This article was first published on the Australian Financial Review. 

Retailers will have to change their advertising spend and improve their e-commerce sites as Amazon steps up its presence in Australia.

Amazon could capture between 40 per cent and 70 per cent of online searches in retail categories in Australia by 2023 if it manages to replicate its success in the US, according to a study by search marketing intelligence firm Adthena.

Amazon’s share of online search in the consumer electronics category is expected to reach 49 per cent, compared with 3 per cent for JB Hi-Fi’s The Good Guys, 2.2 per cent for Harvey Norman, 3.9 per cent for Kogan and 3.5 per cent for Appliances Online.

In the department store category, which covers fashion, health and beauty, and homewares, Amazon’s share of online paid search is likely to exceed levels in the UK, where it accounts for 20 per cent of desktop searches and 25 per cent of clicks on mobiles.

“At the moment Amazon’s search presence [in Australia] is negligible in comparison to their presence in established territories,” Adthena said.

“However, in key online retail verticals such as consumer electronics or fashion and apparel, search marketers can reasonably expect Amazon to quickly build up between 40 to 70 per cent paid search share.”

Adthena chief executive Ian O’Rourke said Amazon’s expansion into Australia would trigger the biggest disruption in decades.

Broker UBS expects Amazon’s Australian revenues to reach $3.5 billion by 2023, while Morgan Stanley forecasts $12 billion by 2026.

Marketing efficiency

“Expect budgets to be reallocated and campaigns adjusted as retailers scramble to protect their share of the market,” Mr O’Rourke said.

The Adthena report highlighted the efficiency of Amazon’s marketing spend. In the US, for example, its share of adspend in consumer electronics is only 15.3 per cent but its share of overall clicks is 49.6 per cent.

Marketers say Amazon is changing the way consumers search for products.

“People are going to go straight to Amazon to search for goods, and that functionality in essence makes Amazon a search engine of sorts,” said PHD Media chief executive Mark Coad.

“That will change the way people search for goods online.”

“If [retailers] are going to do their best to preserve their online retail market share versus Amazon I don’t think it’s going to be done by spending more money on paid search. It’s going to be done by improving their own user experiences, and website functionality,” Mr Coad said.

James Collier, head of performance at M&C Saatchi’s media agency Bohemia, said there had been a huge spike in search queries for Amazon since it relaunched its Australian site this month.

“Amazon has been winning a lot of brand-related auctions in search – that means people are actively searching for Amazon-related products like Kindle (rather than generic searches for e-readers),” Mr Collier said.

Strong brand saliency

“What they’re benefiting from and where other retailers should be worried is there is already in Australia a really strong brand saliency for Amazon so when people go into Google they go there with an Amazon product in mind,” he said.

“So they can make their budget work harder for their own products and it almost creates this virtuous circle.”

Retailers need to respond by spending on generic search, to capture consumers who have not made up their mind about brands, by building brand equity so consumers go directly to their sites,  and by using Amazon Marketplace as another channel to market.

The Adthena study followed a Morgan Stanley report  this year, which found that Amazon was likely to shake up the Australian media industry as much as it would disrupt the retail sector.

“Amazon spends very differently to how Australian retailers currently do – it is focused on key words/search/online, not TV/radio/print media. Its arrival could be a catalyst for Australian retailers to review their ‘play book’ and change the way they spend their ad dollars,” Morgan Stanley analyst Andrew McLeod said.

Amazon’s own ad platform could also emerge as an attractive alternative for online advertising and Australian retailers and consumer brands could divert ad spend directly to Amazon’s own e-commerce platform, he said.

According to SMI data, traditional retailers currently spend on average 19 per cent of their advertising budgets on digital/internet, well below other major advertisers such as technology companies, banks and financial services firms.

Paid search accounts for between 10 per cent and 70 per cent of retailers’ advertising budgets, varying by category and between bricks and mortar, multi-channel and pure-play online retailers, and is growing by more than 10 per cent a year.