Margin squeeze in market

hurts Dick Smith

Michael Evans
January 25, 2011

WHEN your business is turning over $1 billion a week, a few issues in a small part of your portfolio exposed to discretionary spending is a nice problem to have.

With his supermarket and liquor businesses motoring on in a cosy duopoly, the boss of Woolies, Michael Luscombe, went out of his way yesterday to point out the electronics industry has bigger problems than those being emphasised by Gerry Harveys’ situation.

The Harvey Norman boss may argue the lack of a GST on online goods makes for an unfair playing field. But Mr Luscombe, who counts Dick Smith in the Woolies portfolio, pointed out that the hotly contested consumer electronics industry has a big problem with profit margins.

What is more, he underlined the threat to bricks and mortar retailers in the industry, saying the economics of selling goods online makes good sense.

Dick Smith, the one-time wunderkind of the Woolies empire, was the focal point of investor concern yesterday, reporting a rise in sales turnover but a fall in margins from heavy discounting that is eating away at the profits.

The high Aussie is making goods cheaper and combining with tough competition to hit margins. ”The Australian dollar means everything’s cheaper to buy,” Mr Luscombe said.

”There is intense competition to sell those products in the Australian market place and that has driven prices down even further and it’s just meant that the profit that you made out of selling a TV is less than you made even last year.

”The selling price is down by around 30 per cent. More and more they are only sold on special. There’s no doubt we are all finding it difficult to get that growth margin.”

Dick Smith is steadily building an online sales portal, he said, because ”that’s where people want to shop”.

Sales are up 75 per cent for the half, he said. And the economics are better. ”You don’t have to carry the stock. To sell one TV online you need one TV in stock but to sell one in 400 stores you need 400. So the mathematics of the working capital are far better. It’s the way that a lot of people want to shop.

”No doubt when the Aussie dollar returns to [the] historical level with the US dollar it will become less attractive to do it overseas.”

Mr Luscombe’s other discretionary business, Big W, faces a similar story from price deflation. ”We’re not getting the dollars out of [customers]. We are selling things much cheaper than last year, 6 or 7 per cent.”

Sourced & published by Henry Sapiecha