile risk for Myer (MYR) and third quartile risk for Harvey
Norman (HVN), JB Hi-Fi (JBH) and Super Retail Group (SUL).
■ Scenarios. Amazon's disruptive impact on retail tends to occur when the
business reaches a critical retail share. In Australia, we expect the disruptive
effects would be felt when Amazon exceeds a 5% share of retail in a product
category. We assume a five-year timeframe for our scenarios (somewhat
arbitrary but likely in the right ball park)—consistent with a maturity profile in
Australia half the time of that in the US. Our 'Low impact' scenarios assume
that the companies analysed are winners in consolidation of store-based
retail activity. Our 'High impact' scenarios assume that company market
shares contract in line with overall store- based channels. For HVN, the
impact of Amazon on group EBIT is mitigated by the big and bulky product
range and business outside of Australia. For PMV, the impact of Amazon is
mitigated by Smiggle ex. Australia.
Figure 1: Deviation in FY22 EBIT from ex. Amazon scenario

Stock code High Amazon impact Low Amazon Impact
JBH -33% -14%
HVN -9% -3%
SUL -32% -19%
MYR -55% -18%
PMV -22% -13%
Source: Company data, Credit Suisse estimates
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
17 March 2017
Summary
This paper considers the implications of Amazon's entry
There has been increasing speculation about Amazon's entry into Australia in 2017.
Retailers seem to be taking the probability seriously. In this paper, we speculate on the
potential impacts of that entry. The research is based on interviews with retail executives,
examination of entry into analogous markets and analysis of the Australian online sector
as it exists today.
Whilst Australia is probably not a high priority market due to its small population, Australia
has many characteristics potentially attractive to Amazon and no insurmountable entry
barriers. Attractions include a growing, high income population; population concentrated in
a relatively small number of cities and adequate population density; high internet
penetration and online shopping propensity; high retail labour costs; and attractive retail
sector profitability.
We highlight five lessons from other markets
For Australian retail, we note five lessons based on Amazon's entry to other markets.
■ The entry of Amazon challenges the economics of established business models

by impacting retailer basket mix, pricing, supply chain and channel mix. Globally
competitive sourcing is a must. Incumbent distribution advantages are weakened by
Amazon's entry.
■ The Amazon Market Place simultaneously enhances Amazon's competitive

position and increases retail competition. From a competitive standpoint, Market
Place enables Amazon to significantly expand its assortment and price impression.
From a retail industry perspective, Market Place creates an incredibly competitive
environment for third-party sellers, the effect of which is to reduce excess profits in the
retail industry.
■ Amazon operates a broad ecosystem of products and services and doesn’t only
make money selling its own products. The Market Place model is an example
where Amazon is likely to be capturing a large component of the value chain
associated with customer acquisition and delivery. Amazon has tended to set prices
based on long-term considerations rather than short-term profit objectives.
■ Amazon forces businesses to change their business models, often to their

detriment. The lesson for Australian retailers is to be prepared with a defendable
range, sustainable cost structure and sustainable allocation of capital.
■ Big and bulky, hard to ship and limited distribution have some protection. Almost
anything that can be put in a small box is likely to be vulnerable to Amazon. Products
that are easily substitutable or with widespread availability have been challenged.
Products with limited distribution or physical or regulatory barriers to distribution have
been more resilient to competition from Amazon.
Retailers with high gross margins and costs and without globally
competitive sourcing are vulnerable
Amazon's entry would bring opportunities and threats. For retailers with strong sourcing
capability and low distribution, access to Amazon's distribution capability could be
attractive. Conversely, retailers without access to globally competitive sourcing are likely to
struggle, irrespective of existing distribution capability.
The broad-reaching impact of Amazon on Australian retail appears to be under- appreciated.
Amazon would be likely to reach a critical mass of third-party sellers within 12 months of
entry. Five years from entry, Amazon would be likely to have reached a better than 5%
market share in many categories. Third-party sellers would be likely to bring global sourcing
Australian Retail 2
17 March 2017
and pricing capability, in addition to Amazon's own sourcing. Supply chain changes would be
likely to disrupt domestic pricing. Enhanced delivery standards (two-day Prime delivery)
would begin to switch previously store-based shopping trips (often high value items) to
online, resulting in an adverse retailer basket mix and fall in shopping centre traffic.
We highlight a number of electrical, home and sporting goods categories where there are
large enough discrepancies between domestic and international prices that either
generate excess profit or where the existing Australian cost structure is excessive—
excess profit and excess cost both being reduced.
We highlight that a number of retailers operate with high gross margin and cost structures,
which in many cases would not be competitive with Amazon.
A model for thinking about Amazon impacts
Australians have a strong affinity for online shopping and according to an A.C. Nielsen
survey, an eager anticipation for the arrival of Amazon (A.C. Nielsen 20 February 2017).
An analysis of amazon.com shows relatively high levels of customer engagement, as
measured by the number and strength of customer reviews, within the Home and
Electrical product categories. Sports and Leisure, Automotive accessories, Clothing and
Children's toys achieve relatively high satisfaction rankings.
Companies with high gross margins and costs are vulnerable to Amazon and third-party
seller pricing and sourcing practices.
A risk matrix, combining online purchasing factors associated with customer engagement
and distribution barriers, with company-specific characteristics of gross margin, cost of
doing business and price positioning suggests companies at risk.
The Good Guys (TGG) screens below-average risk primarily because of the bulky nature
of its product and relatively low gross margins and operating costs. Myer (MYR) and
Premier Investments (PMV) screen as high risk mainly due to high customer engagement
in the clothing category and their relatively high gross margin and cost of doing business
positions. Other retailers screen as above-average risk.
Figure 2: Company risk analysis (1 = low risk, 5 = high risk)

Harvey JB Hi-Fi The Good Myer Premier Super Rebel & BCF & Big W Kmart Target
Norman Guys Inv ex cheap Amart Rays
Smiggle Auto Sports Outdoors
Online purchasing characteristics
High customer engagement 3 5 2 5 5 3 4 4 4 4 4
Low distribution barriers 3 4 2 5 5 3 4 2 5 5 5
Company characteristics
Price discrepancy 4 3 2 3 3 4 2 3 2 2 2
High gross margin 3 2 2 4 4 4 4 4 3 3 3
High CODB 3 2 2 4 4 4 4 4 3 3 3
Aggregate ranking 16 16 10 21 21 18 18 17 17 17 17
Source: Credit Suisse estimates
Scenarios for discretionary retail

We examine a number of scenarios for the retailers under coverage. The scenarios are
discussed in detail in a subsequent section. We use a somewhat arbitrary five-year
timeline for analysing retailer impacts. It is likely that Amazon's maturity profile will be
significantly shorter in Australia than in the US, Canada and UK due to the more advanced
stage of online shopping generally and Amazon's more developed capability. Our 'Low
impact' scenarios assume that the scenario companies are winners in consolidation of
store-based retail activity. Our 'High impact' scenarios assume that the scenario company
market shares contract in line with the overall store-based channel.
Australian Retail 3
17 March 2017
For HVN, the impact of Amazon on group EBIT is mitigated by product range and
business outside of Australia. For PMV, the impact of Amazon on group EBIT is mitigated
by the growth of Smiggle outside of Australia.
Figure 3: Scenario summary impacts

