Harvey Norman AGM Blowup - 5 Things Gerry & Katie Need to Consider

Sensational scenes, shouting matches, expletives no we are not at a rowdy football match we are at the Harvey Norman 2019 Annual General Meeting where at the end of it all Harvey Norman faced a potential board spill after shareholders handed the furniture and electronics retailer a second consecutive strike on executive pay.

Yes, Harvey Norman Holdings Ltd is a Public Company and yes it has a competent board, however, let us call out Harvey Norman for what it is - a family run business with Gerry as Chairman and Katie as CEO firmly in command and control.

While the family dynasty in retail has been a successful formula in the past not just in Australia but overseas, for example, Nordstrom Department Stores in the USA, in the case of Harvey Norman, the business is in need of a substantial upgrade and renewal especially in its largest operating group - the Australian Retail Division where sales have been lackluster.

Here are 5 Changes I would make at Harvey Norman to Grow the Retail Business. The question is, are Gerry and Katie willing to adapt and change, if not then it may be time to hand over the reins to say the COO John Slack-Smith to renew the business. The issue in our view leaving aside the AGM is about the renewal of the brand and the clash between old fashion traditional retail concepts as championed by Gerry & Katie and modern digital retail.

Change 1: eCommerce Adoption

Whenever you go onto a Harvey Norman Group website you have to request a price for furniture and bedding range so currently, they are not offering true eCommerce. Of course, we have all heard Gerry promote his view on e-commerce as the "evil empire" and this reflects in HN strategy. Well, facts speak louder than words and Williams Sonoma a US furniture & homewares retailer generates 53% of Total Sales of US$5.3 