Without a doubt, JB Hi-Fi is the beacon of Australian bricks and mortar retail. While other companies find themselves struggling in a low wage growth, low consumer spending environment, JB Hi-Fi has consistently managed to shake off those concerns and post tremendous growth and returns to shareholders.
That said, a recent article in the Australian Financial Review highlighted the on-coming threat presented by Amazon, the all-encompassing retail/technology giant from Seattle. While no official date has been set, Amazon has confirmed their intentions to begin to sell directly to Australian consumers through their website, and already offers their video streaming service ‘Amazon Prime’ to Australians.
This poses a major concern for Australian retailers (particularly bricks and mortar) considering Australians are already estimated at spending between $500-700m on Amazon products each year already, despite not having an official presence in the region.
To ascertain whether JB Hi-Fi stands a chance against Amazon’s online discount retailing model, it may be best to compare how a US based bricks and mortar electronics/whitegoods retailer has fared since the strong growth of Amazon. The best comparison that I could find was Best Buy, a retailer of TVs, computers, video games, CDs and DVDs, electronics and appliances. Make no mistake, JB Hi-Fi is directly in the firing line. According to Citi Group estimates (see graph above) 63% of Amazon’s sales are made up of electronics or physical media, the core of JB Hi-Fi’s operations.
Intuitively it would seem JB Hi-Fi would enjoy higher margins than Best Buy given the lack of strong online competition in Australia (the $150m market capitalised Kogan is the only pure online electronics/physical media retailer in Australia), but this is actually not the case:
However, this is where JB Hi-Fi may see a problem with the emergence of Amazon as a true local competitor. The following graph shows the year on year revenue growth of Best Buy and JB Hi-Fi since 2008:While Best Buy’s margins have suffered over the past 10 years, they still remain higher than JB Hi-Fi’s today. This goes to show the success of JB Hi-Fi’s lowest cost model, steadily keeping margins between 21-22% while growing their net profit through store rollouts and top line revenue growth.
Despite maturing as a business around 2011, JB Hi-Fi has consistently found mid-single digit top line growth since then, with an even better tick up this year with the acquisition of the Good Guys last September.
But look at the Best Buy revenue growth, which has steadily declined since 2008 and has been negative since 2012. Here we can see the impact that Amazon has had on bricks and mortar retail in the US, as many retailers struggling to generate top line growth with consumers consistently turning to online purchases. US online sales topped 8% late last year, up from 6% only two years ago.
As sales shift online, Amazon is growing much faster than anyone else (see the graphic from CNBC above). This is where JB Hi-Fi must adapt to ensure they can compete in an online world with Amazon. In their latest earnings release, JB Hi-Fi disclosed that only 5% of their sales come from their online store (for comparison, Best Buy is around 20%).
It is clear that this number must increase in the future, but it creates a natural double edged sword for JB Hi-Fi because growth in online sales will increasingly leave their physical store network obsolete, creating unnecessary overheads. These are the overheads that Amazon will target, as CEO Jeff Bezos has famously said “Your margin is my opportunity”.
So while JB Hi-Fi has been the standout bricks and mortar retailer in Australia for many years, the real test for management begins now as their positioning in the sector as the lowest cost retailer will come under threat, and decisions of how to balance their physical store network while competing with Amazon online will be crucial. One thing for sure is that Australians will continue to purchase more goods and services online, and if JB Hi-Fi can’t adapt consumers will find alternatives, and the clear alternative will be the king of the retail jungle from Seattle.
Disclosure: Farnam owns Amazon in their International Opportunities Portfolio
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This document has been prepared by Farnam Investment Management Pty Ltd (Farnam) ABN 15 149 971 808 AFS Licence 430574. Australian Unity Funds Management Limited ABN 60 071 497 115 AFS Licence 234454 is the responsible entity of Farnam Managed Accounts. While every care has been taken in the preparation of this document it does not contain any recommendations to buy or sell any particular stock(s) noted. Farnam makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation and needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.