So JB Hi-Fi (JBH) is buying the Good Guys to make itself as big, if not bigger (but not as profitable) as Harvey Norman (HVN). It is the biggest example of consolidation in retailing for years and has already won approval from the ACCC.
JB reckons that by cutting costs and smarter buying it can drive down or control costs, and win sales in the whitegoods sector of retailing which is at present dominated by Harvey Norman and a host of smaller players (such as Bing Lee).
But how will JB Hi-Fi really make profits – or increase profits?
We often wonder how retailers – especially giants like Coles and Woolies, Harvey Norman, JB Hi-Fi, David Jones and Myer – for example – make their profits. The conventional view, is that its from screwing suppliers and customers by driving down purchase prices and selling at higher prices (and shortchanging staff on pay and conditions).
And as a general rule that is right – well sort of – but not as brutally put.
But remember the collapse of Dick Smith? Hundreds of millions of dollars were lost by bankers, creditors and some staff.
Its internal affairs are being probed in the NSW Supreme Court at the moment and late last week we saw a rare draft of sunlight which calls into question how retailers make their profits.
Dick Smith receiver, Ferrier Hodgson alleged earlier this year that from at least July 2014, Dick Smith management undertook a program of “maximising” rebates by suppliers – buying excess stock and booking certain types of rebates as an increase in profits or a reduction in marketing expenses before the stock was sold, in breach of accounting standards.
The question of supplier rebates being used to boost profits popped up earlier this year when it was revealed staff at Target had used this to boost first (December 31) half profit at the Wesfarmers-owned retailer, and then pay for them by giving 31 suppliers price rises in the June half year. Big UK retailer, Tesco got caught using rebates to fiddle its earnings back in 2014.
Bill Wavish is a former Chief Financial Officer and Operations Director for Woolworths, executive chair of Myer and a director of Dick Smith (and in a past life worked for Chase Corporation and Sir Ron Brierley). In other words he knows how retailers work and how they make their profits. Late last week he told the NSW Supreme Court.
"There seems to be a view rebates are bad. Rebates are good. Retailers cannot survive without rebates and for most companies like Dick Smith and (Dick Smith’s one-time owner) Woolworths, rebates exceed profit. You don’t try to avoid maximising rebates…Everybody knew – it was the whole business strategy. The skill is instead of needing to go to banks for these facilities, you go to the suppliers for those facilities and when you go to the suppliers you say, ‘I have a nice big Christmas order and I want a nice credit for this’. And instead of paying at the end of December you are paying in at the end of January or early February, which gives you six weeks’ extra credit," he said. That’s what I taught and that’s what was done."
"There is a whole skill in this area. Whilst you might send the buyer back to get an additional rebate, the more fertile ground is to go to other people with their own budget, for example marketing, supply chain and wage subsidy … and get someone like (Nick) Abboud (the former Dick Smith CEO) to give second to last bites – fly him overseas like Las Vegas and talking to senior managers of Panasonic and getting in early. That was the whole business strategy and it was very successful. The issue is how it is accounted for and whether the auditors were happy with it.”
A rebate paid to a retailer by a supplier is effectively a return of part of the purchase price by the supplier back to the retailer. In effect the supplier is paying Coles, Woolies etc to buy its products and sell them in their outlets. Some times these rebates fit in with payments by suppliers (or demanded by the retailers) for shelf position, advertising support, gondolas or shelves at the end of each aisle (a prime position similar to the middle rows on each shelf).
One retailer who doesn’t need rebates to survive is Apple and its 21 stores in Australia (although it does support resellers such as phone companies and other retailers). But its bricks and mortar sales do not need rebates, nor do the iStore, iTunes, Apple Music etc.
But Wavish’s comments that retailers can’t survive without rebates is interesting – but we can’t test it because looking through the most recent results of some retailers, it is hard to find any evidence they exist? That’s a solid reason for ASIC and other regulators to demand a change in accounting standards right away.
There are changes to accounting rules regarding revenue next year that will apply from 2018. But will they produce a clear explanation in company financial reports and accounts as to where their earnings really come from?
If someone with the accounting and retailing background that Bill Wavish has, reckons retailers can’t “survive without rebates”, shouldn’t that be made clear in both the accounts of the retailers and their suppliers (where they are public)?
