As Amazon continues to tease the market, with its soft launch and impending full Aussie roll-out, much ink has been spilled--mostly red--over an expectation of calamity for domestic retailers.

Though at least one local fast-food CEO says he welcomes the competition, the Geoff Bezos behemoth's $14 billion Whole Foods acquisition, now part of Amazon Fresh, should be end-of-days stuff for Wesfarmers (ASX: WES) and Woolworths (ASX: WOW)--if you believe the hype.

But it isn't necessarily so. Unsurprisingly, management of both Woolworths and Wesfarmers have talked a good game, convincing local shareholders their respective gooses aren't cooked.

Not their first rodeo

Some analysts, including Morgan Stanley, suggest Wesfarmers' discount and mid-tier retail chains Kmart and Target leave it more exposed to Amazon than the likes of JB Hi-Fi (ASX: JBH) and Super Retail Group (ASX: SUL).

But Ian Bailey, managing director of Kmart, says it "doesn't expect to beat Amazon on what it does best: deliveries".

"Price will continue to be our lead strategy, and in terms of Amazon, we want to be the same price or lower," he says.

Wesfarmers chief executive Richard Goyder emphasises his belief in Wesfarmers' ability to handle new competition, as seen with the expansion of Aldi since 2001.

"Sometimes it's easy to look at new competition and say the world is coming to an end. New competition is not new to the business and never will be," he told investors earlier this year.

In fact, he seems to believe Amazon is a stimulus to increase Wesfarmers' service offering, thereby helping it win market share from other competitors--such as Costco, Aldi, H&M and Zara.

"Amazon is a stimulus for us to make sure that we are moving fast enough on evolving our offer."

Similarly, Woolworths chairman Gordon Cairns says the company has been building out its digital business, including trialling express delivery.

"We want to be obsessive about our customers, their needs and how we serve them better. If we do not, we will lose out to those who do, like Amazon," he says.

According to CEO Brad Banducci, Woolworths' offering in this space, WooliesX, "will deliver increasingly personalised and convenient shopping experiences for our customers".

Morningstar's view

Though slightly less upbeat, Morningstar equity analyst Johannes Faul also believes it won't be all one-way traffic for Amazon.

"They will be starting from pretty much zero in Australia. And it will take a number of years for them to have a significant impact, in our view, on the existing retailers," Faul says.

"Our view of Amazon is [it's] more of a symptom of what's happening, of consumers migrating online. Amazon just captures that consumer very well. So, in our view, Amazon is going to capture a lot of the online retail sales."

However, Faul disagrees Wesfarmers is any more vulnerable to Amazon's digital business model than other incumbents, given the small single-digit overall earnings contributions of underperforming Target and also Kmart.

Woolworths and Wesfarmers traded only moderately above Morningstar's respective fair value estimates of $23.50 and $39 at the time of publication, and Faul believes current valuations already price in some of the Amazon-driven downside.

"Even if Amazon rolls out its Fresh offering in Australia, the impact on the sales of the big two supermarkets will be quite manageable in our view, at least in the near term," Faul says.

"We've seen retail stocks retreat quite significantly, again, in categories where we have high online penetration and again, that's where we have concerns predominantly.

"We've seen those shares pull back quite a bit, so a fair amount of the news flow and the negativity is priced in."

He believes the Amazon effect is going to "play out over a very long period of time," at least five years or more.

"And if Amazon is as successful in Australia as it has been in the US, there might be more pain to come. But again, this will take years to play out."

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Glenn Freeman is a senior editor at Morningstar.

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