Experts are warning of more retailers hitting the wall even as our economy gradually reopens from the COVID-19 lockdown.

The ASX retail sector will be channelling Charles Dickens in thinking this is the worst of times but also the best of times.

That’s of course assuming they are in a small select group that are best placed to benefit from the industry consolidation that lies ahead.

Australia may lose 20% of retail outlets

Privately owned PAS Group became the latest victim of the coronavirus-triggered recession when it entered voluntary administration on Friday.

The group, which owns brands like Review, Black Pepper and Yarra Trail, employs 1,300 across 225 locations in Australia.

Brian Walker from consultancy The Retail Doctor told The New Daily that total Australian retail store numbers could fall by up to 20% over the next two to three years.

Survival of the fittest

ASX retailers aren’t immune from the pain, but those with a strong balance sheet are likely to profit from the bloodletting.

The hole left by collapsed competitors will be readily filled by the survivors, while cashed up retailers can pick up bargain assets.

UBS took a closer look at this emerging trend to identify the ASX stocks that are likely to come out stronger from the turmoil.

Categories most ripe for M&A

“While macro downside risks are decreasing, we expect pressure on many small/sub-scale retailers to build as stimulus ends (Sep-20), and online penetration accelerates,” said the broker.

“In this report we look at the share breakdown across 11 retail categories to assess where consolidation is most likely, and which listed retailers could benefit.”

The categories that have the most scope for merger and acquisition (M&A) activity include travel, automotive and outdoor specialist retailers, fashion, furniture and hardware.

On the flipside, the areas that have the least scope for consolidation are electronics, department stores and food.

ASX winners and semi-winners

Based on history and market structure, UBS believes Super Retail Group Ltd (ASX: SUL) and Wesfarmers Ltd (ASX: WES) will be the biggest winners from industry consolidation.  

However, Harvey Norman Holdings Limited (ASX: HVN), Flight Centre Travel Group Ltd (ASX: FLT) and Webjet Limited (ASX: WEB) should also benefit from this thematic, although maybe to a lesser degree.

On the other hand, Myer Holdings Ltd (ASX: MYR) and Premier Investments Limited (ASX: PMV) should also in theory gain an advantage from the industry shake-up, UBS said that end-customers desire for choice and growth in online will limit scope for gains.

Any upside for two is more likely to come from closing down weaker performing stores.

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Motley Fool contributor Brendon Lau owns shares of Webjet Ltd. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited, Super Retail Group Limited, and Webjet Ltd. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. 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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