Go Harvey Norman, where?

Harvey Norman has a unique retail model but that model does not look right for the next five years.

Unfortunately it will be extremely difficult for the company to change, so the latest slump in profits is much more serious than simply economic conditions.

Indeed, Harvey Norman is in danger of becoming the Fairfax of retailing. Fairfax dominated classified advertising in decades gone by but previous generations of Fairfax managers lost that dominance to others – mainly online classified groups.

Harvey Norman dominated appliance and furniture markets and had a big share of computer sales but the company has lost market share to Ikea and other retailers, while online retailers increasingly poach customers.

No other retailer has a model like Harvey Norman and the model has worked brilliantly in past decades. But Gerry Harvey and his wife Katie Page have not adapted their model for the current environment.

The Harvey Norman model in Australia and New Zealand starts with the public company owning many of the properties. Of the 247 sites where the group operates, 94 are owned by the public company and 153 are leased.

Harvey Norman's total investment in property is $2.1 billion – about equal to shareholders' funds.

Unlike JB Hi-Fi, Gerry Harvey, for the most part, did not go into major shopping centres like Westfield but rather developed his own sites. The success of Harvey Norman superstores attracted other retailers, enhancing the yield on the property investment.

So Harvey Norman not only enjoyed the profits of its retailing but also the stability of good property returns and rising values – a perfect combination.

A large part of the Harvey Norman business is operated by franchisees that hire the staff and own the stock – usually financed by Harvey Norman. This provided wonderful incentives and better staff control and good franchisees did very well.

But enter the new world where conventional retailers must be able to go close to matching online prices and where rivals like Ikea emerge.

In last half-yearly report Harvey Norman boasted that yields from its properties rose from 3.79 to 4.03 per cent, which boosted returns on equity significantly, but returns to franchisees slumped.

Now profits have fallen again, so Harvey Norman will have to look at lifting rewards to franchisees or risk losing the better ones. One way to gain better returns would be to lower rents but that would affect the value of Harvey Norman properties.

Harvey Norman is planning to concentrate on its origins – furniture and appliances – and move away from computers. That may mean it uses less space in its stores and attracts less traffic, thereby making Harvey Norman properties less attractive to other retailers.

A number of the Harvey Norman sites have a Bunnings store nearby in the same development. Fortunately, Bunnings success is continuing to bring people to the area.

A modern retailer must be as active online as it is via the stores. The franchise model makes this very difficult.

Three months ago my colleague Stephen Bartholomeusz was the first to begin a new criteria for evaluating chief executives – do they 'get it', with the ‘it' being the internet. In the classification process he declared that Harvey Norman's Gerry Harvey does NOT 'get it' (Gerry Harvey's missing data link, May 8).

Our readers responded making it clear that they agreed with Bartholomeusz in declaring that Gerry does not get it. One reader offered the classification ‘Harveynormanosaurus'. I looked at other retailers who were struggling to "get it” (Ice Age for online dinosaurs, May 13).

In the light of the latest profit report, I think the matter is more serious. Gerry Harvey and Katie Page are no fools. They might have been slow to grasp the significance of the net but they do now. Their problem is that the model Gerry Harvey created may not be flexible enough to make Harvey Norman a winner in the new environment. A lift in retail sales will help but will not solve the problem.