PREMIER Barry O’Farrell has backflipped on his controversial ethanol policy, dumping a government ban on unleaded petrol due to begin on July 1.

The cabinet decided yesterday to dump the ban a week after the leaking of secret cabinet documents revealed that Energy Minister Chris Hartcher had tried and failed to get the ban dropped last month.

The dumping of the ban came after it was revealed Mr O’Farrell was proceeding with it despite advice to the contrary from Mr Hartcher, his department, the ACCC, the Crown Solicitor and two independent reports.

The ban on normal unleaded fuel was supposed to force petrol companies to make more E10 fuel to meet the mandate of 6 per cent of all fuel being made with ethanol.

But revelations it was to take place caused a major public outcry. The decision was the second major backdown in Mr O’Farrell’s 10 months in office after he dumped a plan to retrospectively reduce the tariff on the solar bonus scheme from 60c a kW/h to 40c a kW/h last year.

But he said last night he would be retaining the 6 per cent ethanol mandate.

He will ask the independent pricing body IPART to report on whether there was enough ethanol for petrol companies to meet the mandate. The decision spares the drivers of 800,000 vehicles, which can’t take E10, the 15c a litre extra they would have had to pay for premium unleaded from July.

Mr O’Farrell met Mr Hartcher and National Party Leader and Deputy Premier Andrew Stoner prior to the cabinet meeting with his proposal to roll over on the policy and then took the proposal to cabinet, sources said.

Mr Stoner had been a big fan of the ethanol policy.

Only last week the Premier launched a staunch defence of the policy. “Government is paid to make decisions in the best interests of the public. We believe this policy is, and that’s why the decision was made.”

FRUIT and veg is set to become the new battleground of the supermarket price war after Coles announced it will reduce the cost of selected products by up to 50 per cent from today.

If Woolworths follows suit, fresh produce will become the latest product to be heavily discounted by the supermarket giants, following price cuts to milk, bread, toilet paper and washing powder by both companies in the past year.

The peak body representing vegetable growers, AusVeg, said the announcement was ”concerning” because, while an oversupply of produce this season meant some growers would benefit in the short term, it was unclear what impact the price reduction would have on the industry over time.

The general manager for fresh produce at Coles, Greg Davis, said the company had worked closely with growers to transform their fresh fruit and vegetable prices, investing in new growing techniques, quality control, store displays and now lower prices for customers.

A spokesman for the company, Jon Church, said it had invested millions in the campaign but had worked with suppliers on an agreed price.

”By giving growers a commitment that we will take as much of their crops as we possibly can we have provided them certainty that they have a market for their product,” he said.

But a spokesman from AusVeg, William Churchill, said the push by the major retailers to capture market share would put pressure on other growers who did not supply Coles, as competitors tried to replicate the offer to their customers.

”We can see that the supermarket wars have well and truly arrived in the fresh produce industry and this fight will get savage,” Mr Churchill said.

A spokeswoman for Woolworths, Claire Kimball, would not comment on whether Woolworths would follow its competitor and drop its prices, but said fruit and vegetables had been depreciating for the past 12 months due to the volume of product on the market. She said the lower prices would continue for some time.

Woolworths will announce its second-quarter sales today, and analysts from Goldman Sachs expect the company will report lower growth in food and liquor sales compared with Coles, which will make its announcement on Thursday.

Read more: http://www.theage.com.au/national/coles-set-to-fight-a-fruit-and-veg-war-20120130-1qpqc.html#ixzz1kyO989ff

ST. LOUIS — The core demographic for convenience stores may be males, but a new study is cautioning retailers not to overlook female consumers.

According to the research study published by Fleishman-Hillard International Communications, a global strategic communications firm, in conjunction with Hearst Magazines, today’s American female consumer has increased her impact as a receiver, broadcaster and influencer of key information. The study points to a female consumer’s ever-expanding social circle and the unique way she buys across categories as key factors in her importance as a shopper.

Notably, the research study found that 54 percent of all women agree with the statement, “I feel it is my responsibility to help friends and family make smart purchase decisions.”

