In this first of our three-part series on Amazon's Australian launch, we bring you exclusive comments from the local CEO of a leading consumer company facing potential disruption.

 

Retailers may be nervous--or not, depending on who you listen to. Industry pundits are calling it a once-in-a-lifetime shake-up of the consumer sector.

Department store incumbents Myer (ASX: MYR) and David Jones, appliance retailers JB Hi-Fi (ASX: JBH) and Good Guys, and fresh food giants Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) are bracing for impact.

Though as Morningstar and other analysts suggest, Amazon is already largely priced into their valuations, to varying degrees. The timeframe for when its effect will really start to bite is also unknown.

Welcoming digital shift

But Domino's Pizza Enterprises (ASX: DMP) Australia/New Zealand CEO, Nick Knight, says he welcomes rather than fears the arrival of Amazon, for the simple reason that its business model benefits from consumers' growing comfort with digital transactions.

"We're watching with excitement. From our point of view, as customers get more comfortable with that type of transacting ... these things work really well for us, because instead of being out [in a restaurant] eating, they're at home ordering it."

Regarded as a narrow-moat business by Morningstar, Domino's strength in restaurant logistics and technology is a key part of this rating.

"Domino's investment in streamlining its cooking and fulfilment process makes it the "go-to" location for individuals who covet the fastest and most reliable service.

"Technology innovation improves convenience, next to value--the key sales driver. The technological platform is shared globally and spans a digital loyalty program enabling electronic redemption of 'reward pizzas'; electronic customer profiling; geo-tracking of pizza being home delivered; and customer geo-tracking," says Morningstar equity analyst, Johannes Faul.

Domino's has formed partnerships with specialist technology firms--including Amazon itself, where earlier this year it paired with its cloud-based voice service Alexa.

Domino's in Australia has partnered with artificial intelligence company Dragontail in a quality-control technology that uses oven-mounted and cutting board cameras to assess topping, spread of ingredients, temperature, and slice sizes.

That said, fast-food retailing is a highly competitive space. And for all the talk of technology, Faul says: "Let's face it--they sell pizzas."

Speaking to Knight's earlier comments about consumers' growing comfort with digital purchases being good for business, Faul says: "They're being very smart about building scale, and this technology reduces these implementation costs."

Regarding the cost of having physical storefronts and associated overheads: "It doesn't matter whether you're rolling out 100 or 100,000 units in terms of costs," Faul says.

None of these factors remove the basic fact that competition is fierce within the diverse fast-food sector, where customer switching costs are low.

"Outlet growth and profitability may be restricted by the ability of franchisees to secure start-up financing," Faul says.

"Other risks include a change in consumer taste for pizza as a food category and growth execution risk, particularly with differences between Australia, Japanese, and European business environments."

While these threats remain, Amazon--at least for the moment--doesn't count among them.

"Where I see Amazon as posing more of a threat [within the fast-food space] is the aggregators, the likes of Menulog and Uber Eats," Faul says.

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Glenn Freeman is a senior editor at Morningstar.

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