Shop 'til you drop

covid-19 David Lloyd Ausbil ABS richard ivers prime value asset management Bruce Smith alphinity Alex Shevelev Forager Funds Management amp online retail australian equities

16 April 2021
| By Laura Dew |
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When it came to the pandemic, there are images which will remain seared on our minds as stand-out moments of an extraordinary year. One of these is the image of empty shop shelves and customers walking out with masses of toilet rolls as they prepared to lockdown at home for an unspecified amount of time.

Unsurprisingly, as supermarkets were one of the few places allowed to consistently remain open in the past year, their share prices rose in a downturn.

The same applied to consumer discretionary retailers as people furnished their home offices, stocked up on indoor sports equipment and ordered the necessary items for those endless Zoom meetings. There was also a boom for online stores which people turned to after being unable to leave their house to visit shopping malls. 

The trend was unusual as the normal turn of events during a market downturn would be that people stopped spending to save money.

However, in this scenario, many people were actually gaining money during the pandemic as they had reduced commuting costs, received Government stimulus payments such as JobKeeper or JobSeeker, accessed their superannuation early or were spending less on holidays or business travel. 

At the end of the June 2020 quarter, household wealth increased by 1.5% and by September 2020, one-in-five Australians increased their savings. In February 2021, almost half of households expected to save money in the next 12 months, according to data from the Australian Bureau of Statistics (ABS).

David Lloyd, equity analyst at Ausbil, said: “Saving levels are at historical highs, and imply around $18,000 per household, and the strong housing market could provide support to some categories, namely household appliances and white goods”. 

Now, managers say, households will want to put that money to good use by hitting the shops, meaning the share prices could continue to grow for another year.


From the start of lockdown on 20 March, 2020, to the end of the year, shares in Coles rose 9% while Woolworths rose 6% (Chart 1). The share price rise would have been greater, managers say, but for the additional costs to meet COVID-19 rules which included hiring security, installing COVID-safe precautions and paying staff. Stores were also able to sell items without discounting them due to the lack of alternative options for consumers.

Richard Ivers, portfolio manager at Prime Value Asset Management, said: “Coles and Woolworths benefitted from all the toilet paper sales. But it is hard to forecast in this type of environment as last year was so different and there are higher levels of variance nowadays”.

Bruce Smith, principal at Alphinity, said: “Coles and Woolworths did well from lockdown, they had massive amounts of sales but did less well on earnings as they incurred extra expenses related to COVID-19 which added costs. Sales will be less strong this year but they should be able to cut costs now the restrictions are eased which will help.

“We hold Woolworths as we think the de-merger between Woolworths and BWS into two separate companies will be a big focus and should be positive for the company. The de-merger will bring operational change and Woolworths should benefit from that.”

Another firm in this consumer staples space was Wesfarmers which owned hardware retailer Bunnings Warehouse, another store which was allowed to remain open during the lockdown, and Officeworks, which saw its share price rise 57%.

Smith was positive on Wesfarmers as he said it had a “great format and great business” but Peter Gardner, portfolio manager at Plato Investment Management, said he believed it was overpriced.

“We think Wesfarmers is a really great company because of Bunnings so it is hard to say that I dislike it but we do think it is overpriced at the moment.”


What was unusual in 2020 was the amount of consumer discretionary spending by consumers as this would usually reduce during a recession.

“Last year, when markets were crashing and we were in the first Australian recession in 30 years, you would have expected retail stocks to do badly as discretionary spending is usually the first to go. But this wasn’t a typical recession and we had massive stimulus from the Government to stop people losing their jobs and unemployment didn’t go down too much. It became clear that retail was actually going to benefit from this.”

Alex Shevelev, senior analyst at Forager Funds Management, said: “The stimulus demand was a big boom for retailers, especially those focused on home consumption and improvement. It was not what we expected. The speed and the size of the stimulus was quick and significant and the reallocation of spending by consumers away from travel and restaurants was quick as well”. 

From the start of the lockdown to 20 March to a year later (Chart 2), Super Retail Group, which owns sports store Rebel Fitness, rose 198%, homeware retailer Harvey Norman rose 145% while technology store JB Hi-Fi rose 100%.