“During the past few years, we have watched the evolution of women and their sphere of influence,” said Nancy Bauer, senior vice president and senior partner, Fleishman-Hillard. “Simply put, when it comes to the dynamics of today’s marketplace, women have changed the marketing communications game. The 2012 female consumer is a valuable broadcaster and an amplifier of ideas in the marketplace.”

As the research study notes, females are taking even greater control, honing in on priorities and delegating with greater authority as economic challenges linger.

“We all must realize that today’s American woman has integrated a pragmatic and purposeful approach to the decision-making process for products and brands alike,” said Marlene Greenfield, vice president, executive director of research, Hearst Magazines. “Therefore, it is important to incorporate more substance and less sizzle when communicating with her. What’s more, crafting the right message and identifying the right media mix requires an in-depth understanding of the target segment and category involved.”

Retailers should also keep in mind that it is almost as important who she tells before and after a purchase. In 2011, more than 50 percent of women surveyed claimed to regularly influence friends and family to buy or not buy a product or service. That is an increase from 31 percent in 2008, according to the study.

The research also showed that women use their growing social interaction and influence in a positive manner — 33 percent had recommended a product or service in the past six months, while 19 percent recommended that someone not buy a specific product or service.

Social media channels are playing large and growing roles in the expansion of a woman’s networks and in her everyday life. In less than 12 months, the number of brands a woman follows on Facebook has increased by 12 percent. In addition, the study found 73 percent of women now use Facebook, compared to 65 percent in January 2010. In addition, the average respondent reported having 187 friends, compared to 130 friends in 2010.

Specifically of note to retailers, 65 percent of women are a friend/fan of a company, brand or product on Facebook, compared to 52 percent of men, the researchers found.

Woolies criticised by leading motoring body for offering discounts to entice people to buy more alcohol.

Woolworths has drawn flack for linking drinking and driving by offering deep discount petrol vouchers to people who double their alcohol purchases.

The supermarket chain, which is a major player in both the bottle shop and service station markets, is offering a 30 cents a litre petrol discount coupon to buyers who buy two cases of beer or pre-mix cans of spirits. The discount is being offered on top of the usual 4c a litre discount for grocery purchases.

But the Australian Automobile Association (AAA), usually a champion of a better deal for motorists, has drawn the line at the heavy petrol discounts, labelling it “irresponsible”.

“This is a step too far,” AAA executive director Andrew McKellar said. “The message is get a gutful and then get a tankful and that’s really not on.

“It’s troubling that anyone would link drinking and driving, particularly so close to the holiday season when we see so much tragedy on our roads,” he said.

“This discount is well above what is offered on normal grocery items and I would urge Woolworths to start taking a shared responsibility on road safety,” he said.

Woolworths group manager, retail communications, Claire Kimball, dismissed the criticism.

“Woolworths rejects any suggestion that the current fuel discount offer is irresponsible. Our customers are always looking for ways to save and this is one way that we have offered on several previous occasions,” she said.

“I don’t think any fair-minded person would link unsafe driving with our 30 cents a litre discount on petrol following beer and pre-mixed drinks purchases at Woolworths Liquor.”

But Mr McKellar said the inclusion of pre-mixed drinks in the promotion was particularly disturbing as those products were typically targeted at a younger audience, including inexperienced drivers.
“Here we are trying to educate young drivers about being responsible and not drinking and driving, in particular P-platers who have a zero alcohol limit. It’s in very poor taste. It sends the wrong message,” he said.

He said there was also a broader issue concerning the depth of petrol discounts being offered.

Big petrol chains were using “loss-making” discounting practices that put pressure on the smaller independent service stations and threatened to drive them out of business, reducing competition in the longer term.

Australia’s leading independent retailers and supermarket chains are tackling this challenge head on by signing up to GS1 Recallnet – an online portal designed to streamline the process of issuing product recall and withdrawal notifications.

Since its launch in August 2011, hundreds of suppliers and retailers in the food and liquor sectors, including Woolworths, Metcash, Coles and Costco, have already joined GS1 Recallnet to improve their recall effectiveness.

