First, we had the Supermarket Wars. Now ASX investors will have to brace for a new war that's about to erupt in retail land.
The new battle front in 2021 is predicted to be a rent war between leading ASX retailers and our giant ASX property stocks.
If you aren't careful, you might get caught on the wrong side as online shopping is set to accelerate further this year.
ASX property stocks jumping on online revolution
ASX property groups that own malls across the country have come up with their own "online solution" to get a piece of the action.
These landlords are demanding that retailers hand over a portion of their online sales to them, reported the Australian Financial Review.
There's a lot at stake for ASX income investors who have traditionally been drawn to our largest property stocks for steady dividends.
ASX property stocks vs. ASX retailer stocks
The Scentre Group (AS: ASX: SCG) share price and Vicinity Centres (ASX: VCX) share prices have taken a big hit in 2020. These stocks have lost around 40% of their value since the COVID‐19 outbreak. The new outbreaks hitting NSW and Victoria aren't helping either.
In contrast, not only have many ASX retailers faired better, but some at trading at or near record highs! These include the Wesfarmers Ltd (ASX: WES) share price, Premier Investments Limited (ASX: PMV) share price and Nick Scali Limited (ASX: NCK) share price – just to name a few.
Despite their much better fortunes, many retailers are pushing landlords to restructure leases as brick-and-mortar locations have lost their lustre.
COVID intensifies the battle
This was already happening before 2020 due to growth in e-commerce, but COVID has accelerated the trend.
Landlords are happy to play ball, reported the AFR. They want tenants to pay a base rent and a percentage of their online sales.
Property groups justify this by claiming that physical stores help drive online sales. This argument is unsubstantiated and tenuous, in my view.
Another justification is that online shoppers increasingly prefer to pick-up their purchases and do returns in-store.
No surrendering from ASX retailers
Regardless of whether you think that's a valid argument, our large ASX retailers have said they will not acquiesce.
They claim most online orders are fulfilled from warehouses and they say they make skinnier margins from online sales.
I doubt the profit squeeze is true. It's probably dressed up that way because some retailers may massage their cost base to make it look that way.
Profit margin myth
While the smaller profits may have elements of truth in it, it's also likely to only apply to the initial start-up phase. As sales increase, margins will expand exponentially due to the higher fixed cost component (IT equipment).
On the other hand, in store sales have higher variable costs, such as rents and wages.
Stay tuned fellow Fools! This war has only just started.