Gardner said he expected retail would continue to do well in 2021 as positive factors were still in place such as the travel restrictions and property boom which was encouraging home renovations. 

“We are positive on consumer discretionary, those retail stocks have seen increased sales over COVID-19 which has been huge for them. Sales at some firms are 20% to 40% higher than usual which then flows through to profits,” he said.

“We don’t expect it to continue indefinitely but we are still positive as we think it will take longer than people expect to things to get back to normal.”

While some firms were paying out dividends, managers said businesses may look to be cautious about showing off their success at a time when many businesses were being forced to close or if they received the JobKeeper stimulus payments.

Super Retail Group returned $1.7 million of wage subsidies to the Government after seeing net profit after tax of $170 million and furniture retailer Nick Scali paid back $3.6 million, although there was technically no legal duty for them to do so. 

“There has been a media focus on those companies which took the payment, some have given it back but some have kept it which can look bad optically if they have had a good year. They could be reluctant to pay out too much in dividends in case they need to cut it the following year,” Ivers said.

Smith said: “Dividends are harder to forecast for retail companies as lot of them benefited from JobKeeper so they are cautious on drawing attention to that. Quite a few companies benefitted from JobKeeper and paid out a big bonus which wasn’t well received by the community”.


However, these share price rises pale in comparison to those of online retailers such as Redbubble and Temple and Webster. There was a clear pace of acceleration for online retailers but it was borne of necessity as people were stuck at home. This meant there was a doubt if this pace would continue or if it would tail off now people could return to physical retailers. 

From 20 March, 2020, to a year later, Redbubble rose by over 1,000% while Temple and Webster rose 418% and Kogan rose 216%. 

In a business update to the Australian Securities Exchange (ASX), Kogan said it had been “experiencing extreme growth” with three million active customers at the end of December 2020, a 76% year-on-year increase. 

Meanwhile, Temple and Webster said factors such as store closures, faster internet speeds, an acceleration in online shopping take-up and millennials entering its target demographic were all factors driving “strong market growth for years to come” for the firm. 

Due to their smaller size, these companies tended to only be accessed by small-cap managers. 

AMP forecast penetration of online shopping could reach 25% by 2030 and Australia could breach the 15% to 20% barrier within the next five years if online sales continued at this pace which would place it on a similar footing to the UK and the US. 

Geography, however, remained a hurdle in Australia as it was difficult for logistics firms to get value for money from online shopping.

Another factor affecting their performance was how quickly firms were able to pivot to online shopping with those who had existing infrastructure in place benefitting the most, similar to those companies which were already equipped to let employees work from home. 

“Some firms had the infrastructure set up to be efficient in the online space and could extract margins which were better than for their offline sales,” Shevelev said.

“But for other firms, that wasn’t the case and there was some indigestion at the start of COVID-19 as they took time to get up to speed and make online sales efficient.”

Ivers said: “The thing about online spending is some of it was purely because people physically couldn’t go to the shops so online sites had this sugar hit, we will have to see if that continues.”

The growth in online and likelihood of retailers reducing the number of physical stores also had knock-on effects to retail rents for companies like Scentre and Vicinity, particularly in Victoria which had a long lockdown period. 

However, both stocks had maintained positive returns over the year to 20 March, 2021, with Scentre up 80% and Vicinity up 47%.

Shevelev said: “A lot of retailers are continuing to negotiate on turnover rent and the shopping centre owners are pushing against that. Shopping centres are trying to push for longer-term rents while retailers are trying to reduce their rent. Shopping centres have raised capital at the same time as reducing the value of assets on their balance sheets”.

“The COVID-19 period only accelerated the structural trends that were already in place and, in my view, almost (if not all) categories that have moved online have yet to see penetration rates mature or decline. This suggests that online will continue to capture share from in-store sales,” Lloyd said.

“This has meaningful implications for retail landlords, in particular those that own large malls as demand for space will continue to decline, resulting in lower rents and asset values and, ultimately, a lower distribution growth profile for investors.”

Smith said: “Online shopping has accelerated significantly, it will slow down but it won’t go negative. The best mix would be for firms to have an online presence and a bunch of physical stores to respond to both environments”.

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