Change seems ever present, though its causes and pace can be diverse. While cultural change can move at a glacial pace, change brought about by industry and technology shifts can have a more immediate impact.
Whatever the cause, economies and companies must adapt, those slow to respond risk being left behind, floundering in the wake of more agile competitors.
Identifying real change
Identifying the drivers of change and possible asymmetries can help investors assess who may be the winners or the losers. Though a clear distinction must be drawn between distortions creating bubbles and change that is more enduring in nature.
When media ownership rules were reformed back in 2006, many predicted a spike in merger-and-acquisition activity. In anticipation, investor money piled into the sector, driving the share prices of a number of companies higher.
Blinded by regulatory change, investors (and management teams) were subsequently blindsided by the bigger impact of the digital economy.
The length of a fuse
Today, the shift from the analog to the digital is implicitly recognised, though responding to the challenge is by no means easy. A report published last month by Deloitte, Digital disruption – short fuse, big bang?, was a stark reminder that the status quo of past market leaders will in many instances be contested.
According to the report, 32 per cent of the Australian economy in sectors such as media, retail, finance and real estate will face significant digital disruption in the near future – a short fuse with a big bang.
A further 33 per cent of the economy in sectors such as education, health and government services face a similar degree of change, but over a longer time frame – long fuse, big bang.
Assess first
To survive and thrive in the digital economy, a large portion of the Australian economy will have to assess strategy, product and supply chains, and customer engagement.
It’s a far cry from the days when companies like Fairfax and Ten were trading above $5 and $3, respectively. While the task looks daunting, monetising digital assets suggests there is a future if an applicable strategy can be executed. Raids on the registers of both companies in recent times have shown that some are willing to agitate for change.
Retailers such as David Jones, Myer and Harvey Norman have also suffered from the comfort of their ‘old economy’ business models. While price rationalisation and ‘omni’ retail strategies are a positive for consumers, the challenges remain large. And when the valuation becomes more compelling because of the property portfolio, the optionality of the retail business must be assessed against online competitors.
Estimates of Australian online visits in retail are quite varied, though current hits to sites such as David Jones substantially lag those to online pure plays such as The Iconic and Catch of the Day. In turn these substantially lag Australians going to global giant Amazon on a weekly basis.
Amazon has evolved remarkably in its relatively short history. From an online bookstore, the company has expanded into a wide range of categories, excels in logistics and price, and surpasses its peers in the customer experience. In short, it has revolutionised the way many shop and this is before you delve into the array of other services the company offers today.
There’s bang, then there’s bang for buck
A large section of the Australian economy is already facing significant upheaval from digital disruption. Response to this change will be crucial in determining success or failure. Some Australian majors are only today reacting.
By contrast, global internet giants such as Amazon are positioned to thrive in the digital economy. Rather than fearing the impact of the bang, Australian investors should start thinking about the bang for their buck.
Over the past decade, Amazon’s market capitalisation has comfortably risen more than tenfold. Now compare that to the returns of the Australian majors, but only if you have a strong constitution.
Patrick Noble is a senior investment strategist at Zurich Investments.