With GS1 Recallnet, suppliers can quickly and simply issue a recall or withdrawal notification to their trading partners. The system validates the data as it is being entered to ensure it is accurate and complete. Once the retailer has received the notification, they can log into the system to view full details of the recall, including any additional information they may have specifically requested suppliers to provide.

GS1 Recallnet also enables retailers to send immediate feedback to suppliers, perhaps updating them on the progress of the recall or requesting further details. This channels communication through one single portal and increases visibility throughout the recall management process.

Woolworths immediately recognised the advantages GS1 Recallnet brings to the product recall process and has fully integrated its internal recall management system with GS1 Recallnet for its supermarket and liquor businesses. The company now actively encourages its suppliers to consider GS1 Recallnet for all recalls and withdrawals going forward.

Today there over 100 food suppliers ready to communicate their product recalls and withdrawals to their customers via GS1 Recallnet. Retailers, large and small, have the ability to capitalise on this progress by subscribing to the service and encouraging their suppliers to standardise recall and withdrawal communications.

To learn more, register for GS1 Recallnet or an introductory webinar visit: www.gs1au.org/services/recallnet/ contact GS1 Australia on 1300 366 033 or email gs1recallnet@gs1au.org.

About GS1 and GS1 Australia

GS1 is a leading global not-for-profit organisation dedicated to global standards and solutions that improve the efficiency and visibility of supply and demand chains. The GS1 System is the most widely used supply chain standards system in the world. GS1 Australia is the Australian member of the global GS1 organisation, enabling more than 16,000 members – businesses of all sizes from 22 sectors across Australia – to enhance their efficiency and cost effectiveness by adopting electronic supply chain best practices.

COLES and Woolworths are set to prise tens of millions of dollars in revenue from Australia’s brewing giants this year as they bolster sales of house-brand beers, industry experts say.
The retail behemoths have been advised they have the potential to significantly increase sales of private labels despite falling beer consumption.

Liquor industry analysts predict the retailers – believed to reap at least $100 million a year in sales of own-brand beer – can increase their market share from 2.5 to 4 per cent.

Supermarket-owned wine labels now account for almost 20 per cent of wine sales in Australia. The supermarket giants have antagonised food and beverage companies by aggressively rolling out new home-brand labels in recent years.

Woolworths, which last year stated its wish to double private label sales across all products, has clearly been most aggressive in the beer market and this month added a new label, Sail & Anchor, to its range.

The group’s liquor buying manager, Steve Donahue, told BusinessDaily Woolworths’ beer sales were growing. Market research indicates industry-wide sales fell more than 5 per cent in the year to November.

Woolworths has also moved into the booming cider market using the Sail & Anchor brand.

Citi analysts believe the growth of “big box” liquor stores – Woolworth’s Dan Murphy’s and BWS and Coles’ First Choice – will provide vital shelf space for their lower-price private label beers.
They estimate private labels, sold at full price, provide a gross margin of 10-20 per cent compared with less than 5 per cent for mainstream branded beers from Foster’s and Lion.

Citi’s Craig Woolford said the big retailers would always promote the big brewers’ brands while quietly slotting their own labels in for subtle competition.

“Foster’s makes very high profit margins so the beer category has been a target for retailers, though building brand equity in beer takes time compared to wine, as consumer repertoire of wine choices is far wider,” Mr Woolford said.

The retailers’ private labels are divided between so-called “control brands” and their own labels. Control brands, such as the Sol Mexican brand sold in Woolworths outlets, are made by other manufacturers but licensed exclusively to one retailer.

Woolworths has also bought 25 per cent of Perth’s Gage Road brewery.

Hammer ‘N’ Tongs was produced for Coles by Boag’s, but that contract was cancelled by the Tasmanian brewer’s owner Lion and the beer is now made offshore in Vietnam.

Mr Donahue said: “We won’t be spending millions in advertising like the big brands do, and we are growing, but from a small base.”

The consumer is proving an elusive prey for retailers hunting for sales. Across the world, store groups are grappling with diverse consumer behaviours, the internet and business planning dominated by the eurozone crisis and the prospect of a slide back into recession.

