Analysis

Amazon Is Coming. Can Israeli Retailers Survive It?

Industry executives poo-pooed the news, but the e-commerce giant is a big threat

Products in the prep area are seen at the Amazon fulfilment center in Baltimore, Maryland, U.S., April 30, 2019.
\ CLODAGH KILCOYNE/ REUTERS

The executives who develop and manage Israel’s shopping malls confidently told members of the media on Tuesday that the news that Amazon was expanding its presence in the local market is really no big deal.

“They’re not opening logistics warehouses or anything like that,” said one manager, who spoke on condition of anonymity. “All they did is send an email to a few Israeli vendors saying they can sell on Amazon in Hebrew,” said another.

However, Tel Aviv Stock Exchange investors didn’t share that nonchalance and sent the shares of mall management companies and retailers lower —and justifiably so.

For now, Amazon is only telling Israeli vendors — the third parties that sell merchandise on the site — that they can sell to their Israeli customers on an Amazon Israel website. But that is quite significant. 

The e-commerce giant has been mulling for some time whether to establish a presence in Israel and if so in what format. Its executives have visited the country several times and have met with senior managers of companies in related sectors, such as delivery services. 

It now seems the die is cast—Amazon has decided, yes, it will come to Israel.

Officials who have met with senior Amazon executives over the past year say the company was undecided about how to enter the Israeli market — whether to develop an Israeli marketing channel, as it has now decided to do, or to take the more modest approach of simply offering its international site in Hebrew translation.

Amazon took the more significant option. Israeli e-commerce experts say that if the company chose this as Phase I, then Phase II has to be no less then developing local warehouses and logistics as part of the services it offers to local vendors, and later on to overseas vendors as well.

In other words, in contrast to the situation today, where shoppers ordering from Amazon get their order directly from the vendor, in the future Amazon will have an Israeli warehouse. The seller will send its merchandise there and Amazon will take care of local delivery — all within two days, as it famously has become expert at doing.

How long will it take until we get there? Not as long as the mall executives are predicting, perhaps even in the coming year.

In Australia and in Turkey it took only half a year from the time Amazon implemented the first phase of establishing a local presence, as it did in Israel today, to entering the second phase.

What this means is quite clear — rising competition in the retail sector, falling prices and better service from local companies in things like delivery. The big retail chains and the malls that are home to their brick-and-mortar stores will have to adapt quickly.

Israelis have turned increasingly to shopping  online, the result of both  high local prices and the fact that many purchases are exempt from value-added and purchase taxes as well as customs duties (all costs that local retailers carry when they sell the same goods). But it isn’t just competition from e-commerce that is hurting them.

As wages have risen and the cost of airfares has fallen, thanks to the Open Skies agreement with the European Union, Israelis are traveling abroad in record numbers. In between sunning themselves on the beach and taking in the local sites, they are also doing a lot of shopping.

Meanwhile, back at home mall owners are wrestling with excess commercial space for rent and falling rents. Now, adding to those burdens, a giant American retailer is encroaching on their turf.

Israel’s stronger malls will be able to survive the onslaught, but others will close or repurpose large parts of their space for nonretail uses, such as walk-in medical clinics and beauty salons. In the process, they will become less shopping centers and more like leisure and entertainment centers, a place you go to in order to see a movie, play video games and enjoy a meal. 

Israel’s big retailers will have to upgrade their online presence and reduce the number of physical stores they operate. Like the malls, they will have to make shopping more of an experience in order to justify getting into a car, hunting for parking and waiting on line at checkout. The ones who respond fastest are the ones that are the most likely to survive.