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The Retail Mosaic Issue 7

What is truly defensive in retail? Revenue, cost and share price perspective

15 September 2023

Retailers and investors perceive certain retail categories as defensive. Typically, the implied definition of defensiveness centres around the stability of demand, as measured by volumes. However, this perspective is far too narrow given the impact price and cost structures can have on a retailers’ profitability. In Issue 7 of The Retail Mosaic report, we analyse the volatility of volumes, price and dissect the cost structures of the retailers. We also analyse the share price volatility of retailers. Moving beyond just volume as the measure of defensiveness reveals a very different list of companies that are truly defensive. The most defensive retailers, taking into consideration, revenue, earnings and share price are Premier Retail, Wesfarmers, Woolworths and Bapcor.

The Retail Mosaic Issue 6

An inventory balancing act - The short-term pain of excess inventory

07 April 2023

A successful retailer has the right product, at the right price, at the right time. However, retailers regularly find themselves with the wrong inventory position. In Issue 6 of The Retail Mosaic, we assess the metrics used to measure inventory, the most useful red flags and the margin pain a retail with too much inventory may endure. A retailer with excess inventory can quickly sink into financial losses, but the impact usually lasts no more than 12 months. While some Australian retailers have excess inventory, the problems are being cleared quickly and inventory positions are likely to be more balanced in 2024.

The Retail Mosaic Issue 5

Australia vs New Zealand retailing - Are there parallels across the ditch?

10 December 2022

Many Australian retailers have a presence in New Zealand. However, not all are successful in that market. In Issue 5 of The Retail Mosaic, we analyse the consumer, retail structure and profitability of retailers in NZ. Even though the consumer has similar attributes, growth rates diverge often. While some retail segments are more consolidated, many Australian retailers with operations in NZ lack scale.

As global trade tensions build and geopolitical risks rise, we think Australian retailers are going to need to diversify their supply chains. Australia imports ~86% of its non-food consumer goods and we estimate 57% of these imports come from China. The productivity of China has led to a concentration of sourcing that represents a real risk on a 5-10 year horizon as Chinese wage rates rise further, supply chains face further disruptions and trade tensions rise. Electronics is the most at-risk category entirely imported, with 56% of imports from China, followed by clothing and accessories at 94% imported, with 55% from China.

The Retail Mosaic Issue 4

The role of China in Australian retail - the risks and benefits in offshore sourcing

13 September 2022

Australia is an open economy and over the past twenty years, its retailers have increasingly imported consumer goods. In Issue 4 of The Retail Mosaic, we explore the extent of imports by retail category, the significance of China in supplying goods and exposure various companies have to direct imports from China. China provides the most efficient source of production and for many companies represents more than 70% of their offshore sourcing. The risk is that any increase in costs, supply disruptions or trade tensions could impact sales and margins. The companies sourcing most of their goods from China are Wesfarmers, City Chic, Woolworths, Premier Investments and Super Retail Group.

The Retail Mosaic Issue 3

Retail in a world of higher rates

13 April 2022

Australian households and companies have not dealt with an interest rate increase for more than 10 years. However, higher rates are imminent. In Issue 3 of The Retail Mosaic, we assess the impact that higher rates may have on spending, company earnings and share prices. It takes, on average, 18 months for a rate hike to impact spending, but for furniture it can be in as little as six months. We expect housing churn will slow as rates rise, placing further downside risk on household goods. Retailers have limited debt and some hedging that will moderate the earnings risk from higher rates. However, PE ratios could derate by 10-20%, particularly for high PE defensive stocks such as supermarkets and conglomerates.

The Retail Mosaic Issue 2

The potential rebound in tourism and holidays

22 December 2021

Australians like to holiday both locally and overseas. With locked borders over 2020 and 2021, reduced tourism spend has been a source of savings and some of the spare cash has also made its way into retail. As tourism recovers, will retail sales slow? In Issue 2 of The Retail Mosaic, we analyse the change in tourism spending over recent years and assess the possible recovery path and its impact on retail. The good news for retailers is that any recovery in tourist spending is likely to be gradual and centre on domestic trips. Given almost half of spending by tourists while on domestic holidays is in retail stores, then the recovery in holidays may prove to be a smaller drag on retail than some fear

The Retail Mosaic Issue 1

Where does online penetration settle in Australia?

15 September 2021

Australian online sales represent 13% of all retail sales. Even though growth has been very strong over the past five years, we expect online to continue to grow much faster than bricks & mortar. In Issue 1 of The Retail Mosaic, we size the Australian online market by category, compare Australian retailers with US and UK peers and provide a framework for online penetration growth over the next decade. Australian online penetration is likely to reach 21% in the next ten years. This level of growth online means mature retailers will need to eliminate net store openings, invest more in their IT and supply chain and improve their customer data.

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