Read: Investment Month in Review - May 2018
Read: Unibail Rodamco Westfield - A new empire
Uniqlo, Zara, H&M, Aldi, Decathlon and soon to be Kaufland, among others, have in fact entered the Australian market over the last 15 years or so. Again, there’s not a single theme inextricably linking all of these businesses beyond ‘retail’.
Frankly, retailers managed to find ways to cease operating long before Internet shopping was commonplace (Brashs - founded in 1862, closed in 1998). And today’s successful retailers have found ways to compete with, or work with, the new online threat. JB Hi Fi’s shares traded as low as $3.20 in 2005 and are currently trading around $23.
Amazon didn’t invent the Internet
While the Internet is a clear and present danger for many traditional retail business models it is also just the latest in a long line of disruptions that impact any industry over long enough periods. A pundit framed it well recently when they noted that Amazon is not introducing the Internet to Australia…
The Internet’s primary advantage over ‘bricks and mortar’ appears to be in pricing. Locally online retailer, Kogan.com, is focussed on price-based competition for electronics using a direct importing model, combined with ‘Kogan’ branded alternatives. Having built a local distribution capability, Kogan recently announced a plan to offer whitegoods online.
A second advantage, convenience, is arguable as that comes down to a personal preference around whether the ability to order in your pyjamas and then wait for delivery outweighs the option of simply going down the street to buy the product.
Where the Internet has changed the game appears to be around the speed at which technology take-up occurs. Many developers have a ‘fail fast’ philosophy. If something doesn’t work, pivot to the next idea rather than attempt to continue with a possibly flawed model. This is a mindset that the best retailers look to have taken on.
Rents and retail
In addition to the online threat, a common complaint among retailers is around the levels of rent charged by landlords. The landlord/retail tenant relationship is symbiotic. Large retailers can demand lower per square metre rents than smaller peers as their stores drive large amounts of foot traffic. The landlord can then use that statistical data to help promote their centre to other potential tenants.
JB Hi Fi our preferred retailer
We view JB Hi Fi (JBH) as a retailer that has found a way to prosper in the Internet age. It has consistently adjusted its floor space to maximise sales and to keep pace with new technologies and consumer demands.
Source: JB Hi Fi presentation, 2017
In relation to the Internet: JBH has in our view found a balance of price and convenience, with the added feature of a product expert that can help inform your purchase decision. JBH has an online presence and offers click and collect as well as direct delivery – though this does not appear to be market leading.
And landlords: JBH not only draws in foot traffic to a shopping centre, but its sales per square metre are very high (though lower margin than some specialty retail). This provides it some negotiating power when settling on long term leases.
Not everything works. Its move into whitegoods has been less than stellar, however we are confident that management has devised a strategy that will in time deliver reasonable returns from this segment of the business (The Good Guys as well as JB Hi Fi Home). On the positive side, this move has helped to increase the relevance of JBH to its suppliers. Samsung can now sell JBH a TV, phone, washing machine and fridge in the one order.
Recent guidance around the performance of the recently acquired, The Good Guys, was poorly received by the market during May. We view this as an investment opportunity.