JB Hi-Fi chief Terry Smart tips strong Christmas sales but says discounting still aggressive

Major retailers are still expecting solid Christmas turnover despite continuing to discount their products, with David Jones and Myer both confirming profit expectations for the current financial year.

However, JB Hi-Fi chief executive Terry Smart says he’s keeping a close eye on the level of aggressive discounting in his market segment.

“People do need to understand that it’s aggressive out there. There is a softer consumer, and we know that many retailers at this moment are doing whatever it takes. And obviously one of those things is discounting. We don’t see that letting up.”

“I wouldn’t say that I’m concerned about it, but we do need to recognise that the market is very aggressive. We’ve always been a discount retailer, so it’s an environment we’re comfortable operating in, especially coming up to Christmas.”

But one retail expert says while it is possible to record some good sales in the upcoming Christmas period, discounts need to be navigated with skill.

“I do believe that discounting has become a little bit entrenched in the way we retail, but having been said, these cycles can be changed. We are seeing the department stores become very brand dominant, a house of brands in a way. That could change things,” says Brian Walker, chief executive of The Retail Doctor.

Both David Jones and Myer said at the Citi conference yesterday that the Christmas period would deliver solid returns. David Jones chief executive Paul Zahra said the company is set to deliver between five and 10% profit growth in the 2011 and 2012 financial years.

Myer chief financial officer Mark Ashby also said the company is set to record 5-10% profit growth during 2011, and said that “we are certainly factoring in a good Christmas”.

Zahra also said that he was pleased to hear Myer will be reducing its discounting over the next few months, and noted that David Jones has not introduced any new discounts.

However, while both companies have previously said they will stop discounting and constant sales, both department stores are still offering products for discounted prices. With the flow-through effect to rivals and smaller retailers sill having an impact on the market, discounting is still as rampant as it was earlier this year and shoppers remain just as frugal.

The question is just how much discounting will affect Christmas profits. But Walker says despite the constant sales, good returns are achievable if all retailers, large and small, start structuring their businesses properly.

“Not all the pain of a discount is worn by the retailer. A lot of it goes through to the supplier. Good retailers focus on their planning, so they will be selective in what they discount. I also think we’re going to have a late Christmas, in that there will be more of a discerning customer.”

“There will be different strategies employed. When we see interest rates move that will be a very large factor as well. But David Jones and Myer are still going to be very strategic in what they discount and how they do it.”

However, Walker also says there is a possibility this Christmas season could see shoppers move away from discounts – if retailers start emphasising the value of their brands rather than the benefits of lower prices.

“What’s happening is that these cycles can be changed and broken over time. So increasingly it’s becoming a slightly different offering. Department stores are becoming more brand dominant, and Target is doing this as well. So I think brand and proposition is the key to changing the cycle.”

Zahra pointed this out yesterday, saying that David Jones has focused on a “core competency in a house of brand strategy”.

“We have those relationships locked in and that has been our success. Myer has gone down a path of Myer brands with private labels. There is an opportunity for us to both exist and do well,” he told the Australian Financial Review.

Walker says that if the two companies are going to make good returns and move away from discounting, they need to start focusing on their supplier strategy and their brand offering.

“Both companies can do well if they work hard with their suppliers and focus on that brand strategy. For all retailers, the effect of discounting will be obvious, but the margins can still be strong if you work with your suppliers and organise things correctly. They need to focus on their brand”