LNG: Where The Upside Lies<\/a>. Today's article deals with the fund manager's views on the Australian retail and listed retail trust sectors.<\/p>\n\n\tOnline shopping – it's the talk of the town. At least it has been, ever since Gerry Harvey alerted oblivious Australians to the bargains to be had online, particularly from offshore sources in a strong currency environment. It wasn't a good move as far as established local chains are concerned.<\/p>\n
\n\tAlphinity's<\/span> retail sector specialist recently travelled<\/span> to the UK to gauge<\/span> what Australian retailers should expect from here on as online shopping continues to explode. According to retailers, online shopping in Australia accounts for only 5% of all sales, but that figure is growing at a rate of over 25% per annum (Note: National Australia Bank monitors the online sector in Australia and estimates growth is progressing at around 19% annualised<\/span>). Australia has been slower to adopt mainstream online shopping than the UK, likely due to the strong Aussie dollar being a relatively new phenomenon. No doubt smart phones, allowing for instant in-store price comparisons, have also helped. Online accounts for some 20% of current UK sales, across both the discretionary and staple sectors. Predictions are that 40% of all “high street” shops will close by 2017.<\/p>\n\n\tAlphinity<\/span> suggests that given the Aussie is likely to retain relative strength while the pound will remain weak, Australia should catch up to UK sales levels very quickly.<\/p>\n\n\tIt is an issue that Australia's listed retailers must concede and respond to, or perish. Companies such as Seek ((SEK<\/span>)) and Carsales.com ((CRZ<\/span>)) have risen to positions of power in the online classifieds market in recent years, to the point where analysts now suggest Fairfax's ((FXJ<\/span>)) real estate and print classifieds, for example, have only around three years to live. On that basis, Australian chain store (or any store) retailers cannot simply blame weak sales numbers on the post-GFC<\/span> consumer malaise. Change in the retail industry is structural as well as cyclical – a fact David Jones ((DJS)) has now belatedly realised<\/span>.<\/p>\n\n\tAlphinity<\/span> notes Australian retailers are struggling with increased costs for rent, utilities and wages, and falling sales on price deflation and online leakage. This is “bad dynamic” and will promote “lots of losers and not many winners”.<\/p>\n\n\tWhen considering the Australian retail sector we can also consider the “landlords” – listed retail property REITs<\/span>. Alphinity<\/span> suggests landlords will be increasingly vulnerable to either negative rent resets or rising vacancies, which will flow through to share price valuations. Westfield Group ((WDC<\/span>)) is now an operator rather than a landlord, having spun off its property responsibilities to the Westfield Retail Trust ((WRT<\/span>)), but it is one company in the retail space proactively adjusting its model to accommodate the new world order, notes Alphinity<\/span>. This means cutting back on store mall plans while assessing warehousing requirements and paying close attention to shopping mall “mix”.<\/p>\n\n\tIn the following chart, Alphinity<\/span> has created a simple comparison by averaging the share price performances of major listed retail REITs<\/span> Westfield Retail Trust, CFS<\/span> Retail ((CFX<\/span>)) and Charter Hall Retail ((CQR<\/span>)), being the blue line, and listed retailers David Jones, Myer ((MYR<\/span>)), Harvey Norman ((HVN<\/span>)) and JB<\/span> Hi-Fi<\/span> ((JBH<\/span>)), being the red line.<\/p>\n\n\t![\"\"](\"http:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/1_1_alphretail.jpg\")
<\/p>\n
\n\tThe question is this: In the current Australian retail environment, and considering the rapid growth of online preference, which line do you believe might rise\/fall more to meet the other?<\/p>\n
\n\tRetail REITs<\/span> were severely hammered very early in the GFC<\/span> – a good nine months before Lehman – based on their overextended gearing levels. While valuations have much improved today as leverage has been reduced, share price values remain universally below net tangible asset values and yields remain attractive in a falling yield environment. This no doubt goes a long way to explaining why landlord prices have not fallen in line with the prices of their tenants.<\/p>\n\n\tAs to whether such a trend can be maintained is nevertheless unclear. REIT analysts place a good deal of faith in “quality” retail tenants, but such quality usually includes the big chains such as those in the graph.<\/p>\n
\n\tAlphinity's<\/span> observations from the UK, where online now accounts for 20% of sales, are as follows:<\/p>\n\n\tIt is changing the way retailers do business
\n\tIt is changing the type of physical store retailers want
\n\tIt is changing the type of shopping centre<\/span> retailers want to be in
\n\tIt is changing the type of logistics space required