Stock code Amazon high impact Amazon low impact
FY22 online channel share EBIT FY22 relative to no Amazon scenario EBIT FY22 relative to no Amazon scenario
JBH Consumer electronics 34% -33% -14%
HVN Consumer electronics 34% -9% -3%
SUL Auto 20%, Sport& Leisure 25% -32% -19%
MYR Clothing and home 25% -55% -18%
PMV Clothing 25% -22% -13%
Australian Retail 4
17 March 2017
Five lessons
1) Amazon challenges the economics of established business models
The entry of Amazon challenges the economics of established business models in many
ways, some obvious and some more subtle. Some relevant considerations include impact
on retailer basket mix, shopping trip frequency, pricing, supply chain and channel mix.
It is common for many retailers (attachments in electronics, consumables in sporting
goods) to make money by selling the basket. The lead product may not be particularly
profitable; attachments and follow-up sales are often highly profitable. Amazon challenges
this profitability by increasing the attractiveness of delivery (two-day Prime delivery and
two-hour Prime Now delivery in some locations) and therefore shifting shopping trips from
stores to online. Excess pricing, as can be the case for attachments and follow-up sales,
tends to be reduced due to Amazon's more active price management and competition
from third-party sellers.
A negative price and mix effect as described above was commonly cited by retailers that
we interviewed in the course of this research. Several retailers commented that they felt
they were successful at defending volume through a combination of price and service
changes, and online development. Amazon has impacted margins by lowering prices in
profitable product categories and (partly as a result of retailer online development)
reducing the mix of profitable products sold by retailers. Other retailers commented on
customers switching to Prime two-day delivery (e.g. a mid-week purchase of an item
ahead of anticipated weekend use) and reducing the number of shopping trips to
traditional retail formats.
It is also relevant to note that studies have shown the failure of international e-commerce
to completely align price structures between countries1. In Australia, supply chain
structures are often complex and high cost. Therefore, the extent to which Amazon, and its
third-party vendors, can bring global sourcing and pricing to the Australian market is likely
to drive chain changes to supply chain cost and end product pricing.
A typical response to Amazon entry is for retailers to accelerate the development of online
capability and it is worth noting comments by a number of listed retailers in Australia to
that effect. We note that, whilst assisting with revenue retention, these solutions often
generate significantly lower profitability. A retailer might find that, as sales move online,
warranty, other attachment and follow-up sales are harder to achieve. Between a rock and
a hard place—perversely the online development further exacerbates negative mix shift.
2) Market Place significantly enhances competition
The majority of product lines listed on Amazon involve third-party sellers. Market Place is
Amazon's third-party seller platform and it operates with a virtuous circle of increasing
seller numbers, driving down prices and increasing service, attracting more customers,
increasing the number of sellers and so on round the fly wheel.
From a competitive standpoint, Market Place enables Amazon to significantly expand its
assortment and price impression. From a retail industry perspective, Market Place creates
an incredibly competitive environment for third-party sellers. The impact of competition is
likely to reduce excess profits.
Consider that, when a customer searches for a product on Amazon, that customer is
presented with one recommended product choice that Amazon has selected from
numerous sellers, based on a set of price and service factors. Dynamic ranking of Market
Place sellers further encourages seller competition.
1 Chakrabarti R. and Scholnick B (2003), 'Frictions in international e-commercie', Management International Review, 43, 1.
Australian Retail 5
17 March 2017
The Amazon approach is different to eBay, which has operated in Australia since 1999.
Typically, eBay presents the customer with numerous buying options, leaving it the
customer to search price and service options and make a selection. Seller competition is
not encouraged to the same extent as Market Place.
Market Place provides an effective channel for smaller sellers that otherwise face
significant scale barriers. Amazon differentiates on commission with Market Place sellers
and provides fulfilment services. Commission rates on amazon.com range up to 15% of
sales and fulfilment charges depend on unit size. Typically, a seller could expect to
operate on a low 20% selling and distribution cost if using Amazon referral and fulfilment.
A number of Amazon's competitors have commented that Market Place sellers can under-
cut manufacturer price points, which Amazon probably couldn't do as a direct seller and
still maintain its relationship with suppliers. This third-party supplier behaviour provides a
halo price affect for Amazon which retailers with direct supply arrangements are not able
to replicate.
3) Amazon doesn’t only make money selling its own products
This is one of the most controversial views expressed by some competitors and is a topic
of considerable debate. The retailer comment is generally phrased as follows, ‘The
problem for the retailer is that Amazon is not trying to make money selling products—it
makes money from all of the other businesses that hang off selling products’—Market
Place, Logistics and Web Services.
The proposition that Amazon does not try to make money selling products suggests either
that it doesn’t try to make money full stop, or that it exploits scale and scope advantages
that are not apparent to the conventional retailer. We will leave it to Amazon analysts to
provide a view on the former. Amazon has tended to set prices based on long-term
considerations rather than short-term profit objectives. The Market Place model is an
example where Amazon is likely to be capturing a large component of the value chain
associated with customer acquisition and delivery.
The quantum of the value chain captured by Amazon within Market Place is indicated by
referral, fulfilment and other administration fees. A supplier selling through amazon.com
and undertaking its own fulfilment would be likely to be paying a low 20% of the
transaction value to Amazon. The selling fee comprises a referral fee and various
administration fees. Referral fees vary by category; most categories are 15% of
transaction value and are subject to minimums. Amazon fulfilment is likely to be in the
order of 5% of the transaction value. As an example, for an item ordered through
amazon.com, the fulfilment fee for a 1 pound item stored for a month, picked and then
delivered by Amazon would be $2.07. The fee would be $3.50 for an item ordered through
another sales channel.
4) Amazon forces businesses to change their business models
The most common responses to Amazon have been to reduce price, increase range,
transact more business online and to reduce investment in stores. Many of these
strategies have not been particularly successful. When quizzed, the common response
from competitors of Amazon was that they felt that they had to defend what they had and
worry about the profit implications later. The main lesson that could be drawn for
Australian retailers seems to be: be prepared with a defendable range, sustainable cost
structure and sustainable allocation of capital.
Amazon also creates manufacturer issues. The manufacturer issue is Amazon volume
versus retailer showroom. More sales through Amazon tend to reduce price points and
therefore the ability to support retailer showroom space. The retailer issue is price
competitiveness versus retail profitability. Over time, we have seen suppliers increasingly
accept Amazon as an equivalent distribution channel to traditional retail.
Australian Retail 6
17 March 2017
Another common retailer response has been to change the customer proposition towards
service and expertise. In the 1990s, Dixons and Curry’s were price leaders and spent a lot
of effort advertising on price. Whilst price-based advertising still occurs online, the instore
proposition increasingly emphasizes service and expertise. Best Buy embraced a similar
showroom strategy.
Retailer price differentiation between in-store and online seems to have not been
particularly successful and complex to sustain.
Range-broadening strategies have not been particularly successful and it seems to be a
poor strategy when competing with a company with an unlimited range. The more
successful range responses by retailers have involved changing from commodity to
strongly branded product, particularly where supplier brand control is high.
A common consequence seems to be for proportionately more capital reallocated to
online, often to the disadvantage of the incumbent business model.
5) Big and bulky, hard to ship and limited distribution
Almost anything that can be put in a small box is likely to be vulnerable to Amazon.
Products that are easily substitutable or have widespread availability have been
challenged. Products with limited distribution or physical or regulatory barriers to
distribution have been more resilient to competition from Amazon.
Big and bulky products requiring fitting are costly to return online. Amazon hasn't been as
successful in selling large appliances due to the requirement for fit and the bulky goods
return process. A higher average selling price has also made the distribution cost a less
relevant factor in the buying decision.
Products that are hard to ship or require some customisation in store are more defensible.
For example, Amazon hasn't been particularly successful in mobile phones because a
network connection is often required as part of a handset sale—that process still seems to
be relatively complex to do yourself.
Parts of the market in which it is difficult to get distribution, such as tightly held strong
brands, are defensible. There are certain high-end brands in appliances for which the
suppliers haven't give Amazon distribution. Supplier reluctance to deal with Amazon has
been weakening as Amazon proves itself as a reliable and profitable distribution partner.
This is evidenced by moves over the past several years for sporting goods and automotive
accessory suppliers to make full ranges available to Amazon.
Products which have particular regulatory barriers to distribution are likely to be defensible.
Many pharmaceutical products in Australia would fall into that category.
Australian Retail 7
17 March 2017
Australian industry vulnerable

