Tim Richardson

Melbourne, Australia

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Harvey Norman, GST and online retail: lashing out

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Australian retail is facing big changes: big, but predictable. Online retail is getting substantial traction in a widening range of categories. Some large traditional players are passing beyond the denial of the past few years, and haved moved on to anger: they blame the $1000 GST personal import exemption.

Here's a story illustrating the trouble: An acquaintance spoke to me last week about a camera he wanted to buy via ebay from Hong Kong. Although he had discovered that Canon offers international warranties,  he still had concerns: his first purchase from overseas. My friend is busy: he runs his own business, and is a parent of young kids. He doesn't have a facebook account. Kudos to Harvey Norman, because it was his first destination for a price match. Unfortunately, Harvey Norman could not get closer than a $600 gap (which is around a 50% surcharge to the online price). My friend told me that he would have felt like an idiot and a fool buying it from Harvey Norman, so he bought it online.

Gerry Harvey thinks it is unfair that consumers importing should have a $1000 GST-free threshold. The Australian threshold is high compared with EU countries, but with price gaps like that, it's not going to make much difference.  I saw the same acquaintance last night; he was still telling people about the price difference. This was at the kindergarten Christmas party: you can hardly imagine a group more likely to be in the market for new cameras. Word of mouth with continued references to "fool" and "idiot" must be making an impact, and for sure he isn't the only one to make such a price comparison. Online retail has been cheaper for a while. But now, the word is out; it's getting beyond early adopters (and the headlines grabbed by bashing the personal import allowance can't help).

When I came back to Australia in 2008, I was very surprised by the immaturity of online retail; it was well behind western Europe. I remember finding something online at an attractive price, but being disappointed that it was in Perth with a delivery estimate of some days to Melbourne. Life in the Netherlands had got me used to next-day delivery, six days a week.

Australia is catching up now. Our postal system still doesn't deliver on Saturdays, but in other ways the stars are aligning: high mobile penetration, two thirds of adults have social media accounts bringing them to the internet several times a day, and the strong AUD is exposing the high AUD cost content in traditional retail. These changes are ready to huff and puff and blow the house down: some retailers may discover that "bricks and mortar" won't keep the wolf out.

One big, dramatic change recently is the strong AUD. Overseas items have become much cheaper. As I blogged earlier, a HK retailer of Chinese products has all his costs in a USD-linked currency: not only does the strong AUD make the Canon camera cheaper, but it also makes his rent and wages cheaper, and his profit margin shrinks in Australian eyes as well. Harvey Norman gets the cheaper camera, but its other costs don't change much. Combine that with a much more expensive business model, and the traditional retailer has challenges. I think the other big change has been Facebook; it has 10m users and it has converted lots of Australians into frequently-online internet users.

I have difficulty feeling much sympathy for Harvey Norman shareholders. Their company's chief executive was aggressively proud of not having an internet strategy only two Christmases ago (from Smart Company):

"Harvey Norman is being walloped by the downturn. But billionaire founder Gerry Harvey still refuses to consider online retailing, dismissing it as a dead-end for businesses. He predicts it will not make any money for entrepreneurs and says he will not be putting any more money into it.

Harvey told SmartCompany this morning that he will not be making any radical changes to strategy and that his retail chain Harvey Norman will continue to perform well despite the downturn.

Despite a growing number of Australians purchasing goods over the internet, he says online retailing is “a complete waste of time”.

“I’ve got an online part of my business, but I definitely would not put more into it. That’d be a recipe for a disaster.”

“Online people do not make any money,” Harvey also told SmartCompany. “The whole world was conned with online retailing. People say I’m a dinosaur, and I’ve had people coming to me with sites and saying, ‘Oh, look at this, they have 10,000 or 20,000 hits!’ – but it’s a con, a complete con.”

http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081126-Why-online-retailing-is-a-dead-end-Gerry-Harvey.html)

As far as no one making money online: In Q4 2008, Amazon reported USD $230m profit; it was $384m a year later.

