Kmart consolidation, local first and goodbye cash: What retail could look like when the recession has passed


A wave of panic-buying sees shelves empty of toilet paper at Coles. Source: AAP/Kelly Barnes.

“When the war is over, got to start again”, sang Cold Chisel, and make no mistake, we are in a war to stop the transmission of COVID-19 and to save lives and our economy.

And for retail specifically, the nation’s second-largest employer, we are all fighting for survival.

This war will get worse before it gets better, and we are likely to see a very prolonged recovery, dependent upon how quickly infections can be controlled, treated and a vaccine distributed.

So, when the war against this pandemic is over, what could retail look like?

Here are 13 predictions.

1. Consolidation

Small and medium cap retailers in discretionary categories such as apparel, footwear, furniture and jewellery, may not make it to the other side and will close. Discretionary retail will endure safe harbour, voluntary administration and/or closures.

Those few that survive will have seriously depleted balance sheets, higher levels of debt and aged inventory, which will constrain reinvestment and slow the speed and scale of recovery. They will have no choice but to create new business models.

2. Higher concentration

Powerful category-leading retailers such as Bunnings, Officeworks, JB Hi-Fi and Chemist Warehouse will increase their market share and be in a position to acquire other retailers, enter adjacent segments and/or create online marketplaces.

Woolworths and Coles and Aldi will continue to perform strongly, but will not be able to deliver positive comp sales next year as a result of the current irrational stockpiling of dry grocery.

3. Fewer stores

Discretionary retailers will need fewer stores and will actively close marginal or loss-making stores.

They will use this crisis to reset their store portfolios and refocus on the drivers for viable stores (such as the right market, location, operations, merchandising and occupancy costs).

4. Online step-change

E-commerce will grow stronger as a share of total retail. We are now living and working online where strong habits are being formed and entrenched.

Consequently, expect the online share of non-food to exceed 20% of sales and will rise to above 7% for food.

Online marketplaces such as eBay, Amazon and Catch will strengthen and increase their mix towards everyday essentials.

5. One department store

Australia can no longer support ~1.5 million square-meters of department stores across Myer and David Jones.

This crisis will allow Myer and David Jones to give back space and close marginal stores.

One super department store could emerge with 50 core stores, an online business worth 20% of sales, and significant cost synergies. Watch for cashed-up Premier Investments or Private Equity to pull together a deal.

6. Two discount department stores

Australia cannot support ~1.7 million square metres across Kmart, Target and Big W.

Look for Kmart and Target to be further consolidated into one powerful brand behind Kmart providing everyday value essentials for family life.

7. More local

Local neighbourhood centres, anchored by strong supermarkets, will perform strongly, while shopping centres focused on discretionary retail will never recover to pre-war sales productivity.

We will be more interested in supporting our local retailers and refocusing on local community relationships.

8. Rent reversions

Landlords will see significant rent reversions and double-digit declines in leasing spreads on the account of consolidation, closures and the reduced need for stores.

Declines in rental incomes will see reductions in asset valuations, development pipelines will slow while cleaning costs will rise.

9. Percentage rent

Landlords will struggle to secure fixed gross rents as retailers will seek percentage-rent deals to help manage future disruptions to revenues.

10. Make expenses variable

Retailers will reset cost structures and seek to shift expenses from fixed to variable.

They will look to make more labour casual and contracted, shrink head offices expenses, move to concession models for inventory, and shift occupancy to percentage rent.

11. Cash economy declines

The declines in cash payments will accelerate to less than 10% of total retail transactions.

Debit will hold and there will be an increase in new forms on seamless, frictionless credit that grow.

12. Cashflow management

Retailers will refocus on driving inventory turns, quicker days receivables and longer days payable to better manage their cash positions and eliminate any funding gaps.

Further, retailers will seek to negotiate more funding headroom to provide greater flexibility.

13. New concepts

From crisis comes response, recovery and renewal.

We will see new retail concepts emerge in health, wellbeing, communications, safety and home-delivered convenience.

When we break on through to the other side, there will be fewer, stronger and more adaptive retailers ready to seize the opportunities that will come from the long recovery.

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NOW READ: The eight ways retail will shift after COVID-19


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