Why the Harvey Norman Franchise Operation Is Flawed

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COMMENT: Harvey Norman Electrical boss David Ackery who earlier this month pocketed $1.5 million when he sold shares in the Company, is adamant that the Harvey Norman Franchise model is the best model for growth up against the store owned model used by JB Hi Fi.

Harvey Norman Electrical boss David Ackery who earlier this month pocketed $1.5 million when he sold shares in the Company,  is adamant that the Harvey Norman Franchise model is the best model for growth up against the store owned model used by  JB Hi Fi.

But is it?

He believes that a network of franchised stores run by independent operators is the best model despite the fact that they only delivered growth of 4% Vs 20% for JB Hi Fi owned stores.

 JB Hi Fi chief executive Richard Uechtritz has told ChannelNews on several occasions that the franchise model adopted by Harvey Norman is floored.
To give credit where credit is due Ackery has done an excellent job under extreme conditions with the Harvey Norman consumer electronics and IT divisions however what is not known is the precise breakdown of sales or profits for this division which is a more equitable way of comparing the operations of the two Companies.

I believe that the franchise model moving forward has its challenges as it is restrictive and run more by committee’s made up of store owners, than a single focused business team similar to what JB Hi Fi and Dick Smith or even Officeworks has in place.

The lack of a Harvey Norman web site that delivers consumers the opportunity to buy products online is just one glaring example of where the franchise model fails. Under the current model Harvey Norman has to either take the sale directly in competition with their franchisees or split the sale with the franchisee along with the cost of operation. This is where it gets messy.

Then there is the issue of distribution and computer systems and who pays for them.

Right now Harvey Norman is under pressure, sales and profits are down. At 30 June 2009 profits for the 2008/2009 financial year were $250.42 million (2008: $295.14 million), a decrease of 15.2%, whereas JB Hi Fi profits were up 45% to $94.4 million.

Right now Harvey Norman and their franchise network are under attack from the likes of JB Hi Fi, Dick Smith, The Good Guys, Officeworks and the likes of Kmart and Target who are both moving to expand their consumer electronics offerings.

 Even stores like Myer and David Jones, are expanding their consumer electronics operations to compete head on with Harvey Norman for the simple reason that consumers have changed their buying habits and consumer electronics products are in demand.

Gear like notebooks and netbooks TV’s and PVR’s to iPods and iPhones are seen as personal purchases and have been in big demand during the downturn.
While a consumer is putting off buying a new car, or going out to eat, they are buying personal satisfaction and entertainment gear. 

Recent GFK data revealed that Australia has outperformed the global market for IT and consumer electronics during the past six months with the Australian market growing by 8.2% while the US market declined 3% and Europe 5%.

China and Africa grew 6% while the Japanese market grew 8%.

None franchised retailers like Woolworth’s, who last year were keen to buy JB Hi Fi because they owned the entire business, don’t have to go through franchisee committees to choose which product to buy.

They can dictate marketing consistency which is hard to police in a franchised stores operation. They can also dictate which products are sold in which stores.
Earlier this year Woolworths were rumoured to have taken a look at the potential of buying The Good Guys, but this notion was rejected because of problems associated with a franchised network.

 Harvey Norman Director David Ackery was recently quoted as saying of his franchised system Vs Richard Uechtritz, JB Hi Fi model “It is a unique system, but it’s also the most successful system. Richard’s entitled to his opinion, however misguided that may be,” he said.

But are Uechtritzs comment misguided?

JB Hi Fi management can choose a product, range it, wrap marketing around it and have a consistent marketing approach across all their stores in the time it takes Harvey Norman to call one of their franchisee product committees.

In recent months several vendors have told ChannelNews that they welcome the expansion of Woolworth’s Dick Smith operations and the intense completion that is developing in the Australian consumer electronics and IT market as it levels the playing field and gives them the option of not having to deal with Harvey Norman who are seen as tough partners.

Dealing with the hundreds of Harvey Norman franchisees can be a problem and often a costly exercise for vendors who recently baulked, at being asked to fork out more than $30,000 a vendor to simply attend a Harvey Norman franchisee conference in Sydney. Next year the event will be held in Melbourne.

At the end of the day one only has to look at the growth of stores like Dick Smith or JB Hi Fi to realise that a single management approach has its merits Vs the fragmented franchise of Harvey Norman.

 While the franchise model was good 10 years ago, in a centralised IT world where web sites and IT systems are key the franchised model has its challenges.   

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