When he says online is "a recipe for disaster", I imagine that his concerns are that prices and margins would fall compared to in-store, and an online store would cannibalise sales and profits from the traditional stores, including franchisees.  The franchise problem may be tricky: how to handle a shift of sales away from franchisees and into a centrally-run website? I can imagine a lot of distracting attempts to find an online approach that keeps the franchisees relevant ... websites where you order onine but pick up at your nearest store, for example. The problem is that this doesn't put the consumer first:Harvey Norman may end up with a camel solution (the camel is the horse designed by committee).

When we moved back to Australia, I needed to buy some white-goods. Retravision, a bricks and mortar buying-group retailer, had a very simple price match strategy at the time: they didn't price match with internet retailers. If Retravision changes that policy, they're going to need to pay money to tell me, because for some reason I'm not in store very often. I perhaps could find out online, but Retravision doesn't have a strong online brand with me; until I wrote the sentence the thought of visiting its website had never ocurred to me. As for Harvey Norman: Gerry Harvey's public statements have completely destroyed any online credibility (although I see now that Harvey Norman is actively using social media to keep in touch with customers).  I'm online a lot; the first time I visited the Harvey Norman website was a few minutes ago to confirm that it doesn't sell online. The website has had some money spent on it, but it's a online version of a mail-drop catalog ... I nearly forgot what we used to call this type of site: brochure-ware.

The other reason I don't have much sympathy for Harvey Norman is the value proposition: why people shop there. If you're going to ask customers to pay for your rent, sales staff and car parking, you need to offer customers value to compensate. Harvey Norman's added value is largely around financing: the famous interest-free loans. Every message I've seen from Harvey Norman emphasizes "no-deposit, no payments for 48 months".  If consumers can't afford to borrow more, or don't want to, then HN just becomes an expensive place to shop. Cheap consumer credit is what got Ireland into trouble, and guess where HN chose to expand internationally ("Ireland an unsolvable problem"). It may be ironic that a bursting credit bubble is causing problems, but the trouble with the Irish expansion was probably more bad luck than anything else. In contrast, the deep opposition to online retail was deliberate and high profile. I wonder if the posturing was aimed more at shoring up the franchise model ... anyway, little good has come of it. It seems to have bought no progress from Harvey Norman, as far as I can see, and it made no difference to the changes happening. to Australian retail.

Now Mr Harvey proposes to finally go online and sell a few products directly from China, to beat the GST (by making consumers the importer). He is not seriously trying to increase sales, he is trying to force a change in tax policy because he imagines that he will provoke politicians with this loss of tax revenue. This is not an online retail strategy, it's a stunt, and I suspect the government is not keen on taking his side in this fight. It risks uniting opposition to the stalled internet filter with a mass movement against the imposition of GST on online purchases.  Meanwhile, the interesting National Broadband Network is coming, with massive broadband capacity (and the NBN was a key reason the three crucial independent members of Federal Parliament swung behind Julia Gillard). The government is committed to an online future, and meanwhile Mr Harvey wonders why people call him a dinosaur. (See also NY Times article on the Australian NBN).

What should Harvey Norman do? I think Harvey Norman has typical incumbency problems: the most obvious things to do harm parts of the business. A key question will be deciding what the added-value of the business is. Economists speculate the Australian consumers will keep de-leveraging for a few years, so even without the online threat Harvey Norman may need to rethink selling on the back of finance. I can't escape the conclusion that retailers like Harvey Norman are very vulnerable: which means opportunities for others.

Adrian Bortignon, a former colleague, is consulting in this area. He brings experience in global distribution, payment processing and high volume websites, and in integrating social media. His website: http://www.comument.com/

Correction: In an earlier version, I reported that the Harvey Norman facebook page had accumulated a lot of users, but was not being updated. I was wrong: the Harvey Norman facebook page is actively maintained. Thanks to Gary Wheelhouse, head of Social Media at Harvey Norman, for politely correcting me. He also says that the twitter account is well used, with nearly 5000 followers, and that Harvey Norman is in a listening and learning phase ... http://twitter.com/#!/harveynormanau


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Last Updated on Thursday, 23 December 2010 20:55