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Harvey Norman Shake Up Franchisee & Supplier Dynamic, Will Not Guarantee Loans

Just days after changing the accounting treatment for franchisee receivables listed in their 2017 accounts, Harvey Norman franchisees could have less favourable supplier trading terms, following the retailer’s announcement it would not be liable for paying suppliers, nor would it guarantee debts anymore.

Analysts are still trying to gauge the ramifications for Harvey Norman’s franchisees, plus assess the overall competitiveness of the retailer, amidst growing competition from JB Hi-Fi, The Good Guys and the forthcoming arrival of Amazon.

Loans to franchisees dropped to $535 million (from $943 milllion) in 2017, as the retailer reiterated that franchisees, not the parent company, would be liable to pay suppliers. Additionally, Harvey Norman would no longer be guaranteeing debts.

Analysts state the decision will change the relationship dynamic between Harvey Norman franchisees and suppliers, as it forces franchisees to more directly negotiate terms with suppliers, rather than utilising the retailer’s overall buying power.

Citigroup analyst Bryan Raymond remarks of the shift:

“Our view is that Harvey Norman has essentially created a stronger relationship between the supplier and the franchisee – previously that was largely centralised”

“Ultimately for the suppliers there’s the risk this will require significantly more administrative effort and time and staff and what that could result in is that it is recouped through trading terms over time”

Mr Raymond states the main problem will surround trade credit insurance, however, noted that Harvey Norman may have some solutions up their sleeve:

“The main problem is trade credit insurance – normally you want to deal with the most well capitalised business from a trade credit perspective, the franchisor. Harvey Norman has some solutions in the works around the insurance  side … how disruptive it is remains to be seen”.

An analyst who refused to be named outlined the nature of the shifting dynamic:

“What could be an issue is if Harvey Norman is seen to step away from their franchisees from the suppliers’ perspective”

“Obviously that would change the way the suppliers deal with franchisees … but I’m not quite sure that’s where they’re going”

“I think it’s more of an accounting issue rather than a change in the way Harvey Norman are dealing with suppliers”.

Mr Raymond states, “Harvey Norman’s rationale for the change in accounting is that Harvey Norman [through a subsidiary called Derni] would not discharge the debt owed by a franchisee to a supplier”

“Management is attempting to rectify what has been a false assumption that Harvey Norman stands behind the franchisees when ordering and funding inventory purchases”.

Since posting a record breaking profit of $448.9 million, Harvey Norman’s shares have plummeted more than 11%,following a lower than expected final dividend and mounting concerns surrounding accounting changes. Other concerns surround lower than expected cash conversion and softer sales growth in the June quarter, and first eight weeks of fiscal year 2018.

One unnamed analyst spoke of the negative impact of the confusion enveloping Harvey Norman’s books:

“There’s been so much focus around these accounts and their balance sheet, so for them to come out and change the way they account at a time when they’re being a bit more lenient on franchisees … it didn’t leave investors comfortable”.

In conjunction, Credit Suisse Analyst, Grant Saligari, believes the accounting change could be the retailer’s bid to defend it against calls to consolidate its accounts:

“My interpretation is [it’s] around the discussion of potential consolidation – they’ve revisited the way in which they’re accounting for their relationship with the franchisees and decided that they want to make sure it’s more arm’s length in the accounts itself”

“To that extent it does probably help that argument [against consolidation”.

Thus far, Chairman Gerry Harvey and CFO Chris Mentis have not been contactable to offer their remarks about the accounting changes.

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