Pockets of excess pricing
The impact of Amazon on price levels and profitability in Australia appears to be under-
appreciated. In our view, Amazon is likely to cause a fall in prices in some categories that
either generate excess profit or where the existing Australian cost structure is excessive—
excess profit and excess cost both being reduced.
Excess pricing reflects the particular competitive structures of the Australian market. The
assertion is not that all prices are excessive, but that enough prices are high enough to
make a difference. In some cases retailers generate excess profit on some products. In
other cases, the supply chain is overly costly or Australia is subject to differential pricing by
suppliers.
Enter Amazon, with a willingness to set prices to build a market position, even if that action
results in it losing money in the initial instance, scale to alter supply arrangements and
Market place. To the extent that Amazon could bring global pricing to Australia (as Costco
has achieved in a narrower range of products), supply chain costs and retailer margins
would be likely to fall.
The graphs below show pricing relative to amazon.com and highlight a number of product
categories in which pricing appears to be significantly above the level that would be
justified by any potential difference in tax and costs. We also include pricing on
amazon.co.uk relative to amazon.com. All prices have been converted to USD at spot
exchange rates. We want to carefully qualify the results—they are illustrative of potential
price discrepancies only—each basket is only 10 items and so the statistical error is high,
we remove sales taxes, but make no adjustment for different domestic costs. Australian
domestic labour and transport costs are higher than the US and UK.
Generally, we find the US and UK pricing close and probably with a non-significant
difference statistically.
Prices for private-label electrical accessories in JBH appear to be very high and Kogan's
prices appear to be similar to Amazon US and UK. Products in this category include HDMI
cables, USB, RCA and VGA adapters. JBH's branded electrical accessories appear quite
closely priced in comparison. HVN's electrical accessories appear to be high relative to
JBH and to Amazon US.
Supercheap Auto's prices appear high relative to Amazon US and UK. BCF's prices
appear to be moderately higher than Amazon UK and US. Rebel Sport's prices appear
moderately higher than Amazon US and significantly higher than Amazon UK.
Australian Retail 8
17 March 2017
Figure 4: Australian private-label accessory prices Figure 5: Australia branded accessory prices
high relative to amazon.com moderately higher than amazon.com
140% 35%
Private label electrical accessories Branded electrical accessories
average price difference to amazon.com average price difference to amazon.com
120% 30%
25%
100%
20%
80%
15%
60% 10%
5%
40%
0%
20%
-5%
0%
-10%
-20% -15%
Australia JB Australia Kogan UK Amazon Australia JB Australia Harvey Norman UK Amazon
Source: Company data, Credit Suisse estimates. Prices exclude sales tax and converted to Source: Company data, Credit Suisse estimates
USD at spot rates (GBPUSD 1.25, AUDUSD 0.76)
Figure 6: Supercheap's auto accessory prices high Figure 7: BCF's prices moderately higher than
relative to amazon.com amazon.com
60% 25% Camping
Auto accessories average price difference to amazon.com
average price difference to amazon.com
20%
50%
15%
40% 10%
5%
30%
0%
20% -5%
-10%
10%
-15%
0% -20%
Supercheap UK Amazon BCF UK Amazon
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Australian Retail 9
17 March 2017
Figure 8: Rebel Sport prices moderately higher than Figure 9: Bunnings’ prices moderately higher than
amazon.com amazon.com
Sport 14%
15% average price difference to amazon.com
Hardware
average price relative to amazon.com
10% 12%
5% 10%
0%
8%
-5%
6%
-10%
4%
-15%
2%
-20%
-25% 0%
Rebel Sport UK Amazon Bunnings UK Amazon
Gross profit and cost of doing business high relative to market place
benchmarks
A number of retailers in Australia operate with high gross margin and high cost structures,
which in many cases would not be competitive with Amazon. The high margin and high
cost upper right quadrant in the figure below is an area of risk. Most of the retailers that we
examined sit in that quadrant.
Figure 10: Gross margin and cost of doing business positions

60%
High margin
50% Kathmandu
High cost
40%
BCF & Rays Outdoors
Myer
CODB margin
Rebel & Amart Sports

Target Supercheap
30% Big W
Harvey Norman
20% Coles Kmart
JB Hi-Fi Woolworths
10% Flight Centre
0%
0% 10% 20% 30% 40% 50% 60% 70%
Gross margin
Australian Retail 10
17 March 2017
A model for thinking about Australian impacts

Australians are clearly receptive to Amazon
Australians have a strong affinity for online shopping and according to a A.C. Nielsen
survey (17 Feb 2017) an eager anticipation for the arrival of Amazon. The Nielsen survey
found high indications of interest in purchasing products from Amazon. According to the
survey:
■ 56% of respondents said they would be likely to purchase from its Australian site.
■ 67% of respondents indicated that they would buy electronic goods, 61% would buy
books, 59% would buy clothes and 42% would buy shoes from Amazon.
■ Indicating a potentially tougher development in food, only 18% of respondents

indicated that they would buy packaged groceries, 9% fresh vegetables and 7% fresh
meat from Amazon.
■ 45% of respondents said they would pay to become an Amazon Prime member to
receive special deals, discounts and delivery bonuses.
Online channel share in Australia is relatively high in Electrical, Sports and Leisure Goods.
International online penetration is high within clothing and home wear.
Figure 11: Australia online channel share of spending

