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Are ASX retail shares really risky?

Greg Butler
risky, risk, tumble

The spate of recent closures in some major Australian retail chains has thrown a shadow over the entire category in the minds of many investors. Jeans West, Starbucks, Harris Scarfe, Bardot, EB Games and others have recently either dramatically reduced their retail outlets or chosen to go into voluntary receivership.

Even Big W, a division of Woolworths Group Ltd (ASX: WOW) has flagged the impending closure of 30 of its outlets across Australia.

Yet customers are still spending and while retail growth is only marginal, Australia hasn’t seen a major downturn in sales. So, what has affected the fortunes of so many retailers?

There are many possible causes.

Reading the market

The retail market, like many others, is dynamic and ever-changing. Influences like online shopping, new entrants into established retail categories and evolving consumer preferences have all had an impact on the sector.

How well senior management is monitoring these fluid changes amongst its customer base can be critical to its business’ futures. How astute is the management of the retailers you’re considering investing in? It bears close investigation. 

More stores can mean less profit

Managing a retail chain can involve a delicate balancing act. For example, there is the jeopardy of the expansion strategy. It can seem logical that the more outlets you have, the greater the profitability you will enjoy.

But this thinking can be countered by the exposure to added physical, labour and other costs involved in the expansion. While revenue will increase with added outlets, the additional costs involved in setting up stores, freight, recruitment, local marketing, advertising and more can turn increased revenue into lower profits.

The times are changing

The growth of online communication has shifted the retail forum from the local high street to the global stage. Major names like Amazon and Alibaba can sell virtually anything to anyone, anywhere and back their offerings with remarkable customer service. But these megastores are just one end of the market.

Thousands of other online retailers are now competing for the customer dollar. Smart local retailers have adapted and added online to their retail offering.

While in other categories like clothing, the hands-on experience of personal shopping still presents real advantages to a great number of customers.

Retail is a complex and constantly evolving ‘organism’ that requires regular health checks to maintain its viability. It’s worth checking how well your investment choice is performing in this climate.

Warning! Enter at your own risk

While the performance of the ASX retail sector is more visible to us than many other industries, its value as a share category is no more or less risky than any other. The secret for investors remains to do your homework, assess the threats and opportunities and make informed and educated choices.

Many Australian retailers continue to perform very well. JB Hi-Fi Limited (ASX: JBH), Coles Group Ltd (ASX: COL), Harvey Norman Holdings Limited (ASX: HVN) – the list of Australian retail share successes worth serious investor consideration is a long one.

The recent store closures could well be nothing more than the result of senior management’s failure to read the changing market until it was too late.

The post Are ASX retail shares really risky? appeared first on Motley Fool Australia.

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Motley Fool contributor Gregory Butler has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020