It's a great time to be shopping for electronics. But not many retailers are celebrating. Karyn Scherer reports.
If you're the only person you know whose lounge doesn't yet feature a giant, high-definition, ultra-slim TV hanging on the wall, then rest assured - you're not a total loser.
In fact, you're probably quite smart, given that anyone who bought such a TV more than two years ago may now be ruing their decision.
Not only has the technology radically improved in just a couple of years, but so have prices. Last year alone, prices for an average flat panel TV dropped by 20 to 30 per cent. Even by the normal standards of the constantly evolving electronics industry, that's a massive fall.
"Three years ago, you could pay $6000 for a plasma screen," notes one industry veteran. "Last year they were $1200. Now they're $899. What will they be next year? I don't know, but they won't be $899."
While consumers have probably never had it so good, particularly as the dollar also remains stubbornly high, many retailers are nervous about the trend continuing.
"Price deflation is just simply a part of electronics retailing," says JB Hi-Fi chief executive Terry Smart. "What we have seen though, is one particular category, in the TV side of the business, have unusually high levels of price deflation over the past 12 to 18 months. It's hard when you're seeing price deflation of up to 20 per cent to get enough increase in volume to compensate for those dollars lost."
For most retailers, TVs are a huge chunk of the electronics business, accounting for more than half of all sales. And to make matters worse, more players than ever before are fighting for a share of that shrinking pie.
"No doubt we'll see a similar trend here to what has happened in Australia," says Smart. "The market will continue to consolidate and the smaller players will exit, because it does become unviable to operate in a market that is so aggressive with discounting. I think you'll continue to see that consolidation happen through 2011 and 2012."
According to Statistics New Zealand, sales of electrical goods jumped from around $1.6 billion in 2001 to around $2.4 billion in 2007. Since the global financial crisis, that figure has hardly budged. While the tough economy hasn't helped, most retailers blame price deflation for the trend.
Grant Shaw, who manages audiovisual products for Panasonic in New Zealand, notes that around 400,000 flat panel TVs were sold in New Zealand last year.
If that pace continued for just two more years, then every New Zealand household would have a brand new TV, notes Shaw. But of course, many of those sales were second or third TVs for some homes.
Colmar Brunton estimates that 70 per cent of all New Zealand homes now have access to digital TV, but that includes set-top boxes plugged into old sets with cathode-ray tubes. One of the big questions for electronics retailers is how many more flat panel TVs they are likely to be able to sell before the market becomes saturated.
"Certainly the last year has been very, very competitive but it was a record year for unit sales for most brands as well," says Shaw. "The price plummeted but it made it more affordable. A lot of that was big demand, and the price got very low."
Samsung is believed to be the market leader in TVs here, with Panasonic not far behind, followed by Sony and LG.
According to many retailers, it is manufacturers who are mostly responsible for the price wars. But manufacturers claim the same thing about retailers.
"That Saturday morning Herald, when you see some of those prices that come out, that's not driven by the manufacturers - that's the retailers all trying to be cheaper than the next guy," says Shaw.
Terry Smart agrees. "There's no doubt it's a combination of both going on there, but in my mind it's more around retailers really trying to gain share in what is a very tough market. And when it's a very tough market, you really need to be looking at that deep discounting to draw customers in and attract people to that brand."
But according to Shaw, the bargains that many customers have enjoyed over the past few months may not last too much longer, as newer, even thinner models which automatically convert 2D into 3D begin rolling into stores this month.
"This year, 80 per cent of all TVs will be 3D," he says. "The big difference this year is they all have the 2D to 3D conversion, so you can watch normal TV or a normal DVD and it will convert it into 3D."
Most new TVs will also feature an internet connection as standard, he says.
"It's the same with most industries, when something finishes the price gets cheaper and when new models come in, the price will go up again ... Almost all the old TVs have gone for this year now. Looking at what manufacturers have launched lately, prices have definitely gone up another notch."
But some retailers admit there is still plenty of old stock which has yet to be cleared.
It has been claimed that New Zealand has four times as many appliance stores per head of population as Australia. If that is true, then the Australian chains have only themselves to blame.
"Certainly pricing has become much more competitive as the larger Australian chains have joined the market - very much so," says Shaw. Just over a decade ago, the New Zealand retail market got its biggest shake-up in years when Harvey Norman expanded across this side of the Tasman. It has since been followed by JB Hi-Fi and The Good Guys.
