In 2019, prior to COVID-19, we examined the fundamentals of the retail sector, including macroeconomic factors influencing various drivers such as the rise of online shopping. At the time, we anticipated growing pressure on traditional brick-and mortar retail models.
We conducted a detailed analysis, including a discounted cash flow assessment across three scenarios: base, downside, and upside. Our findings suggested the retail sector was poised for a prolonged metamorphosis in
the near term.
As a result, we recommended clients reduce exposure to retail and reallocate towards logistics and needs-based sectors (such as housing, healthcare, life sciences), which are supported by enduring secular trends.
Recent significant disruptions to retail
Our analysis identified two main sources of disruption to the retail sector – the growth of online shopping and the after effects of lockdowns.
- Online shopping: Australian consumers have embraced the convenience of online shopping, though adoption lagged the UK and US due to cultural differences. Traditional brick-and-mortar retailers have struggled to recover lost consumer spending, with department stores particularly impacted by unproductive footprints and declining popularity. Shopping centre managers, however, capitalised by repurposing spaces and securing higher
rental yields. - COVID-19: Lockdowns severely disrupted in-store shopping (excluding supermarkets), though government subsidies masked the full extent of the distress. In response, Australian retailers quickly adapted to multichannel
shopping, significantly improving profitability and occupancy cost ratios.
Looking ahead
Retail was the most defensive and top-performing sector for 25 years. A muted recovery is underway, but positive returns may be challenging in the short term. Specialist sector funds will come under stress from impending liquidity windows, leading to:
- Protracted solutions including sale of assets fund wind-downs.
- Lower equity raising appetite, elevated gearing, need for fresh capital to fund strategic development plans. We expect M&A activity to solve for liquidity.
- Underlying sector fundamentals point to a positive forward recovery based on low supply; growing population; retailer profitability; and low vacancies.
Frontier’s outlook is more optimistic now than at any time since 2019, with potential upside in the next cycle, albeit within redefined structures. Income yields are projected to remain strong at 4.5%–5%. However, geopolitical and macroeconomic volatility could result in recessionary risks.
Want to learn more?
The Australian sector has largely restructured and repositioned itself post COVID-19. Retailers found a way to capture both online and instore sales. However, we observe some potential headwinds caused by economic uncertainty.
If you have any questions or want to access the full paper, please contact us. Our detailed paper dives into drivers of performance; key indicators of sector recovery; scenario analysis; and implications for portfolios. Frontier clients can access the comprehensive research paper instantly on Frontier’s Partners Platform.
