Boon for electronics buyers

That's great for consumers, who are finally getting a little more bang for their buck. But not for retailers.

The likes of Game, Makro, Hi-Fi Corporation, Incredible Connection and Dion Wired are in a tight spot.

The prices of the goods they sell are in most cases lower than they were last year. But because sales volumes are picking up so slowly, it is difficult to achieve the same, or better, sales growth from one year to the next.

An average notebook computer retailed for about R7000 last year. This year it's priced at R4999. "That means if you sold 10000 notebooks last year, this year you have to sell 13000 - and that is to stand still," says JD Group CEO Grattan Kirk

Rapid change in exchange rate makes all the difference

This is not new in computers and digital technology, where deflation has been eating away at price levels for three decades or more. What is different is the rapid change in the exchange rate, and the flat economy. "Any rapid change in the exchange rate is difficult to manage - whether it's up or down," Kirk says.

JD Group, with its subsidiaries Hi-Fi Corporation and Incredible Connection, reports full-year results in November. Deflation at these levels could hurt JD Group more than most. Of the R9 billion the group generates in annual sales, R6,5 billion comes from the sales of electronic goods. "That means 70% of our business is directly affected by the exchange rate," says Kirk.

Competitiveness at an all-time high

But recent results from Shoprite and Massmart also bear testimony to the difficulty. "Competitiveness [between retailers] in electrical products is at a record high now," said Shoprite divisional director Aubrey Karp at the group's annual results presentation. "[Retailers are driving sales] with aggressive promotions at rock-bottom prices to reduce stocks."

He cites the example of an LED TV which retailed at R29 999 in November 2009, R18 999 in March, R15 999 just prior to the World Cup and R12 999 now, according to one retailer's recent advertising.

Though Massmart sells electronic goods through Makro, a fair proportion is sold through its Massdiscounters division, which includes Game and Dion Wired. This division reported sales up 8,6% in the year to June. But price deflation and competitive pricing, among other factors, kept the lid on margin growth, and profit before interest dropped 5,5% to R642,7 million.

A positive spin

However, Massmart CEO Grant Pattison puts a positive spin on deflation.

"A consumer who was going to spend R10 000 on a new TV is still going to spend that - he will just buy a better TV."

Lewis Stores, which sells electronic goods through its furniture business and its subsidiary Best Electric, has also adjusted its product mix to cope with price decreases.

"We took a conscious decision to hang on to our price points," says CEO Johan Enslin "We spoke to our manufacturers and now offer a slightly better range." But with just 18% of sales from electronic equipment, the impact of deflation on Lewis is manageable. "If 90% of your goods were from this area then deflation of 2% would be a problem," he says.

Of course it is consumers, not investors, who benefit.

"Investors cannot bank deflation," says Incredible Connection CEO David Miller "That means retailers have to work incredibly hard to drive sales and create value for investors."

The knack to survival in this environment is merchandising. You cannot afford to have goods on your shelves that you bought for R100 but have to sell for R90 because your competitor bought the same item at that price, says Miller.

"You have to be at the top of your game from a perspective of merchandise planning."

Though retailers cannot rely on another soccer World Cup to help drive sales volumes, demand and prices are picking up. "We have heard that there is pricing pressure in the East," says Kirk. "Raw material prices are rising and so are wages."

For retailers and investors, that is a good thing. Consumers may not agree.

Source: Financial Mail