JB Hi-Fi, Super Retail among retailers bracing for triple whammy to take the wind out of their sales


“We haven’t seen a slowdown in customer activity in Australia, compared to New Zealand, where we certainly are seeing some softness,” Heraghty told Window Shopping after the owner of Supercheap Auto, Rebel, BCF and Macpac reported record sales but a 20 per cent drop in net profit crimped by rising costs and discounting.

“We are at full employment, the savings rate has given customers confidence and at the same time, especially in our categories, you’ve had customers who have been repeatedly locked down, rained out, flooded or hit by bushfires over the last three years – I think they’re frankly desperate to engage in a leisure pursuit or a health and wellbeing pursuit.”

However, he expects macroeconomic headwinds to crunch demand in the second half.

JB Hi-Fi CEO Terry Smart.

JB Hi-Fi chief Terry Smart says consumers are also continuing to spend on mobile phones, computers, and large and small appliances. JB Hi-Fi’s Australian sales rose 9.7 per cent in July (after falling 12.4 per cent in July last year) and The Good Guys sales rose 7.8 per cent (after falling 6.4 per cent).

“At this stage we’re not experiencing a feeling of any slowdown,” Smart said after the group delivered its ninth consecutive year of profit growth.

“The categories we’re in definitely have a high appeal and consumers are probably less likely to step away from buying those at this point in time.”

But in sectors other than auto accessories, sporting goods, outdoor leisure, electronics and appliances, consumers finally appear to be starting to tighten their belts.

Retail sales rose 12 per cent year-on-year in June, but month-on-month growth slowed to just 0.2 per cent, the smallest rise this year, with weaknesses emerging in household goods and department stores.

CBA’s latest credit and debit spending data points to further gradual moderation in spending, while consumer sentiment remains deeply in negative territory.

Bad time to cut spending

At online homewares retailer Temple & Webster, sales in July plunged 21 per cent and sales in the first two weeks of August dropped 17 per cent. But again, the picture was clouded by lockdowns in the year-ago period, which helped boost sales by 49 percent.

According to an Australian Retailers Association/Roy Morgan survey, consumers are planning to cut back on Father’s Day spending next month, with projections down 7.7 percent to $735 million. UBS expects the rising cost of living to start weighing on consumers from November.

The downturn in consumer spending is inevitable, but the timing couldn’t be worse, coinciding with a big jump in biggest wages and rent, two of the costs of doing business for retailers.

A 4.6 per cent (plus 0.5 per cent for superannuation) wage increase for about 2.4 million workers on award wages came into effect on July 1, while many retail rents are linked to the consumer price index, which rose 6.1 per cent in the June quarter , the highest since 2001, and is expected to peak at 7.75 per cent later this year.

MST Marquee analyst Craig Woolford believes retail wages will grow about 5.5 per cent in 2023, after rising about 3.5 per cent in 2022, while rents are likely to rise 5 to 7 per cent this year, after growing 4 to 5 per cent in 2022.

“Given inflation could average 6 to 8 percent in 2023, rental growth is likely to be ahead of sales growth,” Woolford said in a recent report.

Woolford believes growth in sales volumes and prices in the first half of 2023 will be strong enough to ensure sales growth meets cost growth for most retailers. The outlook is murkier in the second half of 2023 and in 2024.

Pulling the discount lever

Retailers have started dusting off strategies that helped them ride out previous spending downturns: cutting rosters, reviewing promotional programs, tapping suppliers for better deals, raising prices, renegotiating leases and paring back investment in marketing.

JB Hi-Fi’s Smart is preparing to push the discounting pedal to maintain sales and market share, while ensuring staffing levels in stores are aligned to sales.

“Our number one goal is to remain absolutely competitive … if it does tighten up, then that discount lever gets pulled,” he said.

At Super Retail, Heraghty says the retailer would start the planned elevated sales growth during the pandemic eventually unwind, and stepped up investment in new stores and refurbities, digital marketing, data analytics and customer loyalty to bolster sales when COVID-19 benefits to erode.

“We knew this was coming, we planned for it and have executed that plan in anticipation,” he said. “We are in a much, much better position than 2019.

Heraghty believes supply chain and logistics costs that soared at the height of the pandemic will decline as supply and demand normalises, and direct COVID-related costs will ease.

Occupancy costs will rise, as about half the retailer’s rents are linked to the CPI and the remainder are fixed or capped at increases of about 3 per cent. But about one-sixth of store leases come up for renegotiation each year and there is scope to reset terms.

“There are not many businesses that can handle 6 or 7 per cent rent increases,” Heraghty said. “Ultimately, a lease is only worth what the market is prepared to pay for it.”

A new workforce planning system that uses algorithms to better match sales with staffing requirements in each store will help minimize the impact of higher wages when an enterprise agreement expires early next year. “That’s quite a potent tool for us in terms of managing our most significant variable cost,” Heraghty says.

At Temple & Webster, CEO Mark Coulter believes sales growth will return to positive territory later this year once the retailer has lapped the impact of lockdowns.

Unlike JB Hi-Fi and Super Retail, Temple & Webster doesn’t have a network of stores or hordes of retail staff. Nevertheless, the e-tailer is cutting back spending on marketing, pulling back on new hires, raising prices and paring investment in growth initiatives such as new home improvement site, The Build, to achieve new profit margin targets.

“With the work we’ve done around our cost base and margins, 2023 should be more profitable than 2022 [when net profit fell 14 per cent], even with this top-line volatility,” Coulter says. “We’re still investing, we’re still adding resources, but at a slower rate than before.”

No one knows exactly how 2023 will play out, but retailers will need plenty of levers to pull to minimize the triple whammy of rising labor and rent costs and weaker sales. By this time next year, investors will know which retailers have managed the challenges better than others.

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