If you’re a JB Hi-Fi shareholder, there are some things you have to know. While they have been a great company over the past 10 years or more and have significantly improved the Australian retail landscape, they are about to lose over 50% of their business to the Internet.
At an IT conference I recently announced that about 30% of JB Hi-Fi sales were Apple products and related accessories, such as covers and cables. I also revealed that Apple will eventually pull the plug on its third party distribution network, putting all these sales at risk for JB Hi-Fi.
Some people thought I was crazy. The JB Hi-Fi CEO, Terry Smart, announced in reply that my claim was incorrect. But what he failed to disclose was exactly what percentage of JB Hi-Fi sales are attributed to Apple and related products. Considering JB Hi-Fi is a publicly listed company with a lot of mum and dad investors, I think this showed stealth and craft, rather than openness and honesty, from Mr Smart.
JB Hi-Fi and other bricks and mortar retailers are in a lot of trouble from the Internet. In my announcement, I was only referring to their dependency on Apple. One of Australia’s leading industry analysts recently told us “there is a risk that half of JBH sales could be lost to the world of online.” Isn’t this something that the Australians who have invested their hard earned money in JB Hi-Fi have the right to know?
Other than the sale of Apple products, JB Hi-Fi makes a lot of their profit from the sale of CDs, DVDs, Blu-rays and accessories such as cables. When it comes to music and CDs, the industry is quickly shifting online and people are buying more music than ever through sources such as iTunes. JB Hi-Fi will see a huge reduction in sales and profits from this sector as more customers take advantage of the prices and convenience offered by the Internet.
When it comes to DVDs and Blu-rays, we are currently seeing Internet TV start to gain huge traction. People will soon be streaming all multimedia on their TVs directly from the Internet. They’re already doing this in the USA through services such as Netflix that let you watch what you want, when you want, for the cheapest prices. When it comes to accessories, more and more people are already learning how they can easily buy cables online for under $10, instead of paying more than $50 in store at JB Hi-Fi.
In investment banking terms, the analysts call these medium term threats to JB Hi-Fi:
- The threat of increased price transparency - shoppers can now use the Internet to check the price of branded products at JB through their smartphones to make sure they aren’t being ripped off (good for customers, but bad for JB)
- The threat of vertical integration – certain product categories are vulnerable to being purchased by the consumer directly from the manufacturer (thereby bypassing JB entirely!)
There goes a huge chunk of JB’s sales before I even get into explaining why it will be in Apple’s interest to pull out of their third party distributor network. You see, in today’s age, manufacturers are less reliant on third party resellers than they have ever been. The Internet has allowed any manufacturer to sell directly to consumers through their online stores. The Kogan business model is built on this premise and this is how we save consumers lots of money.
Apple creates innovative products that have generated mass consumer loyalty. When Apple sells its products through third party resellers, it sacrifices margin on the product so that the third party reseller can make money too. But, consider this; if iPods, iPads and MacBooks were only available in Apple stores and their online shop would it significantly affect the sales of these products in 2011? What about next year, or the year after, as more people turn to online shopping? What happens when Apple realises that it can make more money by selling direct (without sacrificing any of its margin to resellers), than by selling through middlemen?
When Apple dumps their third party resellers, they will be able to sell products cheaper and make more money. Customers will benefit and Apple will benefit. Win-win situations like this invariably create change. Apple already has the wheels in motion to make this happen by tracking when people visit their website prior to purchasing their products from any store and by logging the email addresses of their customers through iTunes.
But, it won’t just be Apple. Other manufacturers will embrace the direct to consumer business model. We will see the likes of Samsung, Sony and LG do the same. Apple will simply be the first because they have the most unique product offering and they are the most responsive to change.
I’d hate to see mum and dad investors lose their hard earned money because the people they entrust with their money aren’t willing to reveal the inconvenient truths of our industry. Don’t take my word for what’s about to happen, go stand in a JB Hi-Fi store for 10 minutes and see for yourself what sells.
I am passionate about the industry in which we operate. I talk to other business leaders constantly and hear advice from the world’s best industry analysts. Mum and dad investors need to understand that the world of retail is changing. Just as Kodak (where Terry Smart was formerly General Manager) weren’t responsive enough to the migration from analogue to digital in cameras and lost their market-leading position to Canon, so too will big retailers lose their market positions to companies that are more aware of industry trends. The world of retail is changing at a lightning pace, and the companies that survive will not necessarily be the biggest companies, or the ones with the book-Smart CEOs, but the ones who are the most responsive to change.
I used to meet with the previous CEO of JB Hi-Fi, Richard Uechritz – he was a very switched on and intelligent man. He built the company to where it is today over a 10 year period, then he resigned his position in 2010, despite being a relatively young CEO. JB Hi-Fi’s share price dropped 5% on the news of Richard’s resignation. Richard knew what was coming and got out at the right time.
I started Kogan 5 years ago to achieve the goal of making technology more affordable for all Australians. I work 24/7 with few breaks in between. Kogan was started with $0 capital and has grown very quickly. Every dollar that Kogan makes is reinvested into the business to help make our products better and more affordable. That said, for the sake of the retail industry and the Australian public, I’m willing to put my money where my mouth is so that the truth, the whole truth, is revealed.
I challenge the current CEO of JB Hi-Fi, Terry Smart, to a $1,000,000 bet that on March 14th 2014 there will not be any Apple hardware products for sale at JB Hi-Fi stores. The Australian public deserves to know the truth right now. The contract for the bet has already been drawn up by my lawyers and can be found here.
If Mr Smart is going to stick his head in the sand, he should at least give his investors the facts so they can make up their own minds. I urge Mr Smart to accept the bet and to be more transparent with the people whose money he is charged with managing.
Founder & CEO
“We live technology. There is always a better way to create and deliver”