By Patrick Avenell

Macquarie Securities has declared Harvey Norman’s franchisee fee structure as “unsustainable” given the current retail market’s propensity towards discounting in low margin categories.

In an overview of the 2011 Christmas trading period entitled “Who will be the last man standing?”, Macquarie Securities analysts estimated that Harvey Norman franchisees’ cost of doing business (CODB) has risen to be more than the gross margins charged at rival publicly listed retailer JB Hi-Fi.

“Traditionally, Harvey Norman has required 25 per cent gross margins off the floor to fund the Harvey Norman head entity plus franchisees,” the report says.

“However, when examining the fees paid by franchisees to Harvey Norman in FY11, total fees paid equates to 19.47 per cent of franchisee total sales. This is before any labour costs, which are paid by the franchisees. Assuming these were around 3% of sales, a franchisee’s CODB would be 22.47 per cent — this is higher than the gross margins earned by competitor JB Hi-Fi.”

This report also notes that Harvey Norman is paying a secondary price, in addition to $1.25 million fine levied, for misleading catalogue advertising in mid-2010.

“In the current environment of high levels of price deflation, lack of industry top line growth and highly promotional driven categories, gross margins are under pressure and not uncommon to be lower than the Harvey Norman franchisee CODB.

“Additionally, the new ACCC rulings mean that Harvey Norman holds more stock for a promo which may not all sell due to the soft trading conditions and are subsequently heavily discounted to clear aging inventory.

“We therefore continue to believe that Harvey Norman’s fees received are excessive and unsustainable, particularly in lower margin categories such as AV/IT.”

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