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Harvey Norman $7.8M Bail Out Of Apple Reseller Raises Franchisee Question

When Harvey Norman Chairman Gerry Harvey was spruiking his big new Auburn store earlier this month there was issue that he did not discuss and that was the bail out, to the tune of $7.8m of yet another failed Harvey Norman franchisee, an issue that raises serious questions for ASIC as to whether the big retailers franchisees are actually independent.

A quick flick through Harvey Norman financials reveals a simple entry for “tactical support” in the June quarter to restructure a franchise who has been identified as Apple reseller Mac1.

Gerry’s Company has not only paid debts owed to suppliers and merged Mac1, a former Dick Smith owned operation, he has now merged the franchisee with another franchisee called The School Locker with both Companies set to compete head on with JB Hi Fi’s successful commercial division. The single biggest debt was to Apple.

Dick Smith bought Mac1 in 2014, for a reported price of $1, but struggled to turn it around.

In the first half of 2016, before Dick Smith collapsed, Mac1 lost $163,000 on revenues of $25.4 million after losing $114,000 on sales of $41.8 million in 2015.

The emergence of “tactical support” on Harvey Norman books, follows an investigation by the Australian Securities and Investment Commission.

ASIC started reviewing Harvey Norman’s accounts in 2016 and after concerns were raised by governance group Ownership Matters over the level of disclosure about the group’s relationships with franchisees.

After completing the review of Harvey Norman accounts in November 2017, this resulted in the big retailer having to change the way that they book kept the treatment of loans to franchisees, ASIC did not rule out raising further concerns.

According to the Financial Review it is the first time Harvey Norman who’s share value has crashed 30% this year, has started disclosing the value of ‘tactical support’.

The issue of failed franchisees is a continuing issue for the big retailer, Harvey Norman has paid tactical support for franchisees, which includes loan relief, rent relief, franchise fee relief and marketing support, of $706 million since 2011. Tactical support peaked at $128.5 million in 2013 and rose from $64.5 million in 2016 to $75 million in 2018.

The latest handout accounted for most of the $10.5 million increase in tactical support during the year and contributed to a 7 per cent fall in earnings from Australian franchise operations to $292 million.

Mac1 Corporate has not gone into external administration and there is no evidence of capital raisings or restructuring. Gerry Harvey has repeatedly rejected calls for franchisee earnings to be consolidated.

In this case Harvey Norman chose to quietly pay the debts owed to suppliers. The Mac1 which was scheduled to be part of the new Auburn store was quietly closed days out from the opening.

Apple resellers are facing a tough time as the global technology company opens bricks and mortar stores around Australia and expands its direct-to-customer operations.

New Harvey Norman Auburn store.

What Harvey Norman management want the industry to believe to the point that it is set out in their engagement is that franchisees were responsible for paying suppliers and the company would no longer guarantee their debts.

Harvey Norman changed the way it treated loans to franchisees and as a result receivables from franchisees fell from $943 million in 2017 to $535 million.

Consolidation of franchisees and recoverability of franchisee receivables, which represent 12 per cent of Harvey Norman’s total assets, remain key issues for auditor Renay Robinson from EY.

“[The Mac1 restructure] is a great example of [Harvey Norman] guaranteeing the debts of franchisees,” one critic of the company’s business model, who declined to be named told the AFR.

“It’s a big amount – $7.8 million – forgiven and it is clear that all employees and suppliers have been paid as no external creditors have wound up any of these entities,” he said.

“The Harvey Norman auditor has no idea how many other Mac1s are out there because all the franchisee liabilities are off balance sheet.”

According to Mac1’s website, which is still operating, the business is owned not by Harvey Norman but by Mac1 Corporate Pty Ltd. ASIC records show Mac1 Corporate is owned by two former Harvey Norman executives, Daniel Wilson and Nicholas Ebbeck.

Mr Wilson was Harvey Norman’s franchise director for 10 years until 2013 and describes himself on LinkedIn as the managing director of Mac1 Corporate and managing director of Harvey Norman Business and Education.

The AFR reported that Mr Ebbeck was a director of Harvey Norman Business and Education and a director of Mac1 Corporate from March 2016 to April 2017, but now lists his job as chief operating officer of arena technology management company Techfront ANZ. He is still listed on ASIC records as Mac1 Corporate’s secretary.

Mr Hogg is still Mac1’s general manager, according to the company’s website, and owns the Mac1 domain name. However, his private companies have undergone several name changes in recent months.

Mr Hogg’s Educom IT Pty Ltd changed its name to Hogg Pty Ltd on June 26, 2018. It was known as Mac1 Group Pty Ltd from January 2016 to May 2018, Malay Vale from March 2010 to January 2016, and Mac1 Pty Ltd from July 2007 to March 2010.

Mr Hogg’s other private company, Ken Hogg Holding Company Pty Ltd, changed its name to Educom IT Pty Ltd on June 26, 2018. Mr Hogg did not respond to the Financial Review’s phone calls and emails.

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