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COMMENT: Is It Time For Retailers Like Harvey Norman To Join Target & Restructure?

A few weeks ago, we tipped the closure of underperforming Target stores and I am tipping more closure of stores as the impact of COVID-19 kicks in.

Some claim this could also be the time for Harvey Norman to rethink their franchise operation with questionable stores ditched or restructured.

As a retailer Harvey Norman Holdings has a 5-year average operating margin of 17.5% with some of the biggest margins coming from Company operated stores.

They also deliver a high 12.4% ratio of free cash flow to sales which for Harvey Norman Holdings is good.

However, many of their franchisee networks constantly need propping up with cash especially during COVID-19.

What retailers are now doing is reengineering the retail landscape under the auspices of COVVID-19 when in reality their networks were struggling prior to the pandemic outbreak.

Struggling retailer Target has cost Wesfarmers shareholders more than $2.5bn in write-downs and impairments since it was bought in a package deal along with Coles, Kmart, and Officeworks in 2007, and there is no end to the pain in sight.

The latest restructure will be harsher than Target has experienced before with about half of its 284 stores to close or be rebranded as Kmart — its dominant and profitable discount department store stablemate — while the Target Country chain will be closed.

Booking $300m in impairments only two years ago, after being forced to swallow a $680m impairment charge in 2014 to wipe off nearly a third of the retail chain’s goodwill, Target will again blot Wesfarmers’ copy book in the current financial year.

The big question is whether it is time for the likes of Harvey Norman to take a knife to their franchisee network in Australia.

Gerry Harvey has spent years propping up franchisees and the big question now is whether the future is more about Company owned stores that he can better control and above all are going to appeal more to a potential buyer if he ever wanted to sell the big retailer.

Franchisees at Harvey Norman love to flex their muscle and when possible dictate terms.

They did this when Harvey Norman bought in former Sony CEO Carl Rose to try and move home entertainment and TV buying to a central buying and distribution model similar to what JB Hi Fi and The Good Guys operate.
Prior to the ill-fated Rose exercise franchisees dictated stock in stores, and which brands they would range.

The well intent plan to centralise buying failed because of a backlash from franchisees who did not like being told how much stock they would be getting.

Their view is that they are the experts despite many being old fashioned retailers similar to Chairman Gerry Harvey.

Last year the Chairman of the big retail group said “We are actively exploring new sites, and there is an expectation to open up to 18 new Harvey Norman company-operated stores overseas within the next 2 years — which will likely be the beginning of our biggest organic growth spurt in over a decade.”

What is now not known is what impact COVID-19 is going to have on Harvey Norman’s overseas expansion plans.

The overseas business represents 22% of total consolidated profit before tax and the Company was planning major overseas expansions.

What is happening is that instead of a painful slow failure of retailers in Australia COVID-19 has been a cyclone that has immediately resulted in a restructuring of retail in Australia which is going to be good for the industry.

Some like Melbourne based Premier Investments and the Spotlight Group want to gouge as much as they can from the restructure even if it means hurting landlords, distributors, and suppliers.

A strong retail network is critical and what COVID-19 has done is sort out the wheat from the chaff and to a degree stopped retail store owners spreading their cashflow or borrowing to prop up poor performing stores.

At Target, David Jones and Myer, stores are being shut and when this is all over what the industry will be left with is better profitability and retail networks that function better.

Key to the future of Australian retail is the expansion online web sites by the retailers who will be left running a bricks and mortar as well as online operation.

Stores will become display rooms for branded products, while online is where they will source information.

Right now Australia is way behind (some analysts say by up to 5 years) both the UK and the USA, and we need to catch up quickly as COVID-19 has heightened awareness of online with tens of thousands of people who have not shopped online now placing orders.

New deliveries to addresses not delivered to before, have risen by over 18% at Australia Post.

Therefore, a smart functioning web site that also builds the brand reputation of a retailer is critical today as people visit a site to not only buy products but to research products prior to visiting a store.

This is why Australian retailers are turning to the Syndigo content engine to enhance their sites performance while also being able to deliver a new generation of information right inside a retail SKU.

This claims Syndigo a major partner to global retail brands, is content that achieves two objectives, delivers enough information to heighten by up to 30% a trip to the cart, and by reducing returns because consumers have got more information than a few words a price and a picture prior to making their purchase decision.

Syndigo supply information on brands products real time to some of the biggest retail web sites in the world.

They include the likes of Best Buy, Walmart, Lowes.com, Target, Walgreen, Costco and over 1,500 other retailers worldwide.
In Australia both JB Hi Fi and The Good Guys feed Syndigo content for Dell PC’s, Apple’s Beats headphones, as well as content for brands from Nespresso, Denon, Marantz and Philips.

The free retail service will also be rolled out to 10 specialists Hi Fi dealers in Australia as these smaller retailers look to significantly upgrade their sites.

Globally and in Australia retail is set to change forever.

Right round the world big retailers are calling in the administrators Reitmans (Canada) Ltd a 560-store chain this week filed for bankruptcy protection after the pandemic forced it to close all its stores and aggravated the retailer’s already-weakening business.

Some big brand retailers that were already struggling before the coronavirus pandemic started to crumble in January after holiday period sales failed to deliver enough revenue to survive.

US Fashion chain J. Crew Group and luxury department store retailer Neiman Marcus Group filed for Chapter 11 bankruptcy protection in the first week of May as they faced mounting losses with their stores temporarily closed.

J.C. Penney, which was facing declining sales and several years of losses is also filing for bankruptcy and hoping to avoid liquidation.

U.S. retailers have so far announced 2,210 permanent closures this year, most of which were made public before the pandemic began, according to retail analytics firm Coresight Research.

The digital transition’s effect on retail was already painfully evident before the pandemic began.

What is now happening is the beginning of a new retail era, which will see brands selling direct, the introduction of retail showrooms or experience locations and the dramatic expansion of online.

Now is the time to bite the bullet and initiate changes.

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