JB Hi Fi’s purchase of E&S is a clever diversification move

JB Hi Fi’s purchase of E&S will bring one of Australia’s great retail brands in head-to-head combat with bathroom and plumbing giant Reece for the first time.

Terry Smart Group CEO and executive director at JB HI-FI.

JB Hi-Fi’s purchase of bathroom and kitchen specialist retailer E&S is – if relatively marginally – good for JB, very definitely for the selling Sinclair family, and indeed, longer term for the 20m Australians who don’t live in Victoria.

First off, it’s a clever diversification move that offers all upside and zero risk, in a retailing environment that is increasingly tough. Not just for margins, but for the basic sales themselves.

Just look at JB’s own sales: unchanged in the latest year, and up less than 10 per cent over three years. After that initial surge in 2021, for the still largely bricks and mortar retailer, coming out of Covid lockdowns.

But it’s pretty marginal. It will initially add just $230m, or barely 2 per cent, to JB’s group sales of $9.6bn.

Yet, for one of the three great (bricks and mortar) retailing ‘disruptors’ of the last thirty or so years in Australia – the other two are Bunnings and Harvey Norman – E&S offers a very attractive disruptor-growth avenue.

E&S operates only in Victoria, although it has a store opening in the ACT this month.

JB can grow the franchise across Australia, in depth, and rapidly, in a way that was simply impossible for the Sinclair family to even contemplate.

That is, unless they were prepared to take E&S into the public company space like the Wilson family did with Reece in bathrooms and plumbing.

And indeed, given the huge, revolutionary and oh-so rapid, changes in the dynamics of retail – and I’m not just talking Amazon and online – it really would have been almost suicidally risky to try that now.

The Wilson family got their timing exactly right, years ago. And you can see the difference in the raw numbers.

Reece: annual sales of $9bn-plus, gross profit of $1bn-plus, gross profit margin of 11c in the sales dollar.

E&S: annual sales of $230m, gross profit of $7m, gross profit margin of 3c in the sales dollar.

JB is paying the family $64m, or nine times that gross profit; with $48m being paid upfront for a 75 per cent stake.

E&S boss Rob Sinclair gets to keep the other 25 per cent until 2029; and even more crucially JB gets to keep Sinclair as CEO.

This should lead to a very sensible marriage of Sinclair’s skills, so key to the E & S brand, and JB’s broader brand development and growth strategies into the other five states, and especially NSW and Queensland.

It will bring two great retail brands – JB and Reece – into head-to-head combat, pretty much for the first time.

As I say, at a time of great and continuing disruption in retail – the online explosion, population growth versus consumer spending cutbacks; appliance replacement dynamics versus new apartment builds, and so on.

It will be very interesting to see how this plays out: the marriage of the JB steamroller and the cosier E&S branding.

Although the deal is subject to the usual regulatory approvals, it would be absurd for the ACCC to see it as in any way anti-competitive.

Indeed, it is clearly dramatically pro-competitive in the E&S-Reece space.

Originally published as JB Hi Fi’s purchase of E&S is a clever diversification move