JB Hi-Fi’s low-fi branding helps it post bumper profit

Strong growth in its games and computer business and a tight rein on costs has helped JB Hi-Fi to record a bumper $65.1 million net profit in 2007-08, up 61% on last financial year.

Strong growth in its games and computer business and a tight rein on costs has helped JB Hi-Fi to record a bumper $65.1 million net profit in 2007-08, up 61% on last financial year.

The result exceeded the company’s $64 million profit guidance from earlier this year. Sales came in at $1.829 billion for 2007-08, up from $1.282 billion the preceding year, while gross margin was down slightly at 21.9%.

Chief executive Richard Uechtritz says he is particularly happy with the result given that the company’s strongest growing product lines were in lower margin segments like games and computers.

“We continue to grow our market share as recently opened stores mature, we open new stores, expand our offering and reduce our prices on the back of increased economies of scale and a continued focus on costs,” Uechtritz says.

Cost cutting has remained a key ingredient in JB Hi-Fi’s success, with its business costs down from 16% last year to 15.3% in 2007-08, contributing to an increase in EBIT margin to 5.6%.

And the company’s low cost push doesn’t just contribute to the bottom line. Rob Lake, retail analyst and director with Orex Recruiters, says it also helps drive a successful marketing and branding strategy based around building a customer perception of value for money.

“They have convinced the market they are a very cheap offer across the entire range, especially at the bottom end, and are one of the few retailers of music hardware that is still booming – you could fire a cannon through Sanity shops and not hit anyone at the moment, but JB Hi-Fi is doing well,” Lake says.

The low-cost look may have started out as a by-product of the company’s low-cost strategy, but it is now a very deliberate marketing focus.

“In the last year or so they opened a new tidy store and it didn’t work, so they went back to hand written tickets and basic look associated with their stores. The grunginess is quite studied but very successful, and the market is convinced JB is the place to go for a bargain,” Lake says.

A healthy culture that seeks out and embraces improvement and change has also helped fireproof JB Hi-Fi from the tough conditions, Lake says.

“They have kept their model up-to-date, entering new sectors like computers and games, and the culture there is one of constant reinvention and challenging what they do,” he says.

But a big future question for the company is whether it will be able to maintain that culture if rumours of an planned acquisition of the company by retail monolith Woolworths come to fruition.

“If that happens it will be very interesting – Woolworths is a highly controlled organisation, managers are told exactly what to do and JBs is not like that at all, so it would be very difficult,” Lake says.

In the meantime, the company is not letting what Uechtritz calls the “weakest retail climate in years” stall its ongoing program of rapid expansion, with 21 new stores to open next year. Eight new stores will be opened in Perth, the most of any state, with four each planned for Queensland and New South Wales and one each for Victoria and the ACT.

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