Some hope for retailers

Entrepreneurs from any sector should take a little time out today to read the transcript of Alan Kohler’s interview with JB Hi-Fi chief Patrick Elliot.

As we’ve often said, JB Hi-Fi stands out as one of this country’s best retailers – a company that has been able to produce strong, profitable growth throughout the cycle and teach its rivals a few things about marketing, branding and positioning.

But like many retailers, JB is now facing a big challenge from online. Elliot has got two main responses.

First, the company is trying to grow its own online store, which Elliot says is still small, producing the same profit as two or three good physical stores.

But second, JB is trying to make itself a small target for bargain hunting consumers who are looking for an excuse to leave physical stores in Australia and buy from online stores overseas.

“I think the other part which we absolutely recognise is that our bricks and mortar model is a very low cost model. Our cost of doing business – which is everything below the gross margin line – is about 14-14.5% of sales,” Elliot says.

“There wouldn’t be too many online retailers who have that low cost base, and so we’re comfortable that with our scale, our buying power and our low cost to business that we can compete quite effectively with an online retailer, and to that extent [keep] clearly pushing our own online model.”

It’s a very different way of looking at the challenge presented by online. Instead of whining about the automatic 10% saving that overseas retailers get from selling goods that are exempt from GST, JB is focused on cutting as much cost as possible out of its business to keep its prices low enough to compete.

Now, it must be said that every retailer in Australia would have been working to keep slashing costs, but clearly some are much better at it than others.

To thrive in this environment, you have to be better at it than your closest rivals.

And retailers looking for a hint on how to keep getting cost down, Elliot points to the dollar. As it keeps rising, retailers need to keep putting pressure on local suppliers to pass along lower prices, or everyone will get hit from overseas imports.