Via UBS:
5 Structural shifts post COVID-19: #2 How will the way we shop change?
In the 2nd of our 5 part series on structural changes in a post COVID-19 world, we look at the impact on shopping behaviour and specifically online vs. in-store shopping. We conclude COVID-19 will accelerate the shift to online retail; store consolidation will accelerate; and retailers with short lease tails and strong online platforms are well placed vs. landlords to improve profitability. Within this report, we lift our medium-term (~FY24) expectations for online (ex-Food) penetration in to ~17% (vs. ~11% today); flag the potential for ~20% of mature specialty stores to close by FY24 (impact to landlords less given ability to curate and remix space); and acknowledge the retailer/landlord balance of power is shifting (to retailers), an accelerant to improving online profitability. Our key picks in discretionary are: JBH, SUL, PMV and ADH.We identify 4 themes as consumers shift to online
1. Acceleration in online: We expect online (ex-Food) penetration of 17% by FY24, implying ~156bpa pa growth – this is a ~70% acceleration vs. recent months (pre-COVID) and closer to global peers today (~19%). 2. Store consolidation: Our online estimates imply no growth in store sales (vs. 14% CAGR online). We believe every 1%pt pa increase in online penetration drives ~2% pa reduction in specialty store numbers; 3. Changing retail/landlord balance of power: As sales shift online and lease terms are shortened, retailer bargaining power is increasing vs. landlords – with rent reductions and / or increased turnover-based rent a likely feature post COVID. Our estimates factor -20% re-pricing on ~1/3rd of retail rents pa ( SCG report); 4. Changing retailer P&L: We expect online profitability to be accretive as critical mass is gained (typically 15%+ penetration), stores are closed and rents are revised downwards. A potential shift to (partial) turnover-rent also reduces operating leverage (and the risk-profile), which could re-rate multiples.
