A liberating concession for David Jones
It is a category that David Jones boss Paul Zahra would probably have pulled out of before now, but simply ditching these products is not simple. In the first instance there is floor space (generally in isolated corners) that would need to be filled and there is inventory on the floor that would be subject to painful discounts.
The deal announced on Monday under which Dick Smith will operate as an electronics concession for David Jones seems like a pretty nifty solution.
(A concession is a store within a store. David Jones provides the real estate and Dick Smith does just about everything else including supplying the product and the staff.)
The department store gets a set percentage of sales, which Dick Smith underwrites up to a certain, unspecified, amount.
Dick Smith gets a couple of things out of this deal. It bulks up sales and gets a better cost price from suppliers, and it probably gets a good deal on the floor space rental.
It also gets a boost in sales - an outcome that works well for a group now owned by private equity but which will be looking to float on the stock exchange within the next five years (coincidentally this covers the length of the deal with David Jones).
Both parties get the additional foot traffic and David Jones customers are provided with new products, such as mobile phones.
David Jones will remain in whitegoods and small electricals because they still make money. But in the broader electronics area the specialists and online suppliers have taken market share and drained the earnings from general merchandise outlets. Even the bricks-and-mortar electronics category killers have found life tough.
JB Hi-Fi, for example, reported on Monday that sales in its visual category fell almost 12 per cent in the year to June 30 on a same-store basis, while software sales declined about 9 per cent. Myer has been phasing out some of its electronics products.
Being first cab off the reporting rank means JB Hi-Fi is a bellwether for how the sector is travelling. It's still a pretty ugly picture out there in discretionary retail despite the numerous interest rate cuts.
JB Hi-Fi's 2013 sales numbers look fairly good at first blush. Total sales for the year were up 5.8 per cent and the second-half sales were a more robust 10.3 per cent higher. But these numbers are a bit distorted. The second half of last year (the six months to June 2012) was a tough period across the retail board. So the gains are (in part) the result of comparing oranges and last year's really rotten oranges.
Investors who follow retail know this. They were looking for optimistic sales guidance for 2014. But JB Hi-Fi management was not obliging.
Store numbers are set to increase 6 per cent over this period and management forecasts sales will improve by 6 to 8 per cent. This equates to only moderate improvement in same-stores sales growth.
Chief executive Terry Smart called it "tough and competitive out there" on several occasions during the investor call even though the worst of the deep price discounting seems to have passed.
Analysts were wary that Smart was being overly conservative and like many managers he is loath to disappoint. But there is no suggestion that it is back to the future for retail. Rather, the excessive discounting has passed, replaced by just "discounting", which paves the way for gross margin to continue to improve.
JB Hi-Fi's low-cost, low-price model is well suited to the current retail environment where the discount operators are generally faring better. In the longer term, its mix of products leaves it vulnerable to online competition..
It was an early mover in developing its online store, which has been growing at rapidly. Having said this, Smart says growth rates are starting to come down.
The company is also moving its offer by opening and converting some traditional stores to the HOME concept.
Frequently Asked Questions about this Article…
The concession is a ‘store within a store’ arrangement: David Jones provides the retail space while Dick Smith supplies the products and staff and runs the electronics offering. David Jones receives a set percentage of sales, and Dick Smith underwrites that revenue up to an unspecified amount.
David Jones expects the move out of the broader electronics category to deliver a full financial year benefit of up to $10 million, according to the article.
Dropping electronics outright is complicated because of existing floor space that must be filled and inventory that would likely require painful markdowns. The concession lets David Jones remove the earnings burden while keeping foot traffic and offering customers new products like mobile phones.
No. David Jones will continue to sell whitegoods and small electricals because those categories still make money. The concession covers the broader electronics area, where specialists and online suppliers have been taking market share.
Dick Smith gains higher sales volume, improved supplier pricing from bulked-up sales, likely favourable terms on floor space rental, and a sales boost that helps a group now owned by private equity — which the article notes may seek a stock market float within the next five years (a time frame that coincides with the length of the concession).
The article describes the sector as challenged: specialists and online suppliers have taken market share, bricks-and-mortar electronics retailers have found life tough, and some department stores like Myer have been phasing out electronics products.
JB Hi‑Fi reported 2013 total sales up 5.8% and second‑half sales up 10.3% (though the article notes these numbers are partly distorted by a weak prior period). Visual category sales fell almost 12% year to June 30 on a same‑store basis and software sales declined about 9%. Management expects store numbers to increase about 6% and forecasts sales growth of 6–8%, implying only moderate same‑store improvement. CEO Terry Smart described the environment as “tough and competitive.”
Investors should monitor same‑store sales trends, margin improvement (as deep discounting eases), management sales guidance, store roll‑outs or conversions, and exposure to online competition. The article highlights that concession deals can reduce inventory pain and preserve foot traffic, while low‑cost operators like JB Hi‑Fi may fare better short term but still face long‑term online risks.
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