Financial Management In The Australian Retail Industry: JB Hi-Fi And Myer Companies

Global and Australian Economic Performance and its Impact on the JB Hi-Fi and Myer Companies

Over the past two decades, the Australian retail industry has posted positive performance. The growth in household income and low-interest rate in the market have encouraged consumers to spend more on grocery and non-grocery products. The industry has over 250 stores with both local and international origin. Wesfarmers is considered the most extensive retail shop in Australia based on firm performance and market share. The emergence of online retailing has increased the growth of the industry as many consumers prefer price competitiveness and convenience offered via internet shopping (Schulz, 2008, p. 34).

Amid the success of the industry, it faces competition from other global players. The three critical rivals of the Australian retail industry are Amazon, Lidl, and the Chinese retailers. The growing. Australian tourism sector, the spending habit by the Australian population, and growing population are key factors that encourage entrant of international competitors into the local industry.

JB Hi-Fi is an ASX listed Company operating in the Australian retail industry. The Company was established by John Barbuto (JB) in 1974 as a single store known as East Keilor in Victoria. From a single store, JB Hi-Fi has grown to become a significant competitor in the Australian retail industry. The Company sells a variety of products such as electronic products, kitchen equipment, car sound systems, games, and movies. JB Hi-Fi has several subsidiaries both in Australia and New Zealand with at least 250 stores across the two countries. The Company recorded an impressive financial performance in 2017. Its Australian sales rose by 11% to $4.2 billion in 2017 contributing to an increase in its operating cost by 19% to $262 million (Plunkett, 2005, p. 171).

Myer is an ASX listed company that operates in the Australian retail industry. The Company was established in 1899 in Melbourne by a Russian Sidney Myer. Myer grew into a significant competitor in the retail store through the development of new stores and the acquisition of the existing ones. For instance, Myer acquired Western Store, Gosford, Grace Brothers, and Boans in 1961, 1968, 1983 and 1984 respectively.

Myer sells a variety of products such as women’s and men’s clothing, children’s and babies’ clothing, accessories and footwear, computers, electrical, furniture, homeware, bedding, video games, toys, and foodstuff among others. In 2017, the company registered a disappointing financial performance. Myer recorded a profit of $11.9 million profit which was an 80% reduction compared to the profit posted in 2016. Likewise, sales dropped by 1.4% to $3.2 billion in 2017. The decreased in profit was attributed to increased operating cost and expenses like impairment charges (Productivity Commission, 2011, p. 213).

Countermeasures Implemented by JB Hi-Fi and Myer Companies

The top-down analysis focuses on the bigger picture before narrowing down to smaller details. This section addresses the global economic performance before narrowing down to the Australian and industrial economic performance respectively and how they impact the economic position of JB Hi-Fi and Myer Companies.

According to the World Bank Group is expected to grow at a slow rate before slowing in the next three years. The slow growth will be caused by decelerating growth of developed economies and employee layoffs in developing and emerging economies. However, the growth would not support the millions of people living below the poverty level. Therefore, many people will remain either no incomers or low incomers which reducing their purchasing power (Bailey, 2005, p. 67).

Social and economic factors drive the Australian retail industry. The key drivers in the growth of the industry are increasing purchasing power, growing population, and positive economic growth. The compound annual growth rate (CAGR) of the Australian retail industry was projected to grow at 2-3% between 2013 and 2018. However, the industry had the second lowest growth rate in the Asia Pacific (Clain & Coffee, 2004, p. 78).

Australia has a flexible market where the rise and fall in the retail industry are familiar. The Australian retail had a size of $140 billion in 2017. The economy has been characterised by a low-interest rate which improves the consumers’ purchasing power. Moreover, the industry-driven increasing confidence, increasing net worth and rising disposable income (Couto, 2017, p. 57).

