This week Gerry Harvey predicted that the Harvey Norman chain would be the ‘last man standing‘ as other retailers fall by the wayside. The following day, Harvey Norman’s most formidable competitor, JB Hi-Fi, announced it was moving into whitegoods, one of Harvey Norman’s bastions. Game on…
‘Call it optimism or desperation, the decision by JB to enter whitegoods is an interesting one. It may be a sign of a struggling retailer desperately trying to find a way to stave off declining sales, or a robust business finding more efficient ways of using its floor space.’
– So said business journalist Scott Phillips in the SMH this week, commenting on JB HiFi’s announcement that is was getting into the whitegoods business.
In the article he also noted that ‘the news won’t exactly make Gerry Harvey happy, after he suggested on Tuesday that his company would be “last man standing” as retail conditions continued to be tough.
‘I’m sure he didn’t count on a new competitor in whitegoods – especially one with a formidable store footprint, category experience and a solid online strategy,’ wrote Mr Phillips.
– But I’m sure that when he made that provocative, ‘crazy brave’ prediction (or was it a desperate threat?) Gerry Harvey did know that JB was going to make his life profoundly more difficult by getting into his bread and butter of toasters and fridges. He knew what was coming at him. And besides, when it comes to last men standing, who do you think might be the contenders?
‘You’ve seen more retailers go out of business in the last two years than you have seen in the history of Australia and there are more retailers currently under pressure,’ he told reporters after the company’s AGM in Sydney earlier this week.
Mr Harvey said that even though the Harvey Norman share price was in the doldrums and profits were down, shareholders should stay with the company as it would pick up market share as other retailers closed.
‘We’re in a very difficult environment and we’re playing “last man standing”,’ he said.
‘We’re doing all things possible to be there when another 20 percent of the stores close in the area that we’re in, then we’re going to get the advantage of those stores going out of business.
‘It is going to happen. I can guarantee you. It’s only getting worse.’ (Geez, Gerry, cheer up!)
– This is a kind of High Noon moment in Australian retailing, with JBs and Harveys at 10 paces. The JB strategy is neither optimism nor desperation but something more clinically ruthless, in that every fridge, or washing machine, or espresso maker that JB sells is one less available for Harveys to sell.
The double-whammy of expanding into a new retailing category in which your already wounded main competitor in a major player must have been a tantalising prospect for the JB management team.
JB Hi-Fi chief executive Terry Smart said the company was attracted to whitegoods partly because of the number of whitegoods retailers which had closed their doors recently – the same market opportunity Gerry Harvey is banking on to save Harvey’s bacon.
He also had what looks as much like a swipe at Harvey Norman as a duck looks like a duck: JB’s would move into whitegoods, ‘as companies with less efficient and higher cost bases struggle to remain relevant and competitive’’.
He said JB’s low-cost business model meant it is ‘well-positioned to take advantage of this opportunity’.
JB’s ‘Home’ concept stores will initially be located at JB Hi-Fi’s larger homemaker sites leading off with some (formerly Clive Anthony) outlets in Queensland.
If the trial is successful and more space in run-of-the-mill JB stores is required for fridges and stoves some time next year, there will be pressure for space and low-margin categories may go.
– But there was another interesting piece of news this week which shows the JB move into whitegoods could be more forward-looking than CEO Terry Smart and his board have been given credit for by a largely critical business media:
‘Music downloads are set to overtake CD, vinyl and music DVD sales by value for the first time in Australia, making recorded music the first traditional media sector to reach a historic digital inflection point. ‘
– AFR, Nov 29
– So it may not be long before some of those dozens of square metres allocated to CDs and DVD bins in JB stores are surplus to requirements.
Last man standing
But Gerry Harvey’s optimism regarding Harvey Norman’s fortunes can’t be based on its 2011/12 financial results, which saw Australia’s largest electronics and furniture retailer announce a 32 per cent slump in annual profit to $172.4 million,
Overall sales fell 7 per cent to $5.74 billion and like-for-like sales were down 6.5 per cent. Australian sales fell 8.1 per cent and sales in New Zealand were down 4 per cent.
Nonetheless a profit is way better than a loss, and a closer look at the Harvey Norman annual report shows a company with good cash reserves and – the main cause of Gerry Harvey’s confidence – a massive property portfolio supporting the retail operations.
Mr Harvey told reporters he believed that Harvey Norman would withstand the current conditions because his suppliers had told him he was in better shape than his competitors. (Which is a little like the court minions admiring the naked emperors’ finery.)
He also conceded that Harvey Norman had the assets to bail out franchisees when they were in trouble. It may well need to. Earnings from franchise stores have been halved for the year, which means income for franchisees is also under continuing pressure.
A problem with the elaborate Harvey Norman business structure is that it is so inter-dependent. The property portfolio depends on good returns from successfully tenants, and if the Harvey Norman franchisees paying the rent start encountering difficulties, the value of the property could conceivably head south. Can’t have that. Last year Harvey Norman doubled support to franchisees to over $100 million by cutting rents and subsidising operations. (It would be lovely to have a landlord who helps out with the rent occasionally!)
The big internal challenge for Harvey Norman in 2013 will be holding on to good franchisees with the rewards diminishing. And good staff. One highly experienced Melbourne-based Harvey Norman photo centre manager resigned this year after he was asked one too many times to run a 9-cent print promotion without extra staff support.
The big external challenge is pretty clearly from JBs. Whatever the outcome here, it’s highly likely the shape of Australian consumer electronics retailing will be different by the end of next year. Gerry said.
– Keith Shipton