Australian Retail: Whereto From Here?

Feature Stories | Oct 13 2020

It’s been more than seven months since the initial nation-wide lockdown dramatically changed consumer behaviour. As restrictions ease, will everything go back to “normal”, or has the future of retail been altered forever?

-Restrictions easing to date provide greater insight
-Online shift to persist
-Work-from-home to continue as a trend
-Home renovation and homeware consumption not over yet

By Greg Peel

There has been much discussion since the virus first hit as to what life will be like post-covid – an era that must presumably follow the discovery of a reliable vaccine. During the early lockdowns, there was one theme that stood out from any other – stay at home.

Stay at home led to three significant sub-themes: cook at home; work from home; and shop on line. Each sub-theme impacted on the retail sector in varying ways, to the point one question was much pondered – will this be the new normal even after the lockdowns are lifted?

Australia has since been provided with evidence, and comparative evidence at that. Each state has lifted restrictions by varying amounts, while Victoria was forced to return to lockdown.

Of the three sub-themes, the evidence appears to suggest that while cook-at-home may to some extent prove ongoing, on the basis of those taking up home cooking for time and enjoying both experience and the lower cost, restaurants can rest assured they’re not destined for the scrap heap of history. Australians have clearly indicated a desire to get back out of home to eat, drink and be merry once more.

The survival of restaurants, of course, depends on whether they can hold on through ongoing reduced capacity due to social distancing requirements, but if this writer’s experience last week of eating out at a pub bistro (booking required), and watching the constant queue outside the bar entrance as punters waited for someone to come out so they could go in, customer turnover should go a long way to countering said reduced capacity.

The conclusion is thus that the surge in supermarket shopping during lockdown should ease back to something more normal.

As for work-from-home, most agree that while some may choose to never return to an office again, the majority will embrace the opportunity of a flexible workplace – either working from an office but taking occasional WFH days, or working from home but occasionally attending the office.

There was considerable trepidation among companies large and small during lockdowns as to whether they could continue to operate as relatively normal with employees zooming and emailing in work while managing their own work hours at home, instead of nine to five, and behold, it worked a treat. No more trepidation.

Of the three sub-themes, online shopping is seen as experiencing the greatest structural shift as a result of the virus. Online shopping is hardly new, it’s just that lockdowns led to significant acceleration in online engagement, thus drawing in many new and previously reluctant users. Nor, for that matter, are Zoom and similar services supporting WFH at all new, but hands up who’d heard of Zoom before this year?

While the online surge has already set in train rolling physical store closures, one presumes for certain cohorts a day out shopping with friends in real shops will always remain an entertaining social experience, such as others enjoy a day out at the footy. But on the other hand, the convenience of online shopping for a wide range of products is something now staunchly embraced.

The lockdown WFH and online themes unsurprisingly led to a surge in sales of office equipment and internet/communication technology for the home, but what few saw coming was a surge in home renovation and updating of furniture and fittings, both from a view of “if I’m going to be stuck here, at least I can tart the place up a bit”, and out of sheer boredom.

But where did consumers find the money? For many, JobKeeper represented a big drop in income. Easy – tap into the holiday fund, the trip to Paris is off. Use the money otherwise spent on restaurants and bars. And for others, JobKeeper actually meant a pay-rise.

As we now enter the seventh month since the initial nation-wide lockdown, with a gradual easing of restrictions over that period, we have gained a much greater insight into what Life after Covid will look like than we had in April, despite not yet having reached the “after” part. It is clear there will be long-lasting implications for all segments of the retail industry – staples and discretionary, including hospitality, travel, electronic goods, homewares, hardware, apparel and more.

For the investor, the question is who will be the winners and who will be the losers among listed retail companies in the short, medium and longer terms?

Online – Retail’s Renaissance

Covid has structurally changed shopping behaviour, Citi declares. Online retail has recorded three years of growth in just six months and, the analysts believe, online penetration will continue to rise.

The only issue is one of building and maintaining an online service is more expensive than that of bricks & mortar, albeit retailers can help finance capital expenditure by closing stores.

Other than online-only businesses, the retailers best placed to deal with the structural shift, Citi notes, is those having already invested in online for several years and having the flexibility to to close stores cost-effectively as store economics deteriorate.

The broker forecasts total online sales growth across the retail industry to rise to 13% by FY22 from 8% in FY19. The surge in online sales experienced in the second half of FY20 and into FY21 will fade as restrictions continue to be lifted, with Victoria the obvious focus at present, but in the wake online will remain a much larger contributor, Citi believes, to sales growth in the future.

The majority of this growth will cannibalise in-store sales, thus accelerating store closures.

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