18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Automotive parts Sports & Clothing & Electrical Groceries
Leisure goods home wear
Source: NAB, Company data, Credit Suisse estimates
Disruptive impacts in five years

Based on experience in analogous markets, Amazon would be likely to launch in Australia
with a few million items and Market Place. Amazon might achieve a 1% share of retail in
its first year of operation.
Amazon's disruptive impact on retail has tended to occur when Amazon reaches a critical
share of product categories. In Australia, we would expect that disruptive effects would be
felt as Amazon started to exceed a 5% share of product categories.
We have used a somewhat arbitrary five-year timeline for our analysis. Timelines are
compressing as Amazon becomes more experienced at entering new markets and
therefore development might be quicker in Australia.
17 March 2017
Amazon entered the UK in 1999 initially with books and had a significant disruptive effect
in the space of a few years because of its aggressive pricing. Consumer electronics
followed several years later and, as Amazon built share, Curry's and Dixon's started to be
impacted. Amazon probably hit a critical mass in consumer electronics in the US market in
2010, when it reached an 8% share of consumer electronics retail. Amazon entered the
Canadian market in 2010 and there has not been significant disruption in Canada yet.
Consolidation of Department stores is occurring now in the US.
Books, electronics and sporting goods have tended to perform well quickly after the
introduction of Amazon in a country. Low-value, highly transactional items and anything
that 'fits in a small box' have tended to do very well. The US and UK markets experienced
a major increase in competition in electronics.
Amazon Prime would likely be offered on entry, including over-the-top services such as
video and music. Prime would be an important development in Australia as it would begin
to challenge Australian retail delivery service fees and drive service costs higher, and
Prime tends to switch customers from bricks-and-mortar retail.
International third-party sellers would be likely to be present on Amazon Market Place in
Australia very quickly. Best of the best third-party sellers on Amazon internationally would
likely be encouraged to enter Australia with Amazon and these sellers would begin to
disrupt pricing.
Customer engagement scores show categories at risk
An analysis of amazon.com shows relatively high levels of customer engagement, as
measured by the number and strength of customer reviews, within the Home and
Electrical product categories. Sports and Leisure, and Automotive tools and accessories
achieve relatively high satisfaction rankings.
High engagement suggests categories at risk. The very high number of product reviews in
Consumer Electronics and Home is consistent with the experience of Consumer
Electronics and Department store disruption in the US market. Clothing, Sports & Leisure
and Beauty also rank highly.
Figure 12: Customer engagement scores

100
Home
Consumer Electronics
Average reviews per product (log scale)
Beauty
Clothing
Sports & Leisure
Small appliances
Childrens toys
10 Tools and hardware
Automotive
Furniture
1
0 1 2 3 4 5
Average review rating (0 to 5 stars)
Source: Company data,. Sample size 10,600 products
17 March 2017
The following companies are exposed to relatively high engagement score categories:
■ HVN—Consumer electronics & small appliances (estimated 50% of Australian

franchisee sales)
■ JBH—Consumer electronics & small appliances (70% of sales)
■ MYR—Home, Beauty, Clothing, Small appliances (90% of sales)
■ SUL—Sports & Leisure, Automotive accessories and parts
■ PMV—Clothing
Analysis of range shows the importance of third-party sellers
An analysis of Amazon's US website shows relatively high levels of third-party product and
third-party fulfillment across all categories and highlights the importance of third-party
sellers in Amazon's offer.
Figure 13: Amazon and third-party product range and fulfilment

100%
80%
60%
40%
20%
0%
Consumer Small Home Furniture Tools and Automotive Beauty Clothing Sports & Childrens
Electronics appliances hardware Leisure toys
Sold and Fulfilled by Amazon Sold by Third Party and Fulfilled by Amazon Sold and FulFilled by Third Party
Source: Company data. Sample size 10,600 products
Retailer strategies—cooperate and compete

Amazon is retailer agnostic and therefore its Australian market entry would provide a
potential distribution channel for incumbent retailers.
Major retailer participation on Amazon to date appears to have been with relatively small
range, presumably with a view to mitigation through incremental sales rather than fully
embracing the channel.
The retailer trade-off is that the customer's relationship is primarily with Amazon, rather
than the retailer. Customer information collection, attachment and cross-sell opportunities
are therefore significantly weaker than in the retailer's own distribution channel. That is
likely to be a bigger issue for a large, national retailer with existing distribution strength
than a smaller retailer with distribution gaps.
For a large national retailer, we suggest that Amazon’s participation would be only slightly
mitigating a weakening of the retailer's distribution position. For a smaller, perhaps local or
regional retailer that is short national distribution, Amazon potential provides a net gain.
17 March 2017
Consolidating these factors into a retailer risk assessment

We combine category factors associated with customer engagement and distribution
barriers with company-specific characteristics of gross margin, cost of doing business and
price positioning to form a risk matrix.
A neutral ranking would be 12.5 (2.5 across five categories). Of the listed retailers
covered, only The Good Guys (part of JBH) sits below the average.
Figure 14: Company risk analysis (1 = low risk, 5 = high risk)

Harvey JB Hi-Fi The Good Myer Premier ex. Super Rebel & BCF & Big W Kmart Target
Norman Guys Smiggle cheap Amart Rays
Int. Auto Sports Outdoors
Online purchasing characteristics
High customer engagement 3 5 2 5 5 3 4 4 4 4 4
Low distribution barriers 3 4 2 5 5 3 4 2 5 5 5
Company characteristics
Price discrepancy 4 3 2 3 3 4 2 3 2 2 2
High gross margin 4 2 2 4 4 4 4 4 3 3 3
High CODB 4 2 2 4 4 4 4 4 3 3 3
Aggregate ranking 18 16 10 21 21 18 18 17 17 17 17
Consumer electronics & electrical

