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Why A JB HI FI,The Good Guys Deal Will Hurt Harvey Norman

By David Richards | Thursday | 19/05/2016

The move by JB Hi Fi to run a ruler over Good Guys makes sense and the timing is right.

JB Hi Fi needs to deliver growth and their move into selling appliance has been frustrated by a combination of stumbling blocks which the acquisition of The Good Guys would fix.

Appliances and white goods is where the profit margins are and the two big players in the Australian market are Harvey Norman and The Good Guys.

Out of these two The Good Guys is the biggest appliance seller of the two.

JB Hi Fi on the other hand has been looking to expand into the appliance market which is worth around $4.6 Billion dollars a year and highly profitable for retailers, but they have two major problems that the acquisition of The Good Guys would fix, store size and relationships with suppliers.
  
Several big brands have only given JB Hi Fi selected appliance products to sell but the price has been higher that what Harvey Norman and The Good Guys are able to buy white goods for, despite this they have they have had a lot of success selling appliances because they have what is acknowledged in the industry as "the best retail management team in the business".

However, JB Hi Fi needs faster acceleration of their appliance strategy which while on track is limited by supply and store sizes.

If a deal did go ahead big appliance brands that have been giving Harvey Norman and the Good Guys better terms than JB Hi Fi face working with a group that will have massive buying power across both consumer electronics and appliances. 

As soon as JB Hi Fi announced a move into appliances, two years ago, Harvey Norman moved to expand their appliance offering by expanding house brand appliances while at the same time cutting better deals with suppliers. 

The JB Hi Fi board, aware of this have now triggered a play that could have a major impact on Harvey Norman.

What they doing is sticking their finger to the wind to litmus test the markets attitude.
 
Last year JB Hi Fi had revenues of $3.3B, Harvey Norman 4.95B. By combing The Good Guys business JB Hi Fi would have revenues of over $5B which makes them a real threat to both Harvey Norman, Winnings, Bing Lee and the buying group NARTA. 

ChannelNews understands that JB Hi Fi has opened the bidding at around $550M while the Muir family who own The Good Guys and a lot of The Good Guys stores are looking for between $850M and $1 Billion, but this is early days and the deal has a lot of potential for both sides. 

Do the Muir family have to sell? No but they should seriously consider a deal with JB Hi Fi, because their options are limited.

The Muir family are currently netting more than $80M a year out of The Good Guys stores that are turning over between $1.8B and $2B.

The stores are also highly profitable and the Muir family own valuable properties that will continue to deliver rent. The stores are also well run by savvy South African management.
 
The big issue is whether the family want to stay in the retail business and whether they will take a price between the JB Hi Fi opening offer and what they believe the business is worth.

The answer could lie in an earn out deal as the market has no appetite for a retail float following the disastrous Dick Smith and Myer floats.

Several venture capital groups, overseas retailers and even JB Hi Fi have ran a ruler over The Good Guys in the past, and all have walked away empty handed, the latest being the South African Company, Steinhoff International Holdings who was looking at an acquisition price of over $800M to buy the group.

A stumbling block was the fact that noone wanted to buy a franchised store group. This resulted in the Muir family forking out up to $200M to buy back the store they did not have 100% control over. 

If the deal goes ahead the appliance market will then consist of two key groups Harvey Norman and JB Hi Fi, this will put pressure on Bing Lee who many expected JB Hi Fi to go after and Winnings who are believed to be struggling to grow sales due to a combination of factors, poor store traffic and white label sales by Aldi and the likes of Masters who will shortly exit the market. 

The deal could also present problems for the NARTA Buying group as JB Hi Fi are their biggest customers, the only saviour will be if JB Hi Fi continue buying via the group a move that will cost them margin. 

JB Hi Fi use NARTA to buy appliances and if they exit NARTA it could cause major problems for the group.

ChannelNews understands the David Jones board recently considered a major move to expand their appliances and consumer electronic goods offering. The move is still being considered. 

The other big appeal for JB Hi Fi is that appliance are primarily purchased from stores and not online while consumer electronics is seeing a migration by consumers to online.

Appliances also have better margins and this combined with JB Hi Fi's operational and management capability makes this the deal to be done. 

 

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