EXCLUSIVE:’Crisis’ Hit Harvey Norman Strips Franchisees Of Responsibilities

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EXCLUSIVE: Harvey Norman, who last month ordered 24 franchisees to take on new store responsibilities in a major management shakeup, has now moved to strip electrical franchisees from selling audio visual products.The shakeup comes as a leading analysts claims that the Company is “In crisis”.

Instead IT franchisee will be responsible for AV while electrical franchisee that previously sold sound and vision gear have been given responsibility for selling white goods and small appliances.

According to leaked emails the moves will start being implemented from April.   

One of the affected franchisees in an email to ChannelNews said “Due to the current conditions that Harvey Norman finds themselves in with regards to profits for their franchisee system, changes to the electrical and IT franchisees are rolling out from April, to be completed over this year and early next”.

Basically the IT franchisee will be absorbing the AV departments from the electrical franchisee which sees a major shift in focus in convergence between the departments, this leaves just the white goods and smalls departments left being managed by the electrical franchisee whilst the IT franchisee will now have majority floor plan across all stores”.


They concluded “it’s caused a major stir within the franchisee network”.

Yesterday Nathan Bell Research Director at Intelligent Investor claimed that the mass retailer was facing a “crisis” he said that their franchising business had “real problems” a sentiment that is coming through in several leaked emails sent to ChannelNews by affected Harvey Norman franchisees.

In an article written for Fairfax Media Bell said that the deterioration in Harvey Norman sales has accelerated. Same-store sales in Australia fell almost 10% in the second quarter, a decline reminiscent of an economic depression despite the fact that the Australian economy isn’t in recession he said.

Bell said that consumer electronics franchisees are suffering at Harvey Norman due to savage price deflation in electronic consumables.

Attracting and retaining good franchisees is crucial for any franchising business, but many must be re-thinking their commitment to the industry.

Commenting on the recent analyst briefing by Harvey Norman Bell claimed that  Managing director Katie Page simply read off the presentation slides and that Harvey Norman management needs to explain itself more fully, he said that management seems to consider its reporting obligations an imposition.

Bell claimed that the whole “Omni channel strategy” referred to in the presentation sounds more like a mission statement than a genuine change in direction.

The company is trying to catch up in the online space but this “strategy” looks like it was cooked up in half a day workshop as a response to analyst concerns.

As if to confirm it, barely three days later, Gerry Harvey announced he was unhappy with sales from the company’s four-month old online site. Surely it’s way too early to pass judgment? The threat from the Internet deserves more attention than this scatological approach Bell said.

 

Several analysts that ChannelNews has spoken to recently said that they are concerned that Harvey Norman has started a discounting war and that he is prepared to lose millions in an effort to hurt his competitors. One analyst said “his strategy is “bad for Harvey Norman, bad for the industry and one which will be hard for Harvey Norman to step back from”.

“Gerry Harvey is a stack them high sell it low retailer, this is what he knows and this is what he is doing in an effort to survive. He will be the victim along with a few other retailers that are being dragged down by his actions.”

Bell said “Harvey Norman will undercut competitors in an attempt to be “the last man standing, as an associate put it. If that’s true, it will be a painful process for all concerned”.

Bell said that the net debt-to-equity ratio at Harvey Norman has risen from 25% to 30% over the past year and the company had to ask its bankers to increase its debt facilities over the past few months. He claims that their debt position will deteriorate further this year.

He claimed that Harvey Norman has a huge property portfolio that will indeed help it become “the last man standing” but even with the property portfolio there are risks.

If retail tenants, including franchisees, start demanding rental reductions, then the company’s property may not be worth the $2.1 billion valuation in the books.


Still, the share price is already factoring in a much worse scenario for profits because excluding property, the implied value for the entire business is a mere $700 million.


Despite the problems, the franchising business still produced a profit before tax of $96 million in the first half and the New Zealand business produced a profit of $21 million in the first half.

Companies in crisis need to do something. Billabong International, for example, ended up selling a half-share in its best brand, Nixon, which saved it from breaching banking covenants.

It’s hard to see exactly what Harvey Norman can do, but do something it must. At the moment, it’s floundering.


 

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