Industry considerations
In Australia, the online channel accounts for 16% of consumer spending on consumer
electronics and electrical appliances. Some 90% of online sales are captured by domestic
online retailers (based on data compiled by NAB). Major online competitors include eBay,
Apple, Appliances Online and Kogan as well as online sales by JBH and HVN.
Based on the already high propensity to shop for consumer electronics online and
Amazon's performance in other markets, significant online channel growth appears likely.
A relatively high proportion of consumer electronics is purchased online indicating strong
consumer acceptance of the channel. Amazon has been successful at capturing market
share in that category indicating strong capability by Amazon.
The outcomes for HVN and JBH are heavily dependent on the extent to which they win
market share in a declining store based channel versus category and regional specialists.
JBH and HVN hold ~60% combined market share currently, mainly through their stores.
Other predominantly store based retailers hold only ~25% market share. Concentration of
the market is suggestive that one of the larger retailers is likely to lose.
A scenario for Australia
It is likely that consumer electronics would be one of the first stores to be launched by
Amazon with a core product range and third-party sellers. Amazon would be likely to move
from launch to a critical mass of third-party sellers within its first year.
It is likely that Amazon's development timeframe would be shorter than previous market
entries. The US experience saw Amazon launch its consumer electronics store in 2001. It
took Amazon to 2010 to achieve c. 8% share of the US consumer electronics market and
that share nearly doubled to 13% by 2015 (TWICE magazine). The period of acceleration
from FY10 coincided with a reduction in trading area, virtually no sales growth and a
significant switch from bricks and mortar to online sales at Best Buy. In the UK, Amazon
launched consumer electronics in 2001 and, according to retailers at the time, built a
sizable market share over three years in cameras and other small consumer electronics.
17 March 2017
In Australia, we assume that Amazon's market share would build to 10% over five years
(one third the development time of the US and in line with the UK) and we assume
underlying market growth of 3% per annum.
There is a large Win/Lose outcome in our scenarios for HVN and JBH, discussed in the
next sections. Under our 'Low impact' scenarios, we assume that that HVN and JBH win
market share in a declining store based channel versus category and regional specialists.
JBH and HVN hold ~60% combined market share currently, mainly through their stores.
Other predominantly store-based retailers hold only ~25% market share.
JBH scenarios
We consider two scenarios. In both we assume that Amazon and the total online channel
(including Amazon) achieve 10% and 34% shares respectively of the consumer
electronics and electrical appliances market in FY22.
Under both scenarios, we assume that JBH expands online sales at a 15% CAGR to
FY22. We also assume that the gross margin for online sales is 5pp lower than the
existing base due to competition for delivery fees and/or additional delivery costs and that
JBH mitigates half of the change in gross profit (from the ex. Amazon case) through cost
reduction. In our 'Low impact' Amazon scenario'', we assume that JBH wins ~400bp
market share in a declining store channel. In our 'High impact' Amazon scenario, we
assume that JBH maintains share in a declining store-based channel.
For simplicity, we leave our forecasts for The Good Guys and JBH New Zealand
unchanged from the base ex. Amazon case.
Whilst we haven't explicitly modelled store closure, the potential is implicitly covered under
our cost mitigation assumption.
Under the 'Low impact' scenario for JBH, other store retailers in aggregate experience a
13% contraction in sales over the period to FY22. JBH's store-based sales are assumed to
grow by 12% over the same period, resulting in a 400bp expansion in share of a shrinking
store based channel.
Figure 15: Scenarios for JBH

FY16A FY22F versus FY16A versus ex Amazon
Sales revenue
Ex. Amazon 6,044 7,826 29% 0%
Amazon high impact 6,044 6,799 12% -13%
Amazon low impact 6,044 7,440 23% -5%
EBIT
Ex. Amazon 294 374 27% 0%
Amazon high impact 294 250 -15% -33%
Amazon low impact 294 321 9% -14%
EBIT margin
Ex. Amazon 4.9% 4.8% -0.1% 0.0%
Amazon high impact 4.9% 3.7% -1.2% -1.1%
Amazon low impact 4.9% 4.3% -0.6% -0.5%
Harvey Norman
HVN is exposed within its Australian technology franchises and small consumer
electronics and appliances ranges within its electrical franchises. In the absence of any
specific disclosure by HVN, we assume that technology and small consumer electronics
and appliances account for 50% of franchise system sales revenue and 45% of franchise
system EBIT. We assume scenarios for sales and gross margins at the franchise level
17 March 2017
similar to JB Hi-Fi. Under a 'low impact' scenario, we assume that HVN gains a 70bp
market share in a declining store based market. Under a 'High impact' scenario, we
assume that HVN maintains market share in a declining store-based market.
Under a 'Low impact' scenario, we also assume mitigation of the impact on HVN through
the consolidation of individual franchisees, reducing cost and allocating a greater share of
the profit impact onto the franchisee.
Under a 'High impact' scenario, we assume that a drop in profitability at the franchise level
is subsidised by HVN and therefore HVN bears the full impact of franchisee profit decline.
We do not make an explicit adjustment to property portfolio value, but note that, if a
sufficiently large enough group of franchisees could not sustain rental payments, a
negative impact on property value would be likely under a continuing use assumption.
A mitigating factor for HVN is that consumer electronics and small electrical represent only
50% (assumed) of Australian Franchise segment sales and the Australian Franchise
segment represents only 60% of group EBIT. The franchisee EBIT impact is -A$37mn in
both scenarios. In the 'Low impact' scenario the impact on HVN is mitigated because the
franchisees are assumed to wear half of the impact on EBIT.
Figure 16: Scenarios for HVN

System sales revenue
Ex. Amazon 7,109 8,031 13% 0.0%
EBIT
Ex. Amazon 462 560 21% 0%
Amazon high impact 462 508 10. -9%
Automotive accessories, sporting and leisure goods

