JB Hi-Fi walks an expansion highwire

In the past decade, online shopping has revolutionised the retail sector. Traditional retailers have suffered as consumers continue to search for quality goods at a cheaper price. And there's no let up. When combined with a tough retail environment as seen in the current market, store closures have become increasingly familiar. Yet in the midst of all this, JB Hi-Fi stands out as a success story. But for how long?

Throughout the latest round of tough trading conditions, JB has managed to keep a low-cost base while simultaneously expanding its market share.

The electronics retailer has continued with expansion plans, opening 15 new stores in the past year. And 16 more new stores will be opened in the next 12 months.

In contrast, rival Dick Smith, owned by Woolworths, has been closing stores around Australia, citing reduced discretionary spending as a major challenge, while Harvey Norman has also lamented the tough retail conditions, downwardly revising online sales targets. Chairman Gerry Harvey has also flagged that it may close some of its formerly Rick Hart-branded electronics stores due to poor performance.

And while industry consolidation is bound to benefit JB in the short-term, it nonetheless reflects the fundamental changes that have taken place in retail since the introduction of the internet.

At a time when consumer discretionary spending continues to decline and online retailers increasingly poach customers from traditional businesses, it would make sense for JB to focus on keeping existing stores profitable, while at the same time ramping up its online presence. In this sense, JB's continued store expansion in the current environment defies all logic.

According to NAB's online retail sales index, 4.9 per cent (or $10.5 billion) of all traditional retail sales in Australia in 2011 were online. And the market is only set to grow as more consumers start shopping online. While Australia may have been slow on the uptake in online retailing, these figures show consumers are making up for lost time.

In this environment, JB's ability to adapt and expand into the online market has seen sales grow strongly. In fiscal 2012, online sales grew 77 per cent. In contrast, branded store sales grew by just 7 per cent, and even then only due to the new stores that were added to its network. Comparable store sales actually fell 1 per cent in the year.

Looking at the dollar figures, it's easy to see why JB is still so focused on building in store sales. While online sales accounted for just 1.62 per cent at $50.8 million, in store sales came in at $3.13 billion. Clearly, in-store sales are strong. But for a retailer that says it's focused on growth, it's surprising that JB hasn't come up with a more innovative strategy to capture a bigger slice of the online market.

But JB's strategy of expansion through new acquisitions is still curious given current conditions. The retailer currently has 168 stores, and has maintained its target of 214 stores in Australia and New Zealand. At the same time, JB plans to launch a new website in the coming year and will expand the product range available to online consumers. But why has it taken so long for the retailer to see that its online presence needs attention? This delayed reaction to the market trend could prove costly for JB.

As JB continues with expansion plans despite a weak market, it risks spreading itself too thin. And while competitors prepare for continued sluggish conditions, it's almost as if JB is ignoring such predictions completely.

Rather than continue to increase store numbers, the retailer would do well to assess a longer-term strategy for sales growth. If JB continues its aggressive plan of opening about 15 new stores per year, it will reach its target by 2015.

Presumably the retailer is hoping that consumer spending will have recovered by then. But there is no guarantee of this. While the global economy continues to decline, and developments in China look ever more negative, there's no way of knowing how long it could take Australia's retail sector to recover.

It will be interesting to see JB's strategy once it hits its target number of stores. The retailer can't continue with traditional store expansion forever. And it needs to focus more on nurturing its online presence because consumer spending online is only going one way, and JB still needs to figure out how to capture a larger chunk of that market.