Last week, Dollarama, a Canadian retailer, surprised the market by making a takeover offer, at a 112% premium, for The Reject Shop. While the acquisition price looks ‘full’, it is a cheap entry to access good floor space in shopping centres. The lack of new space, increasing competition for quality sites, a lower Australian dollar and a relatively strong Australian consumer could all contribute to further foreign acquisitions of Australian retail. A changing landscape could impact the margins enjoyed by incumbents across most retail segments.

Woolworths has said that each of its businesses must “stand on its own two feet”. For Big W, perhaps it could be cut off at the knees at some point. While an exit is hard to execute, in some form, we expect it may occur over the next 18 months. For the retail industry it will be highly disruptive given the floor space needs to generate more sales and gross profit. A mix of other retailers could generate as much as $2.3 billion, or 50%, more in sales than the prevailing level.  While in the short-run, it may benefit a retailer like Kmart, the medium-term risk is all major retailers with geographic overlap lose some sales, namely Coles, Woolworths, Kmart and Target.

This chart pack provides subscribers with insights about the retail operating environment and outlook for wages, floor space and profit margins. The chart pack has been compiled post the FY24 reporting season across the retail market providing fresh insights about the sector.

Over the past decade, retail rental growth has been less than sales growth for many ASX-listed retailers. Can this trend continue? In Issue 8 of Price Watch, we analyse floor space supply and demand. We expect retail supply per capita to fall by 0.7% p.a and retail demand to rise by 0.5% p.a. This is a meaningful disconnect placing upward pressure on rents. We expect half the gap to be solved through productivity initiatives by retailers and landlords to work floor space harder and reduce anchor tenant space. The retailers with the highest exposure to the top 30 shopping centres are Accent Group, Premier Retail, City Chic and JB Hi-Fi.

Many Australian consumer companies are likely to report weak 1H24e results. However, they are likely to be better than consensus estimates with slightly better sales trends and higher gross margins in some cases. While earnings should be fine this half, share prices have run in anticipation of results and the trading updates and outlook commentary are likely to flag higher operating cost growth as a headwind.