We estimate an A$7.3bn Australian sporting and outdoor leisure goods market in 2016
(A$3.8bn clothing and footwear, A$1.5bn equipment and A$2bn outdoor leisure), which
combines data from the Household Expenditure Survey and other sources. The online
channel is estimated to capture 17% of the sports clothing and footwear market
(Euromonitor), which is slightly higher than clothing more generally and likely reflects
strong participation of Australians in online sports footwear purchases. We assume 10%
for the equipment and outdoor leisure market segments.
We estimate an A$5bn retail automotive parts and accessories market, based on data
from the Household Expenditure Survey; this estimate excludes the trade market segment.
We estimate 8% of the retail market is through online channels, with eBay being a strong
participant in that market.
Whilst, our analysis and that by our US colleagues shows a relatively low proportion of
Amazon-owned inventory in the Sporting Goods and Automotive goods categories, overall
(refer to Figure 13 and Credit Suisse 23 May 2016), there has been a reasonable shift
under way over the past several years in brand supplier participation on Amazon, which is
validated by discussions with branded suppliers and retailers. Whilst we see range
selection differing in direct channels (exclusives and customs). there appears to be no
particular reluctance by supplier brands in making a similar range available to Amazon and
the traditional retail channel.
17 March 2017
The service element (Prime two-day delivery) appears to have been an important
determinant of Amazon success in these categories. Amazon appears to have been
rational on pricing, whilst keeping the market competitive. As one retailer noted, items that
might have historically been purchased in store to meet a weekend deadline, can now be
purchased online with two-day delivery via Amazon Prime.
Relatively high concentration of the Australian automotive retail sectors leaves little room
for bricks and mortar retailers to offset Amazon growth with consolidation in the retail
sector. This concentration presents a high lose probability for incumbent retail.
We assume that the online channel grows from its current 14% share of the sporting and
leisure goods market to 25% by FY22 and that the online channel grows from the current
8% of the Automotive accessories and parts aftermarket to 20% by FY22. We assume that
Amazon achieves a 5% market share in both markets over that period, which would be in
line with its current market share in the US and implies a quicker growth profile than was
the case in the US..
Amazon's entry would be likely to result in price disruption, an adverse mix shift and
additional competition in delivery. To date, there has been strong international participation
in the Australian sporting goods market by Wiggle, East Bay, Asos and a number of
product specialists.
Super Retail Group
We examined scenarios for Leisure and Sporting Goods and for Automotive parts and
accessories. Our ex Amazon scenario assumes that SUL's online sales experience a 15%
CAGR to 2022 and that each business gains ~100bp share of the store-based channel
over the period to FY22. We have online sales at approximately 5% of total sales in FY16
at the start of our forecasts.
We calculate 'Low impact' and 'High impact' scenarios for Amazon entry. Under both high-
and low-impact scenarios we assume that Amazon reaches a 5% share of the Sporting
and Leisure Goods, and Automotive parts and accessories markets by 2022. We also
assume SUL online sales have a 15% CAGR, that competition in delivery reduces online
gross margins and/or increases cost by 10% of sales and that SUL offsets 50% of the
gross profit impact (relative to the ex. Amazon scenario) through cost reduction.
In our 'Low impact' scenario, we assume that SUL increases its share of the store-based
channel by 100bp in the Auto, and Leisure & Sports markets. In the 'High impact' scenario,
we assume that SUL maintains its existing share in the store channel in both markets.
Whether there is attrition by other store-based competitors has a significant impact on the
outcome for SUL. The Auto segment is concentrated among three retailers in Australia
creating a large win/lose scenario. Sports and Leisure is somewhat more fragmented due
to participation by leisure specialist and generalist retailers, creating the possibility of
market share attrition from many small competitors. .
17 March 2017
Figure 17: Scenarios for SUL

Sales revenue
Ex. Amazon 2,415 3,077 27% 0%
EBIT
Ex. Amazon 147 279 66% 0%
Amazon high impact 147 190 14% -32%
EBIT margin
Ex. Amazon 6.1% 9.1% 2.1% 9.1%
Amazon high impact 6.1% 6.9% 0.0% 6.9%
Amazon low impact 6.1% 7.8% 0.9% 7.8%
Home wear and clothing

In Australia, the online channel accounts for 8% of consumer spending on clothing and
homewear (excluding electrical). Approximately half of Australian online sales are
captured by international retailers (based on data compiled by NAB).
Significant international online retailers to Australia include Asos, Macy's and Nordstrom.
The Australian domestic retailer share of online clothing and homewear sales of around
5% is consistent with the mid-single digit share of sales cited by listed retailers and the
addition of pure plays online, which would include The Iconic, Shoes of Prey, Birds Nest.
The relatively low concentration of the clothing market suggests that it would be feasible
for both MYR and PMV to hit our 'Low impact' scenarios in terms of market share and the
outcome would depend on strategy and execution.
Whilst Amazon has not been noted for its performance in Clothing, the category scores
highly on our engagement analysis and Amazon has improved its fashion capability by
offering more high-end designer brands, launched its own private-label clothing brands
and expanded its marketing in the area by sponsoring the first ever New York Men’s
Fashion Week. This capability is likely to result in faster growth in the Australian market
than experienced in previous market entries.
For our Australian scenario, we assume a compressed maturity timeline compared with
experience in the US, with Amazon achieving a 10% market share in clothing and non-
electrical homewear in five years (compared with a 10% market share in clothing in the US
currently, some 10 years since buying Zappos). Our base case is that the online channel
(including Amazon) grows from 10% currently, to 25% of clothing and home wear retail in
2022 (five years after an assumed entry).
Myer
In our 'ex. Amazon' outlook for MYR, the growth of fast fashion in its various multi-channel
and pure play online forms takes a 30bp market share over six years, resulting in a sales
revenue CAGR of 1% compared with a market growing at 3.0% p.a. That pressure is dealt
with via the 'New Myer' strategy, under which MYR reduces lower demographic profile
trading space and the business skews more towards a premium market segment. We
estimate MYR's online sales are nearing 10% of total sales, compared with 5% average
for the domestic clothing and department store sectors.
17 March 2017
In both scenarios, we assume that MYR's online sales revenue grows at 15% p.a to FY22.
We also assume that Amazon's entry raises the bar for delivery, resulting in more
competition in delivery fees and additional expense to meet higher delivery expectations.
As a result, the online channel is likely to be less profitable for MYR on a like for like item
than is currently the case. We assume a 10pp negative gross margin and/or cost impact
from delivery competition on online sales.
Our 'Low impact' scenario assumes that MYR successfully maintains the same sales
profile as our ex. Amazon case, suggesting that the New Myer strategy pre-empts the
entry of Amazon (in line with currently assumed ex. Amazon forecasts for MYR). Under
the 'Low impact' scenario, MYR's market share falls 50bp between FY16 and FY22, which
is in line with our ex. Amazon forecasts.
Our 'High impact' scenario assumes that MYR's share of a declining store-based market
falls 70bp to 2022.
Under the ex Amazon case, EBIT grows 57% over six years to FY22. Under the 'High
impact' scenario, sales revenue is lower in FY22 than in FY16, and the profitability of
online sales falls due to competition in delivery fees and additional online expenses. EBIT
falls 29% from FY16 and is 55% below the ex. Amazon case. Under the 'Low impact'
scenario, EBIT is lower than the ex. Amazon case due to lower margins on online sales.
EBIT in FY22 is 29% higher than in FY16 and 18% below that ex. Amazon case.
Figure 18: Scenarios for MYR

Sales revenue
Ex. Amazon 3,290 3,481 6% 0%
Amazon high impact 3,290 3,160 -4% -9%
Amazon low impact 3,290 3,512 7% 1%
EBIT
Ex. Amazon 114 180 57% 0%
Amazon high impact 114 81 -29% -55%
EBIT margin
Ex. Amazon 3.5% 5.2% 1.7% 0.0%
Amazon high impact 3.5% 2.6% -0.9% -2.6%
Amazon low impact 3.5% 4.2% 0.7% -1.0%
Premier Investments
Our ex. Amazon outlook for PMV is mainly driven by growth in Smiggle ex. Australia and
New Zealand and growth in Peter Alexander domestically. Mature fashion brands are
assumed to grow at 2% p.a.
Our scenarios are similar to MYR. We maintain ex Amazon forecasts for Smiggle outside of
Australia and New Zealand. Under both scenarios we assume that PMV's online sales grow at
15% CAGR to FY22. Under both scenarios we assume that additional competition in delivery
has an adverse 10pp impact on gross margin and cost of doing business for online sales.
Under our 'High impact' scenario, we assume that PMV maintains its share of a declining
store-based channel. Under our 'Low impact' scenario we assume that PMV's strategies
partly mitigate the impact of Amazon, resulting in store-based sales midway between the
ex. Amazon and 'High impact' cases.
17 March 2017
Under our ex. Amazon case, EBIT is 70% higher in FY22 than FY16. Under our 'High
impact' scenario, EBIT is 33% higher in FY22 than FY16 and 22% lower than the ex.
Amazon case. Under the 'Low impact' scenario, EBIT is 13% below the ex. Amazon case
in FY22.
The growth of Smiggle outside of Australia significantly mitigates the impact of Amazon's
Australian entry on group performance.
Figure 19: Scenarios for PMV

