Analysis

JB Hi-Fi can shift sales online but the sector in which it operates is at a tipping point.

JB Hi-Fi can shift sales online but the sector in which it operates is at a tipping point. Photo: Glenn Hunt

It seems an odd thing to happen at the height of the technology revolution that is sweeping the world of retail, but the retailers that once led the digital products boom in both Australia and the US are now looking hugely vulnerable. Mr Shakedown is already on the scene, and his dreaded sibling, Mr Shakeout, is only an iPhone call away.

Confronting Harvey Norman and JB Hi-Fi is the same truth that has already driven the world's biggest consumer electronics retailer — US-based Best Buy — to its knees. It's that the digital products cycle has grown tired and, while household penetration of smart phones and tablets is still skyrocketing, other key digital segments are either already saturated or slowing up like a marathoner at the 30 kilometre mark. This goes for computers, digital televisions, audio/video and game consoles — all products that are subject to high household penetration and only incremental innovation. They are also subject to severe deflationary pressures.

Part of the growth that still exists is now being siphoned off by Apple, and will shift further to it as the company expands its retail business.

The result for both Harvey Norman and JB Hi-Fi has been shrinking profits and negative same-store sales growth. The former reported a 7.0 per cent drop in same-store sales at its Australian franchises in the last fiscal year and a 32 per cent drop in net earnings.

JB Hi-Fi did well in the circumstances, with domestic same-store sales declining by 1.0 per cent and net profit by 4.6 per cent.

These results are beginning to look eerily like those of US industry giant Best Buy, which lost more than a billion dollars in 2011 and has had a run of negative same-store sales results. The retailer has announced plans to shrink its US store footprint by 10 per cent and is eagerly trying to sublease space in its big boxes to other, often unrelated, businesses.

Both Harvey Norman and JB Hi-Fi can shift sales online but this doesn't alter the fact that the sector in which they operate is now at a tipping point where consumer interest in many digital products is flagging.

Does anyone benefit from a permanent slowdown in the digital products sector?

Bulky goods centres certainly don't, since many of these have large chunks of consumer electronics space. The Victorian Planning Minister seems to have belatedly picked up on this because he has been relaxing the rules on the kinds of merchandise these centres are able to sell. It's possible that, as a result of the minister's efforts, they will now require a change of name — perhaps to something like "not-so-bulky goods centres".

More will need to be done for them than a relaxation of rules and a change of name, though. Chock-a-block not just with consumer electronics but also with furniture stores that are throwbacks to the 1950s, the bulkies will need a major rethink.

But there are always winners from someone else's misfortune.

A big winner, apart from Apple, could be an unexpected one: the fashion clothing sector that has suffered so much in recent years as consumers found a way — in the form of digital entertainment and communications products — to get their ya-yas out without changing their wardrobes every weekend.

As international fashion retailers move into the Australian market and domestic retailers respond to the competition, clothing retail is already set for a big improvement in its profile in Australia. The ebbing of the digital cycle and less spending going to whiz-bang electronic products could be an extra little bit of help for clothing retailers.

If just a few hundred thousand more people would take their holidays at home instead of going overseas, clothing retail could yet make a major comeback.

Michael Baker is principal of Baker Consulting and can be reached at michael@mbaker-retail.com and www.mbaker-retail.com.