Consequently, retailers approach the crucial holiday spending season, which can account for a significant proportion of their profits, with trepidation.

According to Richard Hyman, strategic retail adviser to Deloitte, the consultants, times are more challenging than in 2008, at the height of the financial crisis.

“In 2008, it was about sentiment. It was an emotional reaction by consumers to [the collapse of] Lehman Brothers,” he says. “We didn’t go into a consumer recession. We are going into it now.”

Metro, the world’s fourth-biggest supermarket and electricals chain by sales, warned on profits this month, after a weak start to the critical pre-Christmas shopping period across debt-ridden Europe.

Carrefour, the world’s second-biggest supermarket chain by sales after the US’s Walmart, has seen similar trends, amid volatile trading conditions in southern Europe and consumers cutting back on discretionary non-food items.

In the UK, consumers are cutting back on spending, as middle to lower income shoppers are squeezed by rising fuel and food prices and government austerity measures.

By contrast, the US consumer has held up “surprisingly” well, says Ira Kalish, director of global economics at Deloitte.

“There is widespread expectation that this will continue, at last through the holiday season,” says Mr Kalish. “Whether it will continue beyond that is hard to know, because consumers have been spending faster than [their] income, so their savings rate has gone down. There is only so far that can go, unless there is an improvement in consumer incomes in 2012. It could be that consumer spending will then slow down.”

Asian consumers have also continued to spend, with shoppers particularly drawn to luxury brands.

But it is not just in shopping in physical stores that Asia offers potential. According to the Boston Consulting Group (BSG), Chinese consumers could become powerful online purchasers.

It says that China, which already has the largest internet population in the world, also has the second-largest population of online shoppers – 145m people. This compares with 170m in the US, and is more than double the number in Japan and five times that of the UK.

BSG predicts exponential growth in online shopping in China through to 2015, with spending that could make China’s ecommerce market worth more than RMB2,000bn, possibly surpassing the size of the US market.

But despite China’s potential, headwinds are gathering.

Mr Kalish says that retailers have been boosted by rising Chinese incomes. However, the country’s economy is slowing down.

Meanwhile, Walmart, the market leader, has suffered a series of high-profile problems in China, falling foul of authorities over the mislabelling of ordinary pork as organic.

“It is still a good growth market. [But] for global retailers looking for growth opportunities, China is not what it used to be. They are starting to look elsewhere,” says Mr Kalish.

One market in the spotlight is India, although some global retailers expressed frustration at its decision to abandon plans to throw open its $450bn retail sector to foreign supermarkets, with Tesco branding it a “missed opportunity”.

Mr Kalish says some countries of south-east Asia, such as Indonesia and Vietnam, are attracting retailers’ attention – as is Turkey. There is also interest in Latin American countries such as Colombia and Peru, and some of the countries in Central America, such as Costa Rica. There is also growing interest in Africa, following Walmart’s acquisition of a majority stake in Massmart, the South Africa-based group, which has a presence in a dozen sub-Saharan countries.

Indeed, African retail markets feature heavily in Deloitte’s and Planet Retail’s second “Hidden Heroes” report, which identifies the next generation of retail markets.

They draw attention to Algeria, Kazakhstan, Kenya, Morocco, Nigeria, Pakistan, Peru and Serbia, and two that featured in the first report: South Africa and Vietnam. “All these markets are, or will soon be, on the radar of the world’s leading retailers,” Deloitte and Planet Retail, the consultants, say.

For global retailers, navigating existing and new markets will be crucial for their success.

Christine Cross, chief retail and consumer adviser to PwC, the consultants, says companies expanding abroad need to have clear aspirations about which countries and markets to target, what return on capital they desire, where they see themselves in terms of market share and their risk appetites.

Store groups can choose to grow organically, by opening one store – or several – to test a market, or by acquisition. They can own corporate stores, or enter into franchise arrangements. The latter is less risky but is often less profitable. Groups can even take a concession in an existing store, which is lower risk still, but also lower profit with less control of the brand.

