Profit results show cheap selling strategy far from nasty

Strong results from companies like JB Hi-Fi, The Reject Shop and Domino’s Pizza suggests a strong value-for-money pitch could be the secret to prospering despite the economic slowdown.

Strong results from companies like JB Hi-Fi, The Reject Shop and Domino’s Pizza suggests a strong value-for-money pitch could be the secret to prospering despite the economic slowdown.

Results for retail and hospitality sectors were expected to suffer this year as a consequence of a dip in consumer sentiment caused by high interest rates, fuel prices and food prices.

But two days ago JB Hi-Fi defied the pessimism when it reported a $65.1 million net profit for 2007-08, up 61% on last financial year, and announced plans to open 21 new stores.

The Reject Shop yesterday followed JB Hi-Fi in improving on a profit guidance from earlier in the year, announcing a 35.6% increase in 2007-08 profit to $16.7 million.

And talking after announcing a 29.6% rise in 2007-08 profit to $11.8 million, Domino’s Pizza boss Don Meij said his company’s offering had proved resilient because it is an “affordable treat”.

“It is less likely to be taken away during hard times,” Meij said.

Retail analyst and Orex Recruiters director Rob Lake says many firms that offer “frivolous luxuries” are benefiting in the current environment.

“These low cost offerings can be a bit countercyclical. People drop their guard in terms of spending for these frivolous luxuries; they won’t buy a sofa but instead they’ll buy something like lipstick or confectionary that is cheap and will make them feel good,” Lake says.

But Lake makes the point that a discount or low value strategy on its own is neither necessary nor sufficient to achieve success in slower times.

His argument is backed by the strong result reported by high end retailer David Jones last week and, conversely, yesterday’s announcement by women’s budget clothing retailer Noni B of a big decline in net profit from $8.3 million last year to $2.5 million in 2007-08.

The businesses that succeed are well run; it is as simple as that,” Lake says. “Take The Reject Shop – they have an offer customers love, they’re not afraid to reinvent and adapt, and people like shopping there because there is a bit of mystery; you’re never sure what you’re going to find.”

Not only is a discount strategy no guarantee of success in slower times, it can actually be a harmful marketing strategy for the wrong business, Brandology principal Michel Hogan says.

“Customer loyalty is driven to a large degree by consistency of delivery and promise. So for someone like The Reject Shop, low-cost value is at the heart of what they do and it works. But if discounting is a knee jerk response because sales are down, people are going to see right through that and it can be counter-productive,” Hogan says.

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