Veteran retailer Gerry Harvey’s confidence trick

Retail kingpin Gerry Harvey recently drove around Tasmania searching for answers to the shopping blues. He spoke to franchisees, senior managers, warehouse staff and customers to gauge the mood of local economies, and to gather feedback on how Harvey Norman (ASX:HVN) could gain competitive edge.

“I talk to customers to find out if they’re satisfied with our service and how and where we can improve,” he says. “It’s all good PR, and listening to customers can spark a fresh idea. Just one good idea can make a difference – for the better.”

Also the chairman of the company, Harvey says he now meets more regularly with senior staff to talk about how to improve the company’s performance. The share price has fallen more than $1.15 in the past 12 months to close at $1.85 yesterday. Return on total assets has fallen from 6.65% in December 2007 to 3.05% in December 2011.

Harvey is the first to acknowledge he doesn’t have all the answers to lift his struggling company, or the ailing retail sector, out of the doldrums. There is no quick fix, he says. The real solution to shopping woes is restoring consumer confidence. And it’s no easy task: it usually requires a brighter economic outlook here and overseas before shoppers loosen their purse strings.

As restoring consumer confidence takes time, Harvey is focusing on what he can control to lift sagging global sales in the listed company with almost 250 outlets across Australia and overseas.

“It’s important to have a positive attitude, particularly in tough times,” he says.

“If hard-working operators with good stores are struggling, then we (the holding company) will subsidise them. I know it’s difficult, and it’s only human to feel dejected when incomes are down.

“Retailers across Australia tell me it’s the worst trading conditions they have ever experienced, and that’s with unemployment at 6%.

“I’d hate to think what the Australian retail environment would be like if unemployment was 11% or 12%.” (At February, 2012, the unemployement rate was 5.2%)

The deteriorating retail landscape is also having a psychological impact, with some franchisees struggling to survive the sales downturn. Harvey says he tries to lift the spirits of dejected franchisees, who are doing it tough and not accustomed to seeing their incomes cut by 20 or 30% – or more.

A decisive, hands-on operator, Harvey and is quick to close non-performing outlets – such as electrical outlets Clive Peeters and Rick Hart – to cut costs. But he continues to search for prime locations, in busy traffic areas, where he believes opening new outlets will lift sales.

He constantly advertises in mainstream media to retain brand presence, while claiming his digital strategy complements bricks-and-mortar by providing another channel for consumers.

A numbers man, Harvey closely monitors earnings, revenue, volumes and margins at stores and online. Improving inventory efficiency and supply chain issues should reduce working capital requirements of company franchisees, he says.

Harvey lets his experience to guide him and suggests other struggling retailers back their own judgement when implementing strategies to boost sales. Operators know their businesses best, he says. Employing competent staff is another vital component to increasing sales. “You can only discount a product so far,” Harvey says.

With the experience of a 50-year career, Harvey says today’s retail environment is presenting more challenges than ever before.

“(Harvey Norman is) not performing like we used to,” he says, referring to the boom times between 1987 and 2000 when new stores opened regularly amid massive technology growth and stronger margins.

Shoppers are paying much less today than they did 10 years ago for computers, TVs and other electronic gadgets – helped by a stronger Australian dollar.

Harvey cites intense competition, price deflation in key categories, a strong Australian dollar, deteriorating economic confidence and a prudent consumer as factors. “There’s a lack of confidence in the Australian economy. People read their super statements and find their balances haven’t grown – or worse, have gone backwards,” Harvey says. “Then they discover their houses are losing value.”

He says widespread job insecurity, the increasing cost of living and constant news about Europe’s debt problems have created uncertainty and extra caution among consumers. Consequently, Harvey says, people are tending to spend their discretionary dollars on affordable “feel-good products and services” such as restaurants and entertainment, rather than expensive outfits or the latest flat-screen television.

Harvey Norman results for the six months to December 31, 2011, revealed profit before tax fell 17.69% on the previous corresponding period to $163.47 million. Harvey admits: “I don’t have the answers on how to double my profits.”