All three are highly regarded as smart operators and there have already been casualties, including Radford's, Hill & Stewart, Eastern Hi-Fi, and some independents. Vacuum cleaner specialist Godfrey's is also believed to be struggling, and even Harvey Norman recently closed a store in Lower Hutt.
Some fear the combination of intense competition and a slump in consumer spending could see more blood spilt yet.
When it announced its plans to enter New Zealand in the late 90s, Harvey Norman instantly got offside with locals by describing New Zealand retailing to Australians as "worse than the worst country town you have ever been to".
The company's founder, Gerry Harvey, quickly made amends and it is a measure of his immense skill as a retailer that these days most Kiwis seem to regard the big Aussie chain almost as family.
Harvey is now in his 70s, and although he remains executive chairman of Harvey Norman, he spends almost as much time these days overseeing his bloodstock empire as he does his retail empire.
He recently added two New Zealand stud farms to his portfolio - the Westbury stud in Karaka and the Bloomsbury stud in Matamata - and happily talked to the media last month about his intention to become New Zealand's leading horse breeder. However, he is rather more coy about his retail plans and failed to return several calls by the Business Herald.
Harvey Norman's success in New Zealand is all the more impressive because electronics manufacturers refuse to do transtasman deals with retailers, so it had to start from scratch, just like everyone else. But even it has been finding the New Zealand market pretty tough lately.
The listed company has around 30 franchised stores here, including several Norman Ross stores.
Norman Ross is the name of the original retail store Harvey helped found with his business partner Ian Norman in 1961. He now uses the brand to fend off The Good Guys at the bargain basement end of the market.
In 2007 it was reported in Australia that Harvey Norman hoped to eventually open 30 Norman Ross stores here, but so far there are just a handful and the company appears to have put the brand on ice until conditions improve. Some of its rivals believe it may even abandon the brand.
In February Harvey Norman admitted its New Zealand sales had fallen by 4.7 per cent last year, which it blamed on the recession and "low consumer sentiment".
The market remained challenging, it said, due to "high unemployment, low savings, a significant fall in property prices and a very cautious consumer". It also blamed the GST increase for exacerbating "a depressed retail environment".
Gerry Harvey may also be touchy because a maverick retailer known as Ruslan Kogan has been reasonably successful in winding up the major Australian chains of late.
Seen by some as the Richard Branson of the electronics sector, Kogan is an online-only retailer who sells ultra-cheap brands built in China specifically for the Australian market.
So far, his publicity stunts include a $1 million wager with JB Hi-Fi that Apple will withdraw its products from third-party stores by 2014, and setting up a website called Tradeleaks that encourages employees to blow the whistle on dodgy commercial practices by his rivals.
Although Kogan is still a minnow in Australia, he does appear to have goaded the big chains into accelerating their plans for online retailing.
Gerry Harvey, in particular, has been openly sceptical about internet sales, frequently pointing out that hardly any traditional retailers are making money online.
In fact it was Harvey who kicked off the campaign which tried to persuade the Australian government to impose GST on low-value goods bought from overseas websites - an issue that also got picked up by retailers here, but backfired spectacularly on both sides of the Tasman.
Just last week, Harvey appeared to concede defeat on the issue, announcing that Harvey Norman would launch its own online retail store, possibly based overseas, within weeks.
"By this time next year you'll see Harvey Norman with a pretty sizeable internet presence," he was reported as saying. "My heart's beating very strongly on whether we make any money out of it. I haven't got any choice. I've got to cannibalise our stores."
But online retailing is old hat to most of Harvey Norman's rivals. The Good Guys has been online in Australia since last year, and JB Hi-Fi and Noel Leeming even longer than that. However all are expected to ramp up their sites in the near future, particularly with rivals such as Amazon gaining in popularity due to the weak US dollar.
One Australian analyst recently picked JB Hi-Fi as the best placed of all the Australian retailers to benefit from online sales.
However others believe it is still far from clear who will emerge as the dominant players in categories such as videostreaming and music downloads, which are rapidly replacing hard-copy sales. Meanwhile, speculation continues to surround the Noel Leeming Group which has more than 80 stores throughout New Zealand, including around 30 stores branded as Bond & Bond.
The latter chain can trace its roots back to a general store founded in Silverdale in 1875, but these days the entire group is owned by Australian private equity firm Gresham. Local private equity firm Direct Capital also appears to have a small stake.