“So often people just want to plant a flag, without having a clear view of what a successful operation in an overseas market would look like, and what the investment will return,” Ms Cross says. One important element is to obtain a rapid insight into that market. “You need to acquire local knowledge quickly,” she says.

One way to do this is to team up with a local partner. This can give access to stores, or smooth the way to obtaining planning permission for new outlets. A partner’s reputation could also be a useful asset.

“It may be that, reputationally, you want to work with a known brand, particularly in Asia, rather than going in as a foreign interloper,” she says.

But she warns: “If you do decide to have a partner, you need to choose them carefully.”

Kim Winser, the former senior Marks and Spencer executive who has led and supported a number of British companies in their international expansion, including M&S, Pringle, Aquascutum, Agent Provocateur and French Sole, says it is easier to take a strong brand into overseas markets.

Retailers without a strong identity will be up against local competitors who are experts on their customers and their behaviour.

“As a retailer going abroad, it is quite a tough call,” she says. “Taking brands abroad is different. In that scenario you are playing on the DNA and personality of the brand. If customers relate to that, then you have got serious potential. Over the next decade or so, I believe the most exciting international developments will be with brands.”

But companies should not veer from their brand identity to appeal to new markets.

“The most important thing is to remain true to your DNA. If you are a heritage brand, then you have to respect that heritage, but hopefully give it a really exciting contemporary feel,” she says.

When it comes to more established markets, having the right online strategy is crucial.

Michael Jary, a partner at OC&C Strategy Consultants, estimates that in advanced economies, about 10 per cent of sales are made online.

Traditional bricks-and-mortar retailers have already moved online, but some purely online retailers are now planning to add physical infrastructure. “The interesting battle in online is between the pure plays and the multi-channel retailers, with both stores and an online presence,” says Mr Jary.

Keeping a tight rein on finances is essential for retailers but investing, even in difficult times, is also important to lay the foundations for success.

Retailers say that despite pressures, consumers are still prepared to spend when they see a product that they want. This is underlined by the success of Apple’s iPad in a sluggish consumer-electronics market.

According to Richard Brasher, chief executive of Tesco’s UK business: “It is not that [consumers] have a complete aversion to spending money, but you better be right. I would say that you have to be great to look good. In the past, you only had to be good to look great.”

ANALYSIS

A new report from Citigroup paints a gloomy outlook for the Australian retail sector in 2012. In essence, it predicts similar conditions to those experienced by retailers last year.
The report, by the group’s retail analysts, also adds its voice to the chorus arguing that the major problems facing retailers are not the ones that retail company executives incessantly talk about.

Mainstream retailers have been at pains to defend their weak sales performance of the past couple of years on grounds that their underperformance was due to factors beyond their control. These include weak consumer confidence, global economic uncertainty and the weather.

Poor consumer confidence, or its close cousin “consumer caution,” are special favourites in the retailer lexicon. But according to the analysts, this amounts to pinning the tail on the wrong part of the donkey. In the report’s own words: “The weakness in retail spending is a retailer’s problem, not a consumer problem.”

The Citigroup research team, led by Craig Woolford, points out a persistent disconnect between broad consumer spending trends and retail sales. While consumer spending has been growing at a robust 5.7 per cent clip during the past 12 months, retail sales have grown at only 2.1 per cent. Take food out and the picture is even worse. Non-food retail sales have grown by just 1 per cent during the same period.

If consumer spending is growing strongly but discretionary retail trade is not, then it suggests consumers are not really as cautious as widely perceived. Rather, preferences have switched away from retail goods and services sold in Australian stores.

This implies that the retailers themselves are part of the problem. Specifically, they have not done enough through merchandising, pricing and shopping experiences to keep consumers from diverting their resources elsewhere.

The Citigroup report identifies three main culprits that have collectively lowered retail sales by more than an estimated 5 per cent over the past year: foreign travel by Australian residents, e-commerce (much of which isn’t captured in the ABS retail trade survey), and deflation in key retail categories such as electronics.

