Harvey Norman and the curse of the falling prices

You buy in bulk, and you sell at a profit. That’s how retail has worked for decades, but that’s changing, especially in technology.

Yesterday, Harvey Norman advised its full-year profits, due to be reported later this month, would be nearly 40% lower than the year before. “Unaudited preliminary accounts for the year ended 30 June 2012 indicate profit before tax… of $227.6 million, compared to $373.9 million for the year [before], a reduction of 39.1% ($146.3 million),” the company stated in its release.

The company cited challenging trading conditions, singling out “deflationary headwinds particularly in the technology sectors”.

As goods increasingly become commodities, the paradigm for retailers is shifting.

The new retail paradigm

If your goods rapidly lose value after you’ve purchased them and before you’ve on-sold them, it’s a problem, explains Jon Manning of Pricing Prophets. This is especially a problem for technology products.

“These products increasingly have shorter and shorter life cycles,” he says. “As a result, the window in which you can make money off them gets smaller and smaller. You can only charge a premium price for a limited amount of time, and then new model comes along.”

He gives the example of the iPhone 4. Released in 2010, it is being heavily discounted because the iPhone 5 is due for release soon.

This poses a huge overbuying risk for retailers. “You don’t want to get left with too much inventory on your hands, before a new model comes out because then you’re forced to fire-sale it,” Manning says.

Avoiding this needs highly responsive inventory management. And if companies are forced to sell their high-tech goods at large discounts, this can also pose a risk to their future sales. “You could be conditioning customers to greater discounts through your focus on pricing, where the only way for you to move stock to discount it,” Manning says.

It’s not just new models of the latest Apple gadget causing the deflation, though: it’s been consistent across all technology sectors, even those where goods are more commoditised. In June’s CPI release, audio, visual and computing equipment fell 3.8%, according to the Australian Bureau of Statistics.

The irony is that for Harvey Norman, the high dollar should mean the retailer could import goods cheaply and sell at greater margins. But the internet has changed that. Emboldened by the buying power of the Australian dollar, customers are going overseas themselves for their electronics, cutting Harvey Norman out of the process.

In response, Harvey Norman has said it’ll shift out of the technology space, instead focusing on homewares and small appliances – bulky goods and products that have less online competition.

It’s not all bad

But what the clever retailers might lose in price on one product, they make up by persuading consumers to buy more, Ruslan Kogan points out.

The founding CEO of online electronics retailers Kogan.com says over the long term, price deflation has meant consumers now buy more electronics than ever – hardly a problem for electronics retailers such as Kogan.

“We’ve seen the number of products people buy [per] transaction increase,” he says. “Sure, you make less money off each product you sell, but as people save money they have money left over to make other purchases.”

Kogan says technology sales will keep increasing provided they’re affordable, because technology enhances people’s lives.

“Price deflation is always going to happen,” he says, adding that retailers have to stop worrying. “We have to keep innovating and becoming more efficient, so we can focus on our value-add to the customer.”