The Australian Small Business Blog

Thursday, March 31, 2011

Is a Retail Dinosaur embracing the Ice Age?

A while ago I wrote about how The Retail Dinosaurs were Revolting against the growth of online shopping. They claimed, that online retailers were undercutting them because they were not paying gst.

As I said at the time that the real reason they were uncompetitive, was more to do with their structural costs – many of which they profited from.

Now it appears that the Tyrannosaurus Rex of the Australian retail industry, Harvey Norman, will set up their own online outlet. But can T-Rex adapt before the coming ice age? History would seem to indicate that it may not.

The problem is, they will be competing against themselves. Gerry Harvey makes money by selling franchises and from the value of the commercial property he owns and the rents he charges. An online store will compete directly against these revenue streams.

Online retailers reduce the value of franchises which is usually based on a multiple of profit. As the profitability of the franchises decrease, the rents currently being charged become unsustainable, which impacts on the value of commercial property. Which is why T-Rex made such a fuss.

So why would Harvey Norman set up its own online site? It can’t charge significantly less than its store prices without destroying its own business model. While details of the new site have yet to emerge, Gerry Harvey has threatened to build his online store offshore to avoid certain government taxes. So this strategy might be more about forcing the government’s hand in regulating this market than accepting that they need to adapt to the new environment.

Look at what happened in the book industry. The game changer was Amazon, not a traditional book store adapting to the online world. Book stores followed rather than lead, and they could never be as aggressive as Amazon who had no investment in the existing retail model, and didn’t need expensive stores in every mall across the country.

In Australia, the government decided to protect authors rather than retailers, and Borders and Angus & Robertson have gone under. As we don’t manufacture the stuff Harvey Norman sell, the government might be persuaded by the tax revenue loss argument above the increased cost to consumers and the outcome for electrical retailers might be different- but as in the case of T-Rex, this is only a short term strategy.

In the end, T-Rex could not prevent the ice age Its whole life model was built around a lush tropical environment that no longer existed. A reptile so large could not adapt. A newer, more adaptable retail model will be developed that will survive in the new environment and its name won’t be Harvey Norman.

May Your Business Be - As You Plan It.

Over to You. What do You Think? Post Your Comments Below.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.

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1 comment :

Arthur said...

Hi Greg

The writing is on the wall isn’t it?

Harvey Norman is going online – Surprise, Surprise!

Gerry Harvey is an intelligent man.

He is aware the current Harvey Norman business model is in decay.

By developing his online presence Gerry is working towards transitioning to a sustainable business model.

For the Big Retail Giants it is not a question of ‘If’ they will become extinct but ‘When’.

Others are following –

Myer is also working on an Online Business Model.

How long will Myer be around as we know it?


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