\n\tIt is accentuating the difference between prime and non-prime valuations of retail and logistics property
\n\tThere will be some significant winners and losers.<\/p>\n\n\tOn the matter of logistics, online global retailer Amazon has seen remarkable sales growth in Europe. Alphinity<\/span> visited a brand new Amazon distribution centre<\/span> in Germany, located on the outskirts of a city. On the outside it is an enormous warehouse. On the inside it hums with the latest in logistical hardware and software. Australia's innumerable suburban warehouses are under threat from such a model, Alphinity<\/span> suggests – a point not lost in Westfield Group's transitional strategy.<\/p>\n\n\tThe growth in online shopping suggests less need for chain store rollouts and locally dispersed warehouses. In the recent round of Australian chain store quarterly earnings results, the chains hardest hit in the current environment were those undertaking rapid store rollout programs, such as JB<\/span> Hi-Fi<\/span> and Kathmandu ((KMD<\/span>)). The big department stores have also been forced to reassess their rollout plans as they redirect funds towards the tardy embrace of online options for customers. Online was the major reason cited by one analyst as the reason why Woolworths ((WOW)) should cut back the number of its Big W stores.<\/p>\n\n\tIn drawing upon the current retail experience in the US, JP Morgan analysts note a clear transition from an old model to a new model, driven by the “customer value proposition”.<\/p>\n
\n\tWith a plethora of brands and models often available in most products, the market share winner under the old model was the store offering the widest range at the best price in the most convenient store location. The internet has now determined the new model, in which assortment and location is no longer relevant. JP Morgan suggests the Australian chain suffering most from such a transition is David Jones.<\/p>\n
\n\tGerry Harvey recently complained that online shopping was growing due to Australia's sub-$1000 GST exemption. Yet the GST difference is only a minimal consideration compared to the threat of the simple “price transparency” the online world offers. JP Morgan notes that in Australia, David Jones recently cited research suggesting Australian shoppers are willing to pay a 20% price premium relative to overseas retailers. Blind defiance? The suggestion of major US retailer Best Buy is that as the online experience improves, consumers will become more demanding. This is a particular problem for David Jones and Myer, JP Morgan believes.<\/p>\n
\n\tA friend of this writer, lets call him a “source very close to Harvey Norman”, puts it in more simple terms. “We used to buy a sofa for $1000 and sell in the store for $2000,” he told me. “Now we buy a sofa for $1000 and hope to sell it for $1100 after a shopper has compared prices, asked for a “cash” discount and pointed out that even with freight, the same sofa is cheaper from offshore”.<\/p>\n
\n\tJP Morgan also cites the threat to Australian retailers from the “vertical integration” model exemplified by the high-flying Apple. JB<\/span> Hi-Fi<\/span> is particularly exposed to Apple's success, the analysts believe, because the company relies on the popular products to encourage shoppers into its stores where a whole range of products and brands are on display. But Apple is rapidly growing its own chain of shop-fronts in this country which are very much tied into the online model of low in-store inventory carry.<\/p>\n\n\tIn selecting its portfolio allocations, Alphinity<\/span> has recognised<\/span> one listed retailer and one listed retail trust (of sufficient free-float size) which have been quick to see the writing on the wall and adapt their businesses to the changing world. As first movers among the listed choices, they should continue to enjoy success in the analysts' view. They are Super Retail ((SUL<\/span>)) and Goodman Group ((GMG<\/span>)).
\n\t <\/p>\n\n\tTechnical limitations<\/strong><\/p>\n\n\tIf you are reading this story through a third party distribution channel and you cannot see charts included<\/span>, we apologise<\/span><\/span>, but technical limitations are to blame.<\/em><\/strong><\/p>\n\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"Fund manager Alphinity draws upon the UK experience, where online shopping is already four times proportionately bigger than in Australia, to help assess the future for Australia’s listed retailers and retail REITs.<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6],"tags":[35,36],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/59906"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=59906"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/59906\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=59906"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=59906"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=59906"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}