JB Hi-Fi becomes Gerry's grinch

Gerry Harvey may have planned to be the "last man standing" in Harvey Norman's retail space but it now appears he is going to be jostling for that precarious position with JB Hi-Fi's Terry Smart.

After what has been a very difficult year for Harvey Norman as intense discounting, the disruptive impacts of distressed and failing competitors and the early intrusions of online retailers, the last thing Harvey needed was a competition from a formidable brand.

With Terry Smart's announcement today that JB Hi-Fi is launching JB Hi-Fi Home concept stores, stocking a full range of whitegoods, cooking, small appliances and home entertainment products, that is, however, what he is likely to face.

Harvey may be disdainful of online competitors – which so far have had a meaningful impact on the electrical, entertainment and technology segments of his business but not on the bulkier furnishings and bedding and large appliance ranges that the stores offer – but it is unlikely he would underestimate JB Hi-Fi and its record of success in high-volume price-competitive retailing.

JB Hi-Fi already has a powerful brand, relationships with the suppliers and customers and the systems and supply chain of a large band sophisticated retailer, as well as a demonstrated ability to operate with a low cost base.

It also, incidentally, has embraced online platforms, both for e-retailing and as a driver of in-store sales where Harvey, while now pursuing an "omni-channel" strategy, has been openly sceptical about the worth of digital platforms in Harvey Norman's retail segments.

The JB Hi-Fi impact will be modest in the near term, with the group trialling a relatively small number of concept stores (four initially) in Queensland, with two more to follow early next year – along with a dedicated e-retailing site. Smart wouldn't be venturing into such contested space, however, if he didn't believe the concept could be leveraged into a substantial new stream of business.

For Harvey, who has had a year that was uncharacteristically poor for what has been one of the most successful retail models of the past two decades, the imminent entry of JB Hi-Fi to his core turf creates another shadow over an outlook that had been expected to be a little more settled next year with the disappearance of some competitors and the change of ownership at Dick Smith as Woolworths exited the electronics sector.

He had hoped that competitors hanging on grimly in hope of being rescued, or at least being given a stay of execution, by a decent Christmas sales period would finally give up and disappear and provide a more stable and less intensely competitive environment for his business, which experienced a 31 per cent decline in earnings last financial year. Harvey Norman does have a property-rich (more than $2 billion of property) and conservative balance sheet to sustain it.

Apart from the potential shift in the nature of the competitive dynamics and structure of the market if JB Hi-Fi decides on a full-scale roll out of its new concept online retailers will continue to erode segments of the market.

The latest National Australia Bank online retail sales index, released today, shows that online sales, while still only about 5.6 per cent of the overall retail market, continue to rise and totalled about $12.3 billion in the 12 months to October.

Interestingly, and in line with the overseas experience, growth in online retailing is now being driven by domestic retailers who have belatedly recognised both the threat and the potential of online retailing and are scrambling to reconfigure their business models and strategies.

The recent Click Frenzy exercise might have been a debacle but it did highlight the appetite of Australian consumers for online offers from trusted domestic retail brands. With growth in online sales running at 10 times that of traditional retailers the bricks and mortar retailers have to have a meaningful online presence to remain relevant, and perhaps to survive.

JB Hi-Fi, a favoured brand of the Apple and Facebook generation whose first instinct is to go online, is probably more likely to be able to leverage its brand and presence online than a property heavy e-retail sceptic, although Gerry Harvey has demonstrated over more than half a century – he and Ian Norman opened their first Norman Ross store in 1961 – that he is an extremely gifted and innovative retailer and marketer and online retailing in this country is still in its infancy.

Between JB Hi-Fi and a Dick Smith chain that has been recapitalised by private equity, is now led by former Myer rising star Nick Abboud and which has former Woolworths and Myer heavyweight Bill Wavish to call on, however, core slabs of Harvey Norman's retail offering are going to be targeted by both old foes and new rivals.

That hoped-for post-Christmas relief as struggling competitors fell over may not eventuate, indeed competitive intensity in the sector might even increase.