The report also notes that the savings rate is relatively high compared with historical norms. This reflects caution to some extent, but may also be at least partly the result of disenchantment with the retail offer itself.

Unfortunately, none of the major factors underpinning sluggish retail sales growth are likely to reverse themselves quickly. E-commerce growth, a large net tourist outflow, deflation and robust saving are all set to continue, resulting in a continuation of current retail sales trends.

This assumes to some extent, perhaps ungenerously, that mainstream retailers don’t do very much differently this year to what they did last year.

But if the problem with retail is on the retailer side, rather than the consumer side, then there is room for some hope. Retailers’ fates are in their own hands and they are not simply at the whim of external forces. Investments in technology, new pricing strategies, differentiation and localisation of the merchandise mix, and more prudent management of real estate have proven to be particularly promising avenues for managing costs and restoring same-store sales growth for retailers overseas.

Shopping centre operators will need to chip in too because they are the ones who determine which retailers get a guernsey, the amount of rent they pay and the environment in which they operate. Centres will absolutely have to evolve at a faster rate than they have in the past and with strategic vision rather than piecemeal tinkering around the edges of the leasing formula.

If 2012 is set to repeat last year’s experience, then business as usual is not an option for either retailers or their landlords.

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

Read more: http://www.theage.com.au/small-business/trends/retail-outlook-more-of-the-same-20120125-1qgkt.html#ixzz1kQmNvsHW

Soon, ATM machines and payment readers in shops will all accept a simple swipe from your card.

BARCELONA: First it was credit and debit cards, then mobile phones. Now the so-called contactless revolution has embraced cash machines.

Maybe you’ve got a contactless card in your wallet or purse, but haven’t yet made use of the new technology to buy anything. So how would you feel about using a contactless ATM that allowed you to take money out without even having to put your card in the machine?

Last week in Barcelona, Spanish bank La Caixa launched what it says is a world first: a city-wide network of contactless cash machines that allow customers to withdraw money and carry out other transactions with a wave of their bank card across a card reader.

It’s the latest move in a payments shake-up that has seen people all over Europe issued with cards which allow them to pay for low-value items using a reader at the till.

Shoppers in Barcelona will be able to use their new-style cards to buy items in thousands of the city’s shops and bars and withdraw euros contactlessly from next month.

It is the precursor to what anyone planning to visit the London 2012 Olympics sites can expect when the games kick off in July – the event Visa and participating banks hope will push the use of contactless payments into the mainstream.

Last week I got to see one of the first of the 500 contactless ATMs that are starting to appear across Barcelona. Users wanting to access their account or withdraw cash have to swipe their card across the machine’s reader and wait for a beep. The ATM reader is able to read all the card’s data. Users still have to input their pin in the normal way. Two seconds later, out pops the cash.
La Caixa, which developed the ATMs in conjunction with Visa, says eventually users will be able to access small sums without the need to input a pin at all, in the same way that customers can make low-value purchases in shops, although the bank says pin-free cash withdrawals are still a little way off.

If you are wondering what the point is of a contactless ATM, particularly when you still have to key in your pin, the bank points out that they offer a number of advantages. It’s certainly a faster way to access your cash – one that will bring down queues at busy sites such as shopping centres and sports venues. They could also be good news for disabled customers, many of whom will find the new cash machines much easier to use.

La Caixa says people using contactless ATMs will no longer be able to absent-mindedly leave their card in the machine. One big plus is that it is much harder to have your card “skimmed” – when its details are read by another device put on the machine by criminals – as it never leaves your hand. For the same reason, there is less chance of people being distracted by a thief and having their card snatched out of their hand, or grabbed when it is being handed back by the ATM.

For extra security, the Spanish ATMs feature a built-in camera and display which shows the user if anyone is looking over their shoulder. The ATM will also record a snapshot of the person accessing the money, which could be invaluable in the event of a dispute. The banking group has pledged to reimburse anyone who has money taken out of their account if a thief uses their card to make a contactless payment.

La Caixa, which has the most domestic bank customers in Spain (10.5 million), is issuing one million new contactless cards to its customers.

