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.