Negative reports on Dick Smith, Harvey Norman

Difficult retailing conditions have provoked negative analysts’ assessments of leading consumer electronics chains, Dick Smith and Harvey Norman.

Brokerage and investment analyst CSLA has suggested Woolworths will close almost half of its 386 Dick Smith stores in Australia and New Zealand, while long-standing Harvey Norman critic Macquaries Securites has declared the fees extracted from the chain’s franchisees are unsustainable, given endemic discounting in low margin categories.

The CSLA report on DSE says the stores should be closed given Dick Smith is generating such a small return for Woolworths. The group contributed just $22 million to Woolworths consolidated earnings of $3 billion.

‘Woolworths will close up to 189 stores (out of 386) that are deemed unviable and invest significant effort in pursuing an online strategy to support the “bricks and mortar” presence,’ the CSLA report suggested.

This would have quite profound implications for the structure of photo retailing in Australia, with at least some of these Dick Smith stores running minilab equipment, and almost all selling cameras.

The shutting down of 50 to 100 minilabs around the country would be beneficial to competitors in the local area.

According to CLSA, Woolworths says the underperforming Dick Smith stores are too large, too small or in the wrong location.

‘We believe the Dick Smith business can be considered “up for sale” following the announcement by WOW [Woolworths Limited] at its strategy day in early October that the Dick Smith business was formally under strategic review,’ the report added.   ‘…We believe Woolworths unlikely to continue with Dick Smith in its current size and shape.’

(JB HiFi CEO Terry Smart last week told CE trade website Current he had no interest in acquiring Dick Smith.)

The results of the formal review of Dick Smith are due to be released in February.

Macquarie Securities overview of 2011 Christmas trading (‘Who will be the last man standing?’), claims that Harvey Norman franchisees’ cost of doing business (CODB) has risen to be more than the gross margins charged at rival 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 said. ‘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 percent 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.’

The report supports persistent rumours of dissatisfaction among some Harvey Norman franchisees in the CE and photo categories.


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