La Caixa is providing 15,000 payment terminals to retailers across Barcelona to ensure customers can pay with a single tap everywhere from the largest stores to fast food outlets and the city’s busiest bars. There is also a plan to offer it to the city’s taxi fleet, as has already been done in New York.

Guardian News & Media

Read more: http://www.theage.com.au/technology/technology-news/its-touch-and-go-as-contactless-payment-gets-real-20120123-1qd8g.html#ixzz1kQPGvltv

JB Hi-Fi faces a gloomy retail market.

When the former chief executive of JB Hi-Fi, Richard Uechtritz, announced his retirement in February 2010, he held 1.5 million shares.

He then sold 500,000 shares in March before retiring in May. After a convenient “leave of absence” he rejoined the board in April 2011.

How many shares did he own at that point?

Absolutely none whatsoever. Actions, as they say, speak louder than words.

The decision to leave JB Hi-Fi last year – and sell all his stock – means he’s $11 million wealthier than if he had retired today.

JB Hi-Fi faces a fundamental threat to its business model, one that will only intensify with time. Since 15 July last year, the stock has fallen about 23 per cent, with most of the damage occurring in the aftermath of the company’s 15 December profit warning.

Brokers, many of whom had the company as a “buy” before the profit warning, have since downgraded to “hold.” That, though, doesn’t go far enough. This is a poor situation only likely to get worse.

No sanctuary

The profit downgrade revealed how the store rollout program is no longer insulating the company against a tough retail market.

While JB Hi-Fi branded store sales rose 7.8 per cent in the five months to 30 November 2011 thanks to new store openings, management forecast that earnings before interest and tax (EBIT) for the six months to 31 December will fall by around 5 per cent.

There’s only one way to interpret this fact: Margins are being squeezed. For a high-volume, low-margin retailer, there is no more serious threat.

The company claims the squeeze is because of competitor discounting but that’s far from the whole story.

First, new stores could be cannibalising existing ones (there are now three stores within five minutes walk of Intelligent Investor’s office in Sydney, including the perennially empty hardware-only shop at Westfield Sydney).

Second, there appears to be a shift in the sales mix from higher-margin items like CDs and DVDs towards lower-margin items such as computers and Apple products.

Finally, expanding television sales require extra staff (another downside to price deflation). All these factors are probably contributing to weakening margins.

Nevertheless, management is persisting with the store rollout – 16 will open in 2012. This action is exactly the wrong thing to do.

Dick Smith purchase?

Investing capital into a declining business will, in the long run, only make things more painful for shareholders. Even Gerry Harvey has realised this trend and stopped further store rollouts in Australia altogether.

The problem is that JB Hi-Fi has long marketed itself as a “growth story”. Changing a company’s sense of itself, especially when it’s committed to growth and already under pressure, is usually too much to ask.

Also lurking within the announcement was another potential red flag. JB Hi-Fi stated that “consolidation in the consumer electronics and home entertainment sector is inevitable”. Here, the “commitment to growth” red flag takes on a potentially blood-like hue.

This could – but may not – signal an intention to acquire Dick Smith from Woolworths, which is conducting a strategic review of its consumer electronics division. Consolidation might forestall the inevitable, but allocating capital to a declining industry won’t save it.

What appears to be the right course of action in the short term – opening stores and buying weaker competitors – is a perfect way to destroy shareholder funds. The question, then, is how bad could it get?

Retailers and businesses in general have a tremendous capacity for reinvention. But with JB Hi-Fi’s reliance on DVDs, CDs and computer game sales to drive traffic and sweetheart lease deals with landlords, this business is at even greater risk than Harvey Norman (which has its own set of slightly different problems).

On a forecast 2012 price/earnings ratio of 10, JB Hi-Fi looks cheap. But that’s because it’s a “value trap”. The decline is very likely just the start of a very steep descent.
This article contains general investment advice only (under AFSL 282288).

Read more: http://www.theage.com.au/business/intelligent-investor/why-the-worst-is-yet-to-come-for-jb-hifi-20120124-1qf2d.html#ixzz1kPm3Mh1k