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Has Harvey Norman Had A 25% Franchisee Failure Rate?

Harvey Norman has been forced to reinstate how many franchisee’s the Company actually has, with some observers claiming a 25% failure rate.

According to his latest financial filings the number of franchisees has gone from 673 last year to 542, these are grouped together in only 192 actual stores.

According to the Financial Review Gerry Harvey’s auditor Renay Robinson of Ernst & Young in putting her signature to Harvey Norman’s FY17 financial report revealed new information about the Company.

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 claims the Fin.

This was a change in direction for the Company. in its unaudited accounts lodged in August, Harvey Norman claimed to have “rectified any incorrect expectations [that it] would discharge any of the debts owed by a franchisee to a supplier”. That enabled the company to end (on paper) its “constructive obligation” to do so. And, therefore, it could argue that franchisees maintained control (by the accounting definition) of their own (so-called) businesses.

The problem is, having sent that letter of rectification to his suppliers, old man Gerald went on TV last month and flatly contradicted it.

“For our reputation, sure we pay it; every supplier knows that.” And having ended its constructive obligation with a statement its chairman has already repudiated, nothing has actually changed.

There exists no known case of any Harvey Norman franchise ever itself defaulting on a vendor and there is a long-held Harvey Norman tradition of never pursuing a failed franchisee for monies owing.

The other problem is that, irrespective of legal sophistry, Harvey Norman’s franchisees can exercise no practical control.

EY determined otherwise, based on “whether [HVN] has sufficient power through its rights under arrangements with franchisees and through the practical application of those arrangements, to direct the relevant activities of the franchisee that most significantly affect the returns (profit or losses) of the franchisees”. Other than setting their rent and franchise fees, controlling their marketing spend, sweeping their bank accounts daily, ordering and paying for their stock, being able to remove them on a day’s notice without compensation and forgiving every last dollar of their debts, what more power would Harvey Norman require to be in control?

ASIC who are believed to still be investigating Harvey Norman have not commented.

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