EXCLUSIVE “Horrendous” Harvey Norman Franchisee Contracts Revealed Following ASIC Investigation
New Harvey Norman retail supply contracts issued via a subsidiary, following last years, Australian Securities and Investment Commission investigation into the retailers franchisee operations, have been described as “horrendous” and responsible for pushing up the price of consumer electronics and appliances in Australia according to suppliers who have contacted ChannelNews.
Derni Pty Ltd a Company controlled by Harvey Norman is now dictating terms to suppliers while at the same time distancing Harvey Norman from any liabilities.
Harvey Norman stores are already recognised as being one of the most expensive retailer to shop, for the purchase of consumer electronics furniture and appliances.
The supply contracts dated 2017 and 2018, obtained by ChannelNews has some distributors “seething” as they now have to deal with more than 190 separate franchisee stores, following last year’s investigation by the Australian Securities and Investment Commission into the failure of Harvey Norman franchisees and the bookkeeping of losses from franchisees who some analysts claim have a failure rate of close to 25%.
Some suppliers who have had demands made on them to hand over hundreds of thousands of dollars to sponsor Harvey Norman events, claim that all of the sponsorship cost is “passed onto consumers” via the price that they end up quoting Harvey Norman and their franchisees.
One supplier who was recently asked to hand over $100,000 dollars for a bronze sponsorship of a Harvey Norman supplier conference said “It’s nothing more than a revenue grab from suppliers. It’s called the Gerry Tax and is part and parcel of doing business with Harvey Norman. The only people paying for this are consumers who shop at Harvey Norman branded stores”.
Distributor who initially have to deal with a Harvey Norman product category steering committee before they can approach individual franchisees, claim that the new franchisee engagement contracts are pushing up trade indemnity “risks” after the Australian Securities and Investment Commission forced Harvey Norman to redefine their relationship with their franchisees.
11 months ago, Harvey Norman who trade with their franchisees via a Company called Derni Pty Ltd was forced to reinstate how many franchisee’s the Company actually has, the number was dropped from 673 in 2016, to 542, across 192 actual stores.
At first Harvey Norman denied that ASIC was running an investigating, now new documents leaked to ChannelNews reveal that substantial changes have taken place in the relationship between Harvey Norman and their franchisees resulting in cost increases for suppliers.
Unlike JB Hi Fi or The Good Guys, where suppliers negotiate with one organisation, suppliers to Harvey Norman branded franchisees, are now being forced to treat each individual franchisee as a separate business a move that increases their “trade indemnity” risks while make the cost of doing business with Harvey Norman more expensive.
Vendors who ChannelNews have spoken to claim that the new contracts which ChannelNews has obtained copies of are “some of the worst” retail trading contracts in Australia.
The contracts clearly state that “Harvey Norman”, “Domayne” or “Joyce Mayne”, and their subsidiaries do not control, or have any ownership interest in, any franchisee a move which ASIC is believed to have demanded of the mass retailer.
Each franchisee is now forced to separately contract with each supplier for the supply of goods and that Harvey Norman is now not responsible for the discharge of any obligations of a franchisee under any contract with a supplier nor do they provide any guarantees to any supplier of goods.
They claim that Derni is not the purchaser of any goods from the Supplier and is not a party to the Standard Trading Terms put into place for other Harvey Norman owned stores.
A supplier may provide credit to a franchisee on terms as agreed between a franchisee and that supplier (Credit). Any Credit is provided to that Franchisee, not to Derni.
Suppliers now have to issue a separate tax invoice for the goods to a franchisee.
A supplier cannot register a Purchase Money Security Interest or any other interest under the PPSA Act over any Product or generally over any asset of the Franchisee.
The supplier is also forced to relinquish any liability with a franchisee.
What Derni do request is a monthly statement of account which is a summary of amounts owing by each relevant Franchisee.
Suppliers also have to take on the liability of all returns.
Last year Harvey Norman auditor Renay Robinson of Ernst & Young flagged changes to the way that Harvey Norman dealt with their franchisees.
In doing so, she explicitly identified (and ultimately determined in the company’s favour) as “key audit matters” both the “recoverability of receivables from franchisees” and the “assessment of control for the purposes of consolidation”, consolidation being an outcome that would reveal the true financial health of Harvey’s empire claim the AFR at the time.
On top of the margin that the steering committee negotiates a supplier has to also agree to pay a brand support contribution to the franchisee, as a result of the purchase of products by the Franchisee, this is said to run into the tens of thousands.
Several suppliers have also told ChannelNews that there has been “A high degree” of staff churning among Harvey Norman steering committee members this year.
“One minute you are dealing with someone only to find that they have quite. Their staff are being hired by the likes of Google and Netgear for their new Arlo operation” they said.
Suppliers to the Harvey Norman stores are also being forced to pay what is described as an “Over and Above” rebate to Franchisee.
“If you choose not to pay these additional payments on top of the margin you are giving to Harvey Norman and the Franchisees you suddenly find yourself on the outer” said one International major supplier.
“Harvey Norman has some of the most demanding terms. We deal with retailers all over the world from Best Buy in the US to Dixon’s in the UK and what this retailer demands and gets away with is appalling when compared to the trading conditions and the margins we pay other retailers overseas”.
“It will be interesting to see how they go up against Amazon as they crank up their operation in Australia” the supplier said.
They added that during the past 12 months they “have significantly expanded their “direct sell” operation in Australia and that they were now working with Amazon to further grow sales in Australia.
“With Amazon we pay around a 15-20% margin and some SKU marketing dollars and that is it. There are no complicated contracts, no instore merchandising and no Gerry Tax or outrageous demands to sponsor a conference that is netting them tens of thousands in profits”.
“Harvey Norman is one big boys club and consumers who shop there are paying some of the highest prices in the world for consumer electronics” they added.
“If I was a shareholder I would be worried because suppliers now have alternatives with Amazon and via direct sell operations. Overseas management will soon start saying no to Harvey Norman terms” they said.