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Will JB Hi-Fi make Gerry Harvey’s day?

Not content with the cut-throat competition currently being played out in flat screen televisions and other consumer electronics, the Harvey Norman (ASX: HVN) and JB Hi-Fi (ASX: JBH) battle royal is being taken to whitegoods, with the announcement this morning that the latter is to begin rolling out JB Hi-Fi “HOME” stores.

At this stage, at least, JB Hi-Fi is just dipping its toe into the fridges, freezers and ovens market, converting some of its existing larger stores by adding these categories, and presumably cutting back on the space being given to other products.

As the company points out, its Clive Anthony-branded stores already sell these categories of products, so it should have the required supplier relationships, pricing and skills within the group to make the expansion relatively seamless.

Of course, seamless doesn’t necessarily mean easy, and the likes of Gerry Harvey’s Harvey Norman as well as Bing Lee, The Good Guys and others will be doing their best to avoid losing market share – and sales and profit – to the newly expanded JB.

The news won’t exactly make Gerry Harvey happy, after he yesterday suggested his company would be ‘last man standing’ as retail conditions continue to be tough. I’m sure he didn’t count on a new competitor in whitegoods – especially one with a formidable store footprint, category experience and a solid online strategy.

Optimism or desperation

The decision by JB Hi-Fi to enter whitegoods is an interesting one. It may be a sign of a struggling retailer desperately trying to find a way to stave off declining sales, or a robust business finding more efficient ways of using its floor space.

One thing is for sure – shoehorning extra stock from a new category into its existing stores suggests either fewer other categories or smaller ranges, as the company makes room for large fridges and ovens in its stores.

The movie and music categories would have to be under significant pressure, given the continued move to digital downloading, while its wide range of small electronics may also be feeling some pressure – particularly the products that are both low value and low margin items.

Retail is all about the return on both the floor space in store and the stock you have on hand. Having a greater number of product categories should increase sales per square metre, assuming the company manages its stock mix correctly, and that consumers aren’t disappointed with narrower product ranges in its traditional categories.

It’s also likely that the less competitive whitegoods categories are higher margin products than items like flat screen televisions, which are suffering both price deflation and decreased margins – not a happy combination.

Competition looms

Whether those margins remain high is yet to be seen of course – the continued march of online retail is ever-threatening and Woolworths’ (ASX: WOW) new Masters home improvement stores are making whitegoods one of its own core categories. Neither is good for profit margins of competing retailers.

JB Hi-Fi continues to be bullish about the future – opening new stores despite the consumer reticence to spend. That’s despite the company’s profit margins continuing to slide. There’s no doubting it operates in a very tough set of categories, and you can’t blame the company for looking for new growth avenues.

Foolish takeaway

Whether ovens and freezers can make a difference will become clear in the months ahead.

The downside is that JB Hi-Fi may lose its image as a busy, vibrant, cool place for teenagers and twenty-somethings to shop, and that the new business may distract it from its core operations.

While Gerry Harvey wouldn’t be welcoming the news, I can’t escape the mental image of him staring, Clint Eastwood-style at JB Hi-Fi, inviting his opposite number to “go ahead, make my day”.

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Motley Fool analyst Scott Phillips owns shares in Woolworths and Harvey Norman. The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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