But Wesfarmers’ discount department stores are having a much tougher time. Kmart, which has carved out a niche as a slightly more upscale department store retailer with a (surprisingly) solid presence on social media, remains profitable but its sales momentum has declined. Yet sister chain Target appears to be really struggling, with its performance described as “unsatisfactory” and its future now unclear.
Wesfarmers is speeding up a review of Target, with all options seemingly on the table. Chief executive Rob Scott says store closures are inevitable, with the chain likely to shift its focus heavily to online, if it survives.
The outlook for discretionary retail was dark before the coronavirus outbreak and ensuing social distancing requirements smashed the sector. If Target doesn’t make it through, it won’t be alone.
For Wesfarmers shareholders it is not ideal, but also not too concerning as long as the Bunnings (and to a lesser extent Officeworks) juggernaut rolls on. The Bunnings business has defensive credentials – it has performed well in earlier downturns as people bunker down and cut discretionary spending to work on projects at home.
Perhaps a bigger question for shareholders is what the company will do with the $2 billion on its books from recent sales of shares in Coles. It has already been linked with collapsed airline Virgin but as the economy deteriorates there will be plenty of other distressed assets for cashed up players such as Wesfarmers to look at.
Nevertheless, the conglomerate’s COVID update reinforces the fact the pandemic has accelerated trends in consumer behaviour and preferences that have been playing out slowly for decades. The rise of working from home, the decades-long shift from physical retail to purchasing online.
Retailers with differentiated brands (Bunnings, Kmart) or that serve specific industry channels (Bunnings, Officeworks) and augment their physical stores with strong online offerings will be better placed to deal with coronavirus and what comes after it than those that lack these qualities (Target).
And Target aside, Wesfarmers’ retail portfolio appears relatively well-positioned to withstand further economic shocks than others.