Australian consumers, burnt out by relentless rises in living costs, are looking for discounts.
Terry Smart, the chief executive of JB Hi-Fi, has been forced to oblige.
“The reality is, when it’s tough, that’s what you do – you go out and promote,” Smart said on Monday, after the retailer reported its annual results.
“It has been reasonably tough in the market, so the team sits down and works with suppliers on creating promotions that can actually drive sales.”
While the early pandemic shopping boom allowed many retailers to expand profit margins by charging customers more, there are now signs that consumers are getting their payback.
No longer willing – or able – to pay what retailers want, customers are asking to be swept off their feet. And if retailers can’t profit from raising prices, they’ll need to increasingly discount their products to entice more people into stores.
JB Hi-Fi, which also owns The Good Guys, recorded $9.6bn in sales in the 2023/24 financial year, slightly down from the prior year but still robust in a period marked by consumer strain.
In order to retain its sales levels, the company has allowed its profit margins to be squeezed. Margins are down 124 basis points over the year, leading to a 16.4% fall in net profit to $439m.
A narrowing of profit margins is generally bad news for companies, and good news for consumers, as discounting starts to take hold of the market.
“If a customer is out there shopping, we just do whatever it takes to actually get that customer to shop with us,” Smart said.
The electronics retailer acknowledged more customers are relying on promotions, with Black Friday, Boxing Day and tax time discounts becoming increasingly important for sales.
This shift contrasts with the early pandemic, when holed-up consumers would pay just about anything to be entertained.
The change in consumer behaviour is sweeping through company earnings in Australia and overseas. Furniture retailer Nick Scali last week recorded a 20% fall in profits.
In the US, where recession fears are rising, furniture seller Wayfair reported a peak-to-trough correction in spending levels last seen during the global financial crisis.
The entertainment company Walt Disney warned of a “moderation in demand” for its theme parks, while shares of Airbnb fell more than 13% in one session after it alerted shareholders to slowing demand.
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For consumer-facing companies, the question is how much of their profit margins they are willing to give up to keep sales at a healthy level.
JB Hi-Fi on Monday indicated it is now offering promotions at pre-pandemic levels, which shows that while the level of discounts have increased a price war has not yet broken out among retailers.
The retailer also announced it was buying the kitchen and bathroom products group E&S Trading, a push into the commercial building market that could help it offset margin pressure in its retail business.
Shares in JB Hi-Fi rocketed on Monday, rising more than 12% in early trading to hit record levels after results surpassed analyst expectations.
The better-than-expected outlook included strong July trading figures, up 5.6% in its flagship Australian electronics stores compared to 5.2% the year before, painting a positive picture for the months ahead.
However, analysts at E&P Capital noted it was important to understand the level of promotions used to drive the July figures.
JB Hi-Fi declared a special dividend on Monday, which is a type of one-off reward paid to shareholders from surplus gains.