Retail giants Harvey Norman and JB HiFi worry as high dollar deflates prices

Retail giants Harvey Norman and JB HiFi have complained the high value of the Australian dollar is exacerbating price deflation on gadgets such as LCD televisions, but other retailers say entrepreneurs have no choice but to adapt to falling prices.

Online tech entrepreneur Ruslan Kogan says department stores should expect constant deflation among gadgets, especially LCD televisions, and says operating online will allow companies to sell products for cheaper and in higher volumes.

“I do wonder what they mean by price deflation, because televisions are always going to go down in price. The ways to manufacture them have become smarter, and it’s always going to keep dropping,” he says.

“If you look at a 46-inch television, they were selling 18 months ago for over $3,000. Now you can pick one up for $1,000. Whether that’s deflating or just business, you have to accommodate for it because no matter what, new technology always becomes cheaper and cheaper.”

Gerry Harvey told the Australian Financial Review this morning AV products have begun to deflate and as long as the Australian dollar remains high, pressures on bricks-and-mortar retailers will keep intensifying.

“All retailers selling AV products have a huge problem at the moment because we’re selling them for so much less than we were before,” Harvey said.

“You now have to sell twice as much as you did two years ago to get the same dollars so it’s impossible. [2011 is] going to be worse [than 2010] there’s no doubt about it, the way things are going in that product category.”

JB HiFi’s Terry Smart agreed, saying his company has been forced to increase volumes and add-ons to accommodate for the loss in price.

“There’s no question the quantum of the price deflation makes it harder to make the difference up in volume. While we’ve seen some great volume growth it no doubt gets harder,” Smart said.

The Australian dollar is expected to reach parity with the US dollar by the end of the year. As goods become cheaper, retailers will start losing business overseas and the price of popular gadgets such as televisions and smartphones will drop.

Retail expert Phil Bonanno says this can be a serious problem if it continues. “Overall, deflation can be very destabilising for economies and businesses of all sizes. Look what it’s done to Japan’s economy from the late 80s onwards,” he says.

But he also warns that retailers need to prepare and start working on their margins now before the pressure really hits. He says technology always drops in price and that businesses need to be prepared and start working on alternatives to boost revenue.

“Retailers selling on price are always going to be subject to price inflation/deflation. I have always been stunned by the commoditisation of reasonably technical equipment, but that’s another story for another day.”

“In this case, I suspect the deflation is in regards to rapid intro of next gen technology coming in and subsequent obsolescence of LCD TVs. I would have thought that HVN would’ve known the tech coming along in both LED and 3D television and managed stocks appropriately, but they run an interesting business. “

Bonanno also says he believes Australia is entering a “great consumer era”, where quality products, higher levels of customer service and better prices all combined will drive demand, “rather than constrained availability/concentrated outlet ownership/management”.

Kogan agrees. He says the online model allows his business to operate steadily no matter the value of the Australian dollar and deflation won’t impact his margins as long as his overheads remain low.

“It’s simply not a problem for us. These gadgets become cheaper because they are manufactured more often and the tech becomes better and better. And what these retailers are also experiencing is huge competition from online retail.”

Kogan points to online businesses- not just in the tech arena – that are beginning to offer cheaper deals as the Australian dollar’s value rises. He says more consumers will shop on overseas websites as the dollar continues to increase.

“Consumers are getting smarter, they are Googling a lot more of their purchases. Online retailers are now offering cheaper prices and with their reduction in overheads, they are getting great money. Big retailers have to accommodate for that.”

“So what these businesses are experiencing is a huge shift to online retail. As these prices drop, online businesses are able to sustain the drops but bricks-and-mortar businesses can’t necessarily sustain these margins. It makes me wonder what they’ve been used to.”

Personally, Kogan says he is unfazed by the Australian dollar and will continue to offer the same products at low prices, entirely online.

“All of our transactions are done in US dollars, so the dollar doesn’t matter. I really don’t care whether it’s at 40 cents or 90, as long as it’s the same for JB, Harvey Norman or Samsung. Our competitive advantage will always mean we can sell for cheaper, no matter where the dollar is at.”