Retail Sector Dynamics amidst current lockdown

Retail Sector Dynamics amidst current lockdown

Major retail stores in Australia have either shut down shops or adjusting the hours of their operation to prevent the rising spread of coronavirus. Close to 35,000 people have been put out of work by airlines, casinos, retailers and other businesses in the past few days due to the virus outbreak. Many casual workers working in the hospitality sector have lost their jobs as employers have shut their doors.

Consumers have limited their trips to grocery stores and relying on contact-less delivery options wherever they can due to prevailing uncertainty on the length of the virus containment.

The closure announcements happened soon after the government announced the second round of shutdown and social distancing measures with the growing COVID-19 cases.

The Morrison government declared closures of pubs, cafes, clubs, restaurants along with beauty, tattoo and massage parlours on 24 March 2020. The measures came after Australians failed to obey social distancing guidelines and large crowds gathered on Sydney's beaches.

However, essential segments of the industry like petrol pumps, pharmacies, freight and logistic operators, supermarkets and home delivery services will continue to run. The new restrictions have led to the termination of several businesses.

Australia's Retail Sector Ambiguity

Major retail giants, Premier Investment Limited (ASX:PMV), footwear retailer Accent Group Limited (ASX:AX1) and jewellery chain Lovisa Holding Limited (ASX: LOV) have gone for total shutdowns of all non-essential stores after the government imposes shutdown measures to stop the coronavirus pandemic.

The Retail apparel Group and APG & Co which owns Saba, Sportscraft and Jag, Michael Hill International Limited (ASX: MHJ) has also joined the league in closing all Australian stores, along with .Mosaic Brands Limited (ASX: MOZ).

Woolworths Group Limited (ASX: WOW), the largest food and liquor retailer in Australia, is already feeling the chills of the COVID-19. The panic buying behaviour of buyers has resulted in significant stock shortages for the Supermarket giant.

Earlier during the month, the retail giant ran out of toilet paper amidst panic-buying, which resulted in the capping of the toilet paper to 1 per person. Besides, the giant has also restricted baby wipes, paper towels and rice to 1 pack per customer. `

However, Woolworths stood down 8000 workers from its hotel's arm, Endeavour Group on 24 March 2020 since the Federal Government announcement of the ban on pubs, clubs and hotels. The company has also postponed the demerger of the A$10 billion, Endeavour Group until 2021.

Following Woolworth's footsteps, Coles Group (ASX: COL) has also put purchase limits on food items. Both the giants have introduced special hours for elder and disabled persons to help save them from the crowded lines.

Not to loose calm: WOW seems to be possessing strong balance sheet with access to liquidity and funding. The payments to staff are being made on time and suppliers are being supported with shorter payment terms and early payments where appropriate. Though the company has withdrawn its earnings guidance amidst looming uncertainty of COVID-19, the Board is optimistic that the Group remains in a strong financial position and the company has significant headroom in its facilities and covenants.

The store has moved to remote working practices for the well-being of its staff and customers. It has also taken a series of measures to protect the health, safety and finances of its team members.

Wesfarmers Limited (ASX: WES) stands relatively immune to closures after the actions taken by the government. In a press release dated 26 March 2020, the firm stated, "Bunnings, Kmart, Target and Officeworks stores are operating under standard and near-standard trading hours ensuring the continued availability of its products and services in a way that doesn't risk its team members and customers."

The Group also declared that it would pay its interim dividend of A$0.75 per share on 31 March 2020.

Harvey Norman (ASX: HVN), appliance and furniture giant, has reported production slowdown due to shutting down of factories in China amidst virus outbreak.

However, the CEO expects its supply and manufacturing to resume in a few weeks. The company reported 9.1% sales increase from 1 March to 17 March with a comparable sales increase of 9.4% during the same period.

JB Hi-Fi Limited (ASX: JBH) has implemented a number of actions like additional cleaning facilities, store traffic management, restricting travel and promoting cashless transactions to protect the well-being of the customers.

The total sales growth for JB Hi-Fi Australia was 9.1% with comparable sales growth of 8.8% during the period of 1 January to 22 March 2020 as per its latest trading update.

The company continued to see strong momentum in the March quarter as it provided customers with essential products and technology products for remote working, and appliances for food storage to prepare for COVID-19.

The company is pleased with its performance till date and remains open for Australia operations.

Myer Holdings Limited (ASX: MYR) and David Jones have also preferred to remain open and are operating. Although Myer has barred all services in its stores that have a risk of more human contact.

While some retailers are going for closure, others are continuing with their operations to protect the health of the staff and customers, and also to keep their businesses buoyant amid the virus impact.

As per Credit Suisse analysts, "Funding would be of crucial importance for the retail sector. Liquidity constraints due to closures would result in supply disruptions. "

Government in Full Action

The Morrison government announced a second stimulus package worth A$66 billion on 22 March 2020 amounting to the total stimulus of A$189 billion till date. Some of the major measures to protect and financially support the workers included-

  • A special coronavirus supplement of A$550 per fortnight to be paid to active and new recipients of Youth Allowance, JobSeeker Payment, Special Benefit, Parenting Payment and Farm Household Allowance for the next six months.
  • Grants up to A$100,000 for small and medium-sized businesses.
  • Early superannuation access to up to A$10,000 in 2019-20 and 2020-21.

Morrison hinted on more stimulus measures to come in the future as the current measures might not fix the economy.

Also, the Supermarkets have now been allowed to work together temporarily by the Australian Competition and Consumer Commission (ACCC) after limited deliveries and suspended services to cope up with logistics issues.

This coordination was banned earlier under collusion laws. However, the measure bars the supermarkets from coming together and set agreed retail prices for the products. The move applies to IGA supermarkets, namely Coles, Aldi, Woolworths and Metcash.

For businesses, the most significant challenges will be to shine amidst temporary collapse in revenues, falling consumer confidence and footfall in the industry.

As countries around the world are going for draconian lockdowns, if this becomes necessary for Australia before proper actions are put in place, the retail sector could be significantly hit from mass closures and limited spending.

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