Sales revenue
Ex. Amazon 1,050 1,555 48% 0%
EBIT
Ex. Amazon 129 219 70% 0%
Amazon high impact 129 171 33% -22%
EBIT margin
Ex. Amazon 12.3% 14.1% 1.8% 14.1%
Amazon high impact 12.3% 11.9% -0.4% 11.9%
Amazon low impact 12.3% 12.6% 0.4% 12.6%
17 March 2017
Reference Appendix
Our new “Total return forecast in perspective” chart helps visualize Credit Suisse and consensus views of a company’s 12-month return within
the context of forecasting risks and its historical trading pattern:
12mth Volatility is calculated as the annualised standard deviation of weekly total return series over the past 12 months. It illustrates variability of
stock returns; in other words, risk. The way to think about it is that one would rather take 10% forecast return from a stock that has 20% volatility,
than from the stock that has 40% volatility. The shaded area shows the one standard deviation range based on past 12 months volatility. In statistical
terms, once you make a number of brave assumptions, there is a 68% probability that the share price will end up inside that range in 12 months’
time.
52wk Hi-Lo is maximum and minimum daily closing price over the past 52 weeks. It is often handy to know the price momentum especially when the
stock is trading close to its highs and lows: Is the stock trading close to its peak? Is the momentum against the stock?
*Consensus is IBES consensus supplied by Thomson Reuters. IBES is a survey of sell side research analysts, collecting a few dozen data
points such as EPS, DPS, Sales, Target Price, ROE and so on. *Mean is the average of target returns, while the shaded area around the mean
represents the range of estimates from the lowest to the highest estimate. This aids visualisation of a number of important factors such as: the range
of analyst estimates; where Credit Suisse’s estimates on this stock sit relative to consensus; and where the share price is relative to consensus
mean and consensus range target.
Target return is calculated as capital gain plus forecast dividend yield (net) over the next 12 months. For "CS tgt" we have used Credit Suisse’s
target price and Credit Suisse forecast for 12-month forward dividend, grossed up for franking. For the consensus mean and range, we have used
consensus target price and consensus dividend forecasts for 12 month forward.
17 March 2017
Companies Mentioned (Price as of 17-Mar-2017)

ASOS Plc (ASOS.L, 5888.0p)
Amazon com Inc. (AMZN.OQ, $853.42)
Best Buy (BBY.N, $44.5)
Costco Wholesale (COST.BA, $248.15)
Dixons Carphone Plc (DC.L, 304.8p)
Flight Centre (FLT.AX, A$29.14)
Harvey Norman (HVN.AX, A$4.75, UNDERPERFORM, TP A$5.12)
JB Hi-Fi (JBH.AX, A$24.82, UNDERPERFORM, TP A$26.49)
Kathmandu (KMD.AX, A$1.8)
Kogan.com (KGN.AX, A$1.72)
Myer Holdings (MYR.AX, A$1.14, OUTPERFORM, TP A$1.44)
National Australia Bank (NAB.AX, A$32.15)
Nordstrom, Inc. (JWN.N, $44.31)
Premier Investments (PMV.AX, A$13.66, NEUTRAL, TP A$14.5)
Super Retail Group (SUL.AX, A$10.68, NEUTRAL, TP A$10.42)
Target Corporation (TGT.N, $54.59)
Woolworths (WOW.AX, A$25.98)
Disclosure Appendix
Analyst Certification
I, Grant Saligari, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and
securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this report.
3-Year Price and Rating History for Harvey Norman (HVN.AX)
HVN.AX Closing Price Target Price

Date (A$) (A$) Rating
30-Apr-14 3.11 3.22 N
09-May-14 2.99 3.13
31-Oct-14 3.60 3.17
05-Dec-14 3.58 3.75
18-Jan-15 3.66 4.10 O
27-Feb-15 4.42 4.65 N
03-Aug-15 4.45 4.76 O
28-Aug-15 4.42 4.67
27-Oct-15 3.98 4.42
13-Jan-16 4.37 4.42 N N EU T RA L
O U T PERFO RM
01-Mar-16 4.87 4.70 U N D ERPERFO RM
31-Aug-16 5.38 4.97 U
28-Feb-17 5.15 5.12
* Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for JB Hi-Fi (JBH.AX)
JBH.AX Closing Price Target Price

02-Apr-14 18.80 22.78 O
09-May-14 19.23 20.00 N
19-Jun-14 18.74 19.76
11-Aug-14 17.62 19.07
29-Oct-14 15.91 19.76 O
16-Jan-15 15.95 17.19 N
03-Feb-15 16.62 17.39
10-Aug-15 21.43 21.49
02-Dec-15 17.78 18.82
13-Jan-16 21.68 24.75 O O U T PERFO RM
N EU T RA L
08-Feb-16 21.73 25.64 U N D ERPERFO RM
15-Aug-16 29.73 24.90 U
13-Sep-16 28.50 25.21
20-Sep-16 29.06 26.16
29-Nov-16 26.80 26.43 N
13-Feb-17 29.38 26.49 U
17 March 2017
3-Year Price and Rating History for Myer Holdings (MYR.AX)
MYR.AX Closing Price Target Price

20-Mar-14 2.36 2.53 N
02-May-14 1.98 2.11
04-Jul-14 2.05 2.25 O
11-Sep-14 2.01 2.20
12-Nov-14 1.65 2.01
16-Jan-15 1.35 1.54
02-Mar-15 1.55 1.59 N
19-Mar-15 1.29 1.31
03-Aug-15 1.18 1.12
01-Sep-15 1.13 1.20 U N EU T RA L
O U T PERFO RM
20-Nov-15 1.03 1.15 N U N D ERPERFO RM
17-Mar-16 1.24 1.29
12-May-16 1.20 1.40 O
19-Aug-16 1.40 1.56
15-Sep-16 1.28 1.40
16-Mar-17 1.08 1.44
3-Year Price and Rating History for Premier Investments (PMV.AX)
PMV.AX Closing Price Target Price

