Where The OZ Appliance Market Is Going
A detailed analysis of the Australian appliance market by the Citi Equities team claims that the “Appliance tailwind for electronics retailers is fading”.
They claim that while the fundamentals of the appliances category remain sound, competitive and cyclical headwinds are emerging for retailers.
They also claim that Harvey Norman has peaked and that there are risks associated in JB Hi Fi acquiring the Good Guys.
Citi said that after Telco, appliances have underpinned growth for consumer electronics retailers and that appliances have outperformed all major electronics categories with the exception of Telco over the past 18 months.
Citi claim that both small and large appliances are key categories for Harvey Norman, which they estimate accounts for 32% of franchisee sales at the mass retailer.
They claim that Harvey Norman has approximately 29% of the appliance market and that they are the leading retailer in the category. This makes them a target for a combined JB Hi Fi Good Guys assault or by a revitalised The Good Guys under new management who is looking for growth.
While appliances are a small category for JB Hi-Fi currently, around 3% of sales, Citi claim that it is still too early to clearly analyse the impact that the JB Hi Fi HOME Business is having on the market.
They said “We do believe that appliances are expected to contribute materially to growth over the medium term for JB Hi Fi.
Currently JB Hi Fi is planning to double their appliances space by FY20 and that they are currently rapidly expanding its appliances offering, as a result, appliances constitute approximately one third of the sales and earnings growth in the business.
Citi said that they expect JBH to deploy 40,000 sqm of floor space to appliances by FY20, up from 20,000 sqm in FY16 and that they will reach 10% share in small appliances and 3% share in large appliances by FY20.
They said “We do not expect JB Hi-Fi to grow the appliances category materially, so this share is expected to come from incumbents Harvey Norman and The Good Guys”.
Citi said that Harvey Norman is a primary beneficiary of the housing cycle and that appliances have delivered strong performance for the retailer during the past five quarters.
However, Citi, expect comp sales growth in the HN, Australian franchisee business to have peaked in 1H16, with underlying category growth of 3.9% and 2.9% in FY17 and FY18 forecast.
Overall Citi estimate appliance categories have gross margins between 25% – 26%, which is higher than tech and AV categories which are typically between 21% and 22%.
The problem for most retailers selling appliances is that large appliances in particular require greater floor space and higher rents, and have lower stock turns, reducing the operating leverage on in-store labour.
Citi estimate appliances sales productivity to be $8,000/sqm to $12,000/sqm for the industry.
We estimate this is 30-40% lower than AV, tech and telco, and half the level of JB Hi-Fi ($19,000/sqm), which Citi claim has industry leading sales productivity.
We expect good electronics retailers to be able to generate EBIT dollar growth from incremental sales in appliances, due to the complementarity of the categories.
Citi said that Both large and small appliance suppliers have experienced double-digit sales growth over the past five quarters, benefiting from favourable housing and FX and that they consider mid-single digit sales growth to be sustainable due to a lack of deflation.
AV and IT, appliances products do not experience underlying -5% to -10% deflation.
They said that appliances are expected to grow in line with “household formation and population”.