Gerry Harvey Sounds Desperate While JB Hi Spends A Lot Of Money Looking Cheap

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Australian retailers such as JB Hi Fi and Harvey Norman risk becoming Window shopping locations for consumers shopping for cheap deals online.

 John Hempton of Bronte Capital in a recent blog said that Gerry Harvey sounds somewhat desperate these days – firstly arguing that internet shopping is a con (nobody makes any money in it) and then arguing that there should be additional taxes on it. Then he sets up an internet company in Ireland. It looks really bad except that because of the above-mentioned balance sheet, he can stay around for a while and he might even be able to liquidate and be left with something valuable at the end. (I still believe liquidating a large retailer is incredibly hard.)

Hempton then goes on to say that JB Hi-Fi spends a lot of money to look cheap. Have a look at their website – it is almost a parody of old-style discounting pamphlets. The stores have false plywood floors to make them look like a discounting house. They have young staff wearing casual clothes and signs that are carefully printed on a computer so that they look hand-drawn. The shop is deliberately cluttered giving it a feeling of being (very) crowded. They don’t do products that are not hip. There are no fridges, blenders, toasters, but lots of pads, laptops, large screen TVs and computer games. The Apple products are given prime placement, not because selling them is profitable but because it makes the store look cool.

And for a long time JB Hi-Fi really was cheap. The website flashes the slogan “cheapest prices – always”. This was a company with the virtuous cycle of looking cheap and being cheap, selling fast, having high turnover and low inventory costs (important in electronics where obsolescence is quick) and just looking like a happening place. It was also a hot stock.

In the US, the debate is whether the country can support one or zero highly profitable big box chains. Best Buy – the bears argue – is the showroom for Amazon. In Australia, as I said, we still have two chains – it’s as if Circuit City were still around. Moreover because Harvey Norman has a balance sheet it can survive quite a long time and Gerry Harvey is prone to say it is the competitor that will go out of business. But Harvey Norman really is losing share to JB Hi-Fi and ultimately both will lose share to the internet.

For the full Hempton blog go to Bronte Capital.

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