26-Mar-14 9.28 9.93 O†
17-Sep-14 10.53 11.72 †
23-Mar-15 12.45 13.31 N†
27-May-15 14.43 NR †
04-Sep-15 11.92 12.60 N*
22-Sep-15 12.96 12.76
08-Dec-15 14.25 13.07 U
18-Mar-16 15.31 14.42
01-Aug-16 16.32 14.70
22-Sep-16 16.17 14.57 O U T PERFO RM
N EU T RA L
14-Nov-16 13.22 14.50 N N O T RA T ED
U N D ERPERFO RM
†Indicates CSEC coverage
3-Year Price and Rating History for Super Retail Group (SUL.AX)
SUL.AX Closing Price Target Price

08-May-14 9.53 9.50 U
16-Jun-14 8.32 8.60 N
21-Aug-14 9.18 9.60
16-Jan-15 7.89 8.95 O
19-Feb-15 9.71 8.95 U
21-Aug-15 9.77 8.71
26-Feb-16 8.32 8.78 N
05-May-16 8.99 8.90
02-Sep-16 10.78 9.77 U
24-Feb-17 10.25 10.42 N U N D ERPERFO RM
N EU T RA L
* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.
17 March 2017
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Restricted 2%
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Target Price and Rating

Valuation Methodology and Risks: (12 months) for Harvey Norman (HVN.AX)
Method: Our target price of $5.12 per share for Harvey Norman is based on our DCF (discounted cash flow) valuation of $4.77 (WACC [weighted
average cost of capital] 9.1%, terminal growth 1.5%), and SOTP (sum-of-the-parts) valuation of $5.47 per share. Earnings risks are to the
downside and therefore we have a Underperform rating. We expect tailwinds from the Australian housing market to slow and the potential
for HVN to benefit from a likely consolidation event within the consumer electronics market.
Risk: The main risks to our $5.12 per share target price and Underperform rating for Harvey Norman are a prolonged downturn in discretionary
spending, an inability of HVN to increase Franchise margins and a devaluation of HVN's property portfolio.
17 March 2017

Valuation Methodology and Risks: (12 months) for JB Hi-Fi (JBH.AX)
Method: Our target price of $26.49 per share for JB Hi-Fi is based the average of a DCF (discounted cash flow) valuation of $26.62 per share
(WACC [weighted average cost of capital] of 9.4%, terminal growth 1.5%) and SOTP (sum-of-the-parts) valuation of $26.37 per share. Our
Underperform rating is due to JBH's share price being above valuation and earnings risks to the downside.
Risk: Risks to our $26.49 target price and Underperform rating for JBH include a material change in JBH's new store development, change in
category share and changes in consumer discretionary income. The increasing share of electronics retailing through online channels puts
greater emphasis on a successful online channel development by JBH. We note that Amazon does not currently retail consumer
electronics in Australia.
Valuation Methodology and Risks: (12 months) for Myer Holdings (MYR.AX)
Method: Our target price of $1.44 per share for Myer Holdings is based on the average of our DCF (discounted cash flow) valuation of $1.48 per
share (WACC [weighted average cost of capital] 9.5%, terminal growth 1.5%) and SOTP (sum-of-the-parts) valuation of $1.40 per share.
Earnings risks appear to the upside over the medium term and therefore we have an OUTPERFORM rating.
Risk: The main risks to our $1.44 target price and OUTPERFORM rating for MYR are the success of a new re-positioning strategy under which
Myer is introducing a range of new brands and store refurbishments, general movements in consumer spending and competition.
Valuation Methodology and Risks: (12 months) for Premier Investments (PMV.AX)
Method: Our target price for Premier Investments is $14.50 per share and is at a 0.5% discount to the average of our discounted-cash-flow (DCF)
valuation of $13.91 per share and our sum-of-the-parts (SOTP) valuation of $15.23 per share. The discount has been applied so as to
achieve a Neutral rating. Near term downside risks to earnings counter-balance a more attractive valuation.
Risk: The risks to our target price of $14.50 per share and Neutral rating for PMV are associated with a potential weaker growth profile in the
Smiggle and Peter Alexander businesses and accelerated market share loss in its other clothing businesses as a result of increased
international competition in the Australian market.
Valuation Methodology and Risks: (12 months) for Super Retail Group (SUL.AX)
Method: Our target price of $10.42 per share for Super Retail Group is set equal to the average of our DCF (discounted cash flow) valuation of
$10.48 per share. (WACC [weighted average cost of capital] 9.9%, terminal growth rate 1.5%) and SOTP (sum-of-the-parts) valuation of
$10.35 per share. Earnings risks appear equally balanced and we therefore give SUL an Neutral rating.
Risk: The risks to our $10.42 per share target price and Neutral rating for Super Retail Group are the achievement of profit improvement in the
Leisure division, the competitive impact of Decathlon entering the Australian market and the general consumer spending environment.
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Australian Retail: Amazon Ready or Not

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Australian Retail: Amazon Ready or Not

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17 March 2017

Figure 1: Deviation in FY22 EBIT from ex. Amazon scenario

■ The entry of Amazon challenges the economics of established business models

■ The Amazon Market Place simultaneously enhances Amazon's competitive

■ Amazon forces businesses to change their business models, often to their

Figure 2: Company risk analysis (1 = low risk, 5 = high risk)

Scenarios for discretionary retail

Figure 3: Scenario summary impacts

Australian industry vulnerable

Source: Company data, Credit Suisse estimates

Figure 10: Gross margin and cost of doing business positions

Rebel & Amart Sports

10% Flight Centre

Source: Company data, Credit Suisse estimates

A model for thinking about Australian impacts

■ Indicating a potentially tougher development in food, only 18% of respondents

Figure 11: Australia online channel share of spending

Source: NAB, Company data, Credit Suisse estimates

Disruptive impacts in five years

Figure 12: Customer engagement scores

Source: Company data,. Sample size 10,600 products

■ HVN—Consumer electronics & small appliances (estimated 50% of Australian

■ JBH—Consumer electronics & small appliances (70% of sales)

■ MYR—Home, Beauty, Clothing, Small appliances (90% of sales)

■ SUL—Sports & Leisure, Automotive accessories and parts

Figure 13: Amazon and third-party product range and fulfilment

Source: Company data. Sample size 10,600 products

Retailer strategies—cooperate and compete

Consolidating these factors into a retailer risk assessment

Figure 14: Company risk analysis (1 = low risk, 5 = high risk)

Consumer electronics & electrical

Figure 15: Scenarios for JBH

Figure 16: Scenarios for HVN

Automotive accessories, sporting and leisure goods

Figure 17: Scenarios for SUL

Home wear and clothing

Figure 18: Scenarios for MYR

Figure 19: Scenarios for PMV

Companies Mentioned (Price as of 17-Mar-2017)

HVN.AX Closing Price Target Price

3-Year Price and Rating History for JB Hi-Fi (JBH.AX)

JBH.AX Closing Price Target Price

3-Year Price and Rating History for Myer Holdings (MYR.AX)

MYR.AX Closing Price Target Price

3-Year Price and Rating History for Premier Investments (PMV.AX)

PMV.AX Closing Price Target Price

SUL.AX Closing Price Target Price

Target Price and Rating

Target Price and Rating

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