How this $70m ASX small cap is cutting down a $50bn industry

The power imbalance between ASX retailers and property stocks are changing more quickly than many expect. This is what every ASX investor needs to know.

ASX Small Caps

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The online sales surge reported by Shaver Shop Group Ltd (ASX: SSG) last week is an ominous sign for the $50 billion shopping mall industry.

The $70 million market cap retailer reported last Thursday a near 400% surge in online sales for the six weeks to May 10 as Aussies rediscovered the love of self-grooming during this COVID-19 lockdown.

This has the potential to re-write the lopsided relationship between small retailers and all-powerful shopping centre landlords sooner than many think.

Six years in six weeks

Shaver Shop isn't the only retailer to see a big online surge. Others like Myer Holdings Ltd (ASX: MYR), Premier Investments Limited (ASX: PMV) and JB Hi-Fi Limited (ASX: JBH) have reported strong growth in internet sales.

While the online trend isn't new, the surge in adoption rates due to the coronavirus pandemic over the six-week shutdown is probably equal to what is forecast for the next six years!

Power rebalances

This changes the power balance between ASX retailers and property groups in two ways. The first is the realisation by retailers that they don't need as many shops as they thought previously.

The second is the devaluation of foot traffic. In the past, mall operators would incentivise large anchor tenants, such as Woolworths Group Ltd (ASX: WOW), to move in as they draw large number of shoppers.

This allows landlords to charge a premium to smaller retailers who regard high traffic areas as a key sales driver. Smaller retailers are usually charged a base rent plus a variable component on sales turnover.

Mega malls have peaked

But the business model for landlords may have to change and it's the mega malls that are likely to feel more of the impact of this structural shift.

The losers include Vicinity Centres (ASX: VCX) with its flagship Chadstone Shopping Centre, and Scentre Group (ASX: SCG) with its Westfield branded shopping destinations.

If physical stores become pick-up points for online orders or a showcase for products to aid web purchases, then retailers will baulk at paying a premium to be in mega malls.

Foolish takeaway

Don't get me wrong, I am not saying mega malls will turn into ghost cities in the post COVID-19 apocalypse. But their strategic value has probably peaked and these landlords have a lot of shops to fill.

What this means for investors in ASX-listed Australian real estate investment trusts (A-REITs) is that they may need to question traditional valuation models when making their investment decision.

On the flipside, the online evolution is likely to lift the operating margins for ASX retailers. This means that profitability can improve even if online sales don't fully offset lost sales from a physical store.

The David and Goliath battle is only just beginning.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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