Five factors have shaped the economic performance of the Australian retail industry;

1. Population growth and employment: The Australian labour market has remained steady in the last five years. However, the unemployment rate has inclined over the same period. Therefore, consumers have fewer dollars to spend. In additional to the decreasing savings trend, consumers are left with fewer funds to spend on retail products (Chenery, 2014, p. 90).
2. Government Policies: The government has introduced policies that restrict excessive borrowing from banks. On the other hand, the Australian government is involved in the Trans-Pacific Partnership which is an opportunity of creating trade opportunities for its retail industry in the foreign economies (Petermans, 2016, p. 71).
3. Housing and Inflation rates: The interest and inflation rates have remained low in the Australian industry. Household ability to create wealth has also risen. Such trends support investment which boosts consumption rates by households (Robbins, 2014, p. 181).
4. Exchange rate: The Australian dollar has depreciated. Depreciation has increased the import cost leading to a reduction of the profit margin. On the other hand, the depreciating exchange rate of the Australian dollar has boosted the online segment of the retail industry because the international retail products have become relatively unaffordable. The dollar has stabilised over the past five months, and the trend is expected to continue in the coming years (Armstrong, 2014, p. 143).
5. Business cycle: The Australian retail industry is at its maturity stage of the business cycle. The industry’s growth rate has slowed down, and the trend is expected to continue in the foreseeable future. The industry is facing stiff competition from other global industries such as China, the UK, and the US.

The performance of the JB Hi-Fi and Myer Companies is directly affected by the Australian economy. The Australian economy is facing a sustained recession. Studies have shown that the real unemployment rate in Australia rose to 1.422 million people in 2017 representing an 11% increase. Compared to 2016, the number of unemployed people increased with at least 60,000 in 2017. Likewise, the number of underemployed people increased by 7.8% to 1.011 million in 2017. Conversely, over 2.6 million Australians are looking for extra work as a way to sustain their household expenses (Hubbard, 2014, p. 319).

Increased unemployment rate and prolonging economic recession have an adverse effect on the Australian retail industry. The consumers buying behaviour is likely to change; the ability of consumers to spend on retail products have reduced. With the increasing number of unemployed and low income population, the number of consumers expected to make retail purchases will reduce. Consumers have become price sensitive and are more likely to buy low priced products compared to high priced products. Therefore retailers such as JB Hi-Fi and Myer should take notice of the changing buying behaviour by consumers and implement favourable countermeasures that would ensure sustainable operation (Ikeda, 2015, p. 213).

Financial Ratio Analysis for JB Hi-Fi and Myer Companies

JB Hi-Fi has put in place several countermeasures to maintain its market share and competitive advantage in the industry. The Company offers its products at a lower price compared to its competitors. Using cost-effectiveness as a competitive strategy, JB has managed to maintain and strengthen its position in the market (Goodland, 2001, p. 115). The price advantage strategy is a countermeasure to the economic recession and the decreasing number of consumers with high buying power. However, the company has done less on its marketing strategy. JB Hi-Fi should provide quality products just like its competitors at a lower price. The strategy would improve the company’s sale volume and hence its profitability.

The growth and expansion of Myer Company depend on the stability of the Australian economy. The prolonged recession of the Australian economy is evident in the 2017 annual report of Myer retail store.  In 2017, the company registered a disappointing financial performance. Myer recorded a profit of $11.9 million profit which was an 80% reduction compared to the profit posted in 2016. Likewise, sales dropped by 1.4% to $3.2 billion in 2017. This shows that the weak economic growth directly impacted the performance of Myer. The company is expected to experience reduced its sales if the economic recession is not sustained (Gillespie, 2014, p. 78).

The bottom-up analysis focuses on the performance of an individual Company rather than the entire industry where the business operates. The analysis focuses on aspects such as financial performance, products and services and quality management of an organisation. Bottom-Up analysis can also be used to compare the financial performance of two or more companies operating in the same industry. This section compares the financial performance (ratios) of the JB Hi-Fi and Myer retail store companies operating in Australia. The ratio will also be compared with the respective industrial ratios (Brigham & Ehrhardt, 2014, p. 89).

Ratio analysis is used to examine and the company’s financial performance in the market. The information used in ratio analysis is obtained from the historical and current financial statements as well as the industrial information. Ratio analysis is used to test financial performance in term of liquidity, efficiency, solvency, profitability, Market Prospect, and coverage ratios.

1. Liquidity ratio evaluates a company’s ability to its short-term financial obligations. The common liquidity ratios include the current ratio and quick ratio.
2. Solvency/ Leverage ratio evaluates the level of a company’s debt with its equity, assets, and earnings. Example of solvency ratios is a debt to assets, debt-equity, and interest coverage (Maynard, 2017, p. 46).
3. Profitability ratios evaluate how profitable a business is from its operation. Example of profitability ratios include a profit margin, return on equity, return on assets, and return on capital.
4. Efficiency ratios examine how a company uses its assets to create sales and profit. Example of efficiency ratio includes asset turnover and inventory ratios.
5. Coverage ratio to evaluate the ability of the company to pay interest arising from their operations (English, 2011, p. 69).
6. Market Prospect ratios evaluate the earnings from investment projects. Example of market prospect ratios includes P/E, dividend payout and earnings per share.

