If you missed the announcement on Friday that three subsidiaries of Harvey Norman have been placed into administration, don’t worry – you were supposed to.
The company released the information well after the market had closed and most journalists were enjoying a refreshing beverage at their local pub. In a brief statement, the company said that the three subsidiaries were in the hands of administrator David Levi.
The release of information was pretty poorly handled. When journalists did get onto the story, there was so little detail (and no one to talk to) that many assumed three Harvey Norman stores had collapsed.
Not quite. The two West Australian subsidiaries held stores that Harvey Norman picked up when it acquired the Rick Hart chain last year and have actually been shut for some time.
It’s a similar story with the Bendigo subsidiary that is now in administration – it was formerly a Clive Peeters store and has been shut for a few months. Not that that was much help to the Harvey Norman store in Bendigo that is still trading and got caught up in the story.
It appears the three subsidiaries that have been placed in administration are involved in disputes with the landlords of the three closed stores.
So this seems to be more of a legal dispute than a signal that Harvey Norman is suddenly on shaky ground – although the company itself didn’t do much to make that clear.
What made the announcement particularly worrying was that it came a few days after Harvey Norman told investors profit in the September quarter had fallen by 20%.
The interest rate cut we had last week would have cheered Gerry Harvey up, but it is clear that this is a business that is under some pressure given the current economic climate.
With this in mind, here are five questions that we’re sure would be under discussion at Harvey Norman headquarters:
Given Harvey Norman sells many big-ticket items such as furniture and bedding, customers are reasonably sensitive to interest rate movements, so any rate cut has got to help. But like many retailers, Gerry Harvey will be keen to see if the rate cut is enough to offset consumer caution over the situation in Europe. If confidence doesn’t pick up, Harvey will be looking for another rate cut in December.
Let’s put this Christmas aside and focus on the long-term. Harvey Norman’s offering is as much about financial services as it is about whitegoods and couches – being able to offer customers long interest-free payment terms has traditionally been a key selling point. But in a nation where households are trying to reduce debt, the idea of buying on the never-never and adding to your debt pile no longer excites as it once did, even if cautious households are probably better placed to take advantage of interest-free periods than they were five years ago.
Gerry Harvey said earlier this year that his company now understood the potential of online and was preparing to ramp up its sales in that area. Harvey Norman launched a daily deals site Harvey Norman Big Buys in April, and also promised a full service online store would be up by June or July. But that hasn’t happened. This is probably related to the fact that any store would compete with Harvey Norman’s existing franchisees, who would need to be placated in some way. But as another Christmas approaches without a proper online store, questions about the company’s strategy in this area are reasonable.
Harvey Norman isn’t just an Australian business – it operates in New Zealand, Croatia, Singapore and Slovenia. Most of these overseas stores have performed poorly, particularly Ireland where Harvey has admitted he regrets establishing operations. There are two ways to see these overseas operations. On the glass-half-full view, these stores provide diversification away from what is a saturated Australian market. But on a glass-half-empty view, these operations are a distraction and remain exposed to some ugly global trading conditions, particularly in Europe.
This isn’t just one question, but a series of posers that investors looking at the long-term must be considering.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