Gresham bought the company from Eric Watson for $138 million in 2004. In 2007 it was rumoured that Harvey Norman was poised to buy the group - a possibility that had JB Hi-Fi muttering about market dominance issues, given that between them, Harvey Norman and Noel Leeming would have more than 40 per cent of the market.
Nothing eventuated, but it is widely assumed that Gresham is still keen to quit the investment.
Harvey Norman, the Warehouse, Briscoes and JB Hi-Fi are all believed to have cast their eyes over the business in recent times.
Back in 2007, one investment bank predicted Harvey Norman might be interested in buying just Bond & Bond. One rumour currently doing the rounds is that Gresham is considering ditching the Bond & Bond brand altogether, but Noel Leeming's current chief executive, former Warehouse executive John Journee, is quick to dismiss that suggestion.
According to insiders, many of the group's big stores are doing fine, but there are a plethora of smaller stores that are believed to have high rentals and ugly balance sheets.
Journee acknowledges there has been some rejigging of stores in smaller centres, where existing Bond & Bond stores have been rebranded to Noel Leeming. But in actual fact, the Bond & Bond brand has been outperforming Noel Leeming of late, he says.
It is well known that in 2009 Gresham injected $15 million into the group after it breached its banking covenants. Its latest accounts, to June last year, show that although its revenue increased by nearly 6 per cent to $516 million in 2010, it still made a pre-tax loss for the year of $5.1 million.
According to Journee, the business has since been turned around. Its earnings before finance costs have increased by double digits two years in a row, he says, and it has increased its market share from just under 20 per cent to just under 30 per cent.
Journee believes it is mostly taking business from the independents, but he also notes that Harvey Norman has experienced a drop in sales for the first time.
Two new stores were opened before Christmas and another two will open next month, he says. They are the first new stores for about two years.
"To be fair we had some work to do on the company to get it match fit. But in the last 18 months I've been very, very pleased with the turnaround of the business and the performance. We've now got the confidence to get back on the front foot again, so hence the new stores rolling out."
He is also confident the group will have no problems refinancing its loans with its bankers, BOS International, at the end of June.
"It's a tough market but we just put our head down two years ago and got on with it. Like everyone else, we've actually got growth predominantly through market share in the last year. But we finished December with high single digit year-on-year growth and with profit growth to match ... so that's helping us to deal with a flat to negative market."
JB Hi-Fi has also yet to turn a profit in New Zealand, although it almost got there last year, clocking up a pre-tax loss of just $250,000, compared to the previous year's $5 million loss. While revenue from its 13 stores improved to $167 million, its gross margins fell.
The chain prides itself on being a low-cost operator - a stance that has not always gone down well with staff. Last year the Unite Union helped organise protests among its New Zealand employees over their hourly pay rates, which are just above the minimum wage.
The chain was founded in 1974 and has become a sharemarket darling in Australia due to its phenomenal growth. But some analysts now believe the company has matured, and note that its two recent acquisitions - Hill & Stewart in New Zealand and Clive Anthony's in Australia - have both been disasters.
Mark Wade, from Linwar Securities, is one of those who believes some of its gloss has worn off. Its recent announcement of a buyback of up to 10 per cent of its shares is probably a signal that further acquisitions are not on the immediate agenda, he believes.
JB Hi-Fi no longer reveals its sales product mix, but in 2007 exactly one-third of its sales were in music, movies and games, Wade notes. That category is widely believed to be haemorrhaging onto the net, which must be a concern, he says.
"In today's dollars that would represent about A$1 billion in sales that have been eroded as they have moved online, so they are vulnerable. It's not just sales but it's also margins. CDs and movies have very high margins, so to replace them with something like iPhones, you're going to have to have disproportionately larger amounts."
Wade notes that Harvey Norman is also recovering from its disastrous acquisition of the Clive Peeters chain in Australia, and is not likely to be keen to buy any more stores in the immediate future.
"If they were going to strike it would be once they'd sorted out Clive Peeters a bit more and if they did want to buy, it would be preferably from administrators, where they'd get it a lot cheaper - unless the private equity guys were willing to take a big haircut."
RBS analyst Daniel Broeren says no electronics retailers he has spoken to are optimistic about their results this year.
"The one thing I would say about Noels is they do still command a pretty strong position in New Zealand, but with Fisher & Paykel going across to Harveys now I guess that will be gradually eaten away because that was really the cornerstone of the business - the exclusive relationship with F&P."
Despite its improvement, Broeren believes Noel Leeming is likely to find it tough to find a new owner.
"Noel Leeming has been struggling for a long time and the store formats don't really fit what JB sees as successful format," he says. "The Bond & Bond stores are very small, and the Noel Leeming offer is getting a little bit tired. Unless JB picked it up for an absolute bargain I don't think they would bother."
Interestingly, The Good Guys also appears to be on the market. According to recent reports, American private equity firm Blackstone has been looking at the group, which is currently owned by Australia's Muir family and its store managers.
The Muirs are believed to want around A$1 billion for its 100 or so stores, although analysts have suggested around half that is more likely. Whoever else is sniffing around the group is probably also having Noel Leeming waved under their nose.
Like most of its rivals, Dick Smith's also appears to be struggling. Its accounts show its revenue fell by nearly 6 per cent in New Zealand to $340 million in the year to last June. While it still managed to make a pre-tax profit of $10.3 million, that was half its previous year's profit of $19.7 million.
The chain is owned by Australian retail giant Woolworths, which also owns the Countdown, Foodtown and Woolworths supermarkets in New Zealand. Just as it has revamped its supermarkets here, Woolworths is also revamping its Dick Smith's stores, converting them to its new Techxperts format.
Some analysts remain unenthusiastic about the new look, believing Dick Smith's has much in common with the unfashionable Radio Shack chain in the United States. Woolworths also appears somewhat gloomy about the New Zealand economy, noting in its latest results that consumer electronics continues to face "a challenging macroeconomic environment" here. It also notes "significant price deflation in key categories and intense competition".
Says Broeren: "Dick Smith's, from a profitability perspective, is not going too well. My view is their offer is substandard, and even the refurbished stores are not a compelling offer. But they're backed by a big parent with strong cashflow and deep pockets and they'll be keen to make that work. They're investing more heavily online than a lot of their peers are and they may take the ascendancy there. It's an opportunity the others don't seem to be too willing to take at the moment."
As well as Farmers and Betta Electrical, the other major player here is Appliance Connexion, a co-operative formed in 1998. As a result of its merger with Retravision in 2009, the group now includes more than 120 stores, most of which operate under the 100 per cent brand. It is also a member of Narta New Zealand, a huge buying group which includes other chains such as JB Hi-Fi and The Appliance Shed.
Appliance Connexion chairman Peter Drummond admits his members are finding it particularly tough competing against the big Aussie corporates in such a depressed market.
"The last two-and-a-half years have been extremely competitive," he agrees. "No retailers will be making anything like a full margin. But we're still profitable."
Drummond notes that unlike the corporate players, his members lack the ability to create new shares, or ask their investors to stump up more money. But by the same token, they don't have boards who may be getting cold feet, and they are determined to stick it out in regions many of the larger players have ignored, he says.
He also notes that the Aussies are getting a taste of their own medicine at home, with American players such as Lowe's and CostCo now operating in Australia.
"In Australia you've got Lowe's coupling with Woolies to create a huge retail opportunity. I've seen Lowe's many times in the US and they're just outstanding. And CostCo is now in Melbourne, but it hasn't really affected the retail trade as I understand it."
Drummond insists after-sales service is still a crucial part of the business for many independent stores. And he refuses to be pessimistic about the current economic environment.
While 3D may not yet have captured the public's imagination, it will soon become a viable alternative for many consumers, he believes.
"Not everyone wishes to have 3D or watch 3D and there is not a lot of live content available to people yet, but that will gather speed as 3D becomes more popular."
People are also replacing and updating their electronic toys far more frequently than in the past, he notes.
"3D is going to be one of the exciting areas for people, as well as telephones, and smart TVs with internet connections in the lounge. It will take people out of an office or a cubbyhole in the bedroom into the family area, and they'll be able to talk on Skype to friends or family and have an easy connection."
In other words, the much-hyped trend of convergence, which was talked about so optimistically in the 90s, is finally starting to happen.
"It's such an exciting product area to be involved with, and there's not many other industries where the technology is gaining ground so quickly and so meaningfully," he enthuses. "When you talk about mobile phones or areas that weren't available to everyone in years gone by, well now they are. It's a very exciting industry."
John Journee agrees, and notes that consumers are still buying more new toys, even though they are spending less. That bodes well for the future, once the economy improves, he believes.
"To be honest, the technology that is delivered up in TVs is stunning for the value, and computing is not far behind it. And mobile phones and cameras is another area where what you get as a consumer for what is relatively small amount of money in historical terms is pretty spectacular. With the currency dipping, we've probably got about as cheap as it's going to get."