The financial ratio analysis for the two companies as well as that of the Australian retail industry have been summarised as shown below;

Ratio Explanation (Based on the ratios)

• Current Ratio

Current ratio indicates the ability of a company to meet its short-term financial obligations. Current assets calculate the ratio by current ratios.

JB Hi-Fi has the highest current ratio compared to Myer Company. JB Hi-Fi can meet its short-term obligations while Myer cannot.

• Quick Ratio

The quick ratio indicates the ability of a company to meet its short-term obligations using its most liquid current assets. The ratio is calculated by current assets (fewer inventories) by current liabilities (English, 2011, p. 70).

The two companies cannot meet their short-term financial obligations based on the quick ratio. The ratio is less than one.

• Total Asset Turnover

The ratio measures the ability of a company using its total assets. Total asset turnover is calculated by dividing total sales by average net fixed assets (Kapil, 2013, p. 165).

JB Hi-Fi has the highest asset turnover ratio (2.77) while Myer has the lowest (1.54). However, the two ratios were lower than the industry ratio (3.3.1).

• Receivables Turnover

The ratio measures the ability of a company using its receivables. Receivables turnover is calculated by dividing total sales by total receivables.

Myer has the highest receivable turnover ratio (169.81) while JB Hi-Fi has the lowest (125.77). However, the two ratios were higher than the industry ratio (87.04).

• P/E Ratio

The valuation ratio is used to examine market share price based on earnings. P/E ratio is calculated by dividing the Market price of a share by earnings per share.

Myer has the highest P/E ratio (12.37) while JB Hi-Fi has the lowest (-0.93). However, the two ratios were lower than the industry ratio (15.95).

• Gross Margin

The ratio shows the percentage of a company’s gross profit that was realised from the total sales. The ratio is calculated by dividing gross profit margin by the total sales and expressing it as a percentage.

 JB Hi-Fi has the lower gross margin ratio (21.72%) compared to Myer’s 44.56% has the higher ratio (-0.93). The ratio of the industry stood at 28.14%.

• Net Profit Margin

The ratio is used to examine a percentage of total sales which contributed to net profit margin. The ratio is calculated by dividing net profit margin by the total sales and expressing it as a percentage.

JB Hi-Fi has a higher net margin ratio (3.4%) compared to Myer’s -19.01 %. The ratio of the industry stood at 4.21%.

• Return on Assets (ROA)

The ratio examines earnings from a company’s total assets. The ratio is calculated by dividing net income (plus interest expenses) by average total assets.

JB Hi-Fi has a higher net margin ratio (9.42%) compared to Myer’s -29.22 %. The ratio of the industry stood at 13.59%.

• Return on Equity

The ratio examines earnings from a company’s total equity. The ratio is calculated by dividing net income (plus interest expenses) by average common equity.

JB Hi-Fi has a higher net margin ratio (25.9%) compared to Myer’s -58.67 %. The ratio of the industry stood at 41.11%.

• Debt to Equity

Debt to Equity ratio is used to test a company’s financial leverage. It is calculated by expressing debts as a percentage of total equity.

JB Hi-Fi has a higher net margin ratio (49.54%) compared to Myer’s 25.54%. The ratio of the industry stood at 13.4%.

The study evaluated both the economic and financial performance of the JB Hi-Fi and Myer Companies which are ASX listed companies. The study showed that tourism sector, the spending habit by the Australian population, growing population, and economic performance are key factors that encourage the growth of the Australian retail industry.

Increased unemployment rate and prolonging economic recession have an adverse effect on the Australian retail industry. With the increasing rate of unemployment, the number of consumers expected to make retail purchases will reduce.

Therefore retailers such as JB Hi-Fi and Myer should take notice of the changing buying behaviour by consumers and implement favourable countermeasures that would ensure sustainable operation.

First, the companies should put in place several countermeasures to maintain its market share and competitive advantage in the industry such as offering products at lower prices compared to competitors.

Second, the companies should focus on improving their marketing strategy by providing quality products at lower prices. The strategy will improve the companies’ sale volume and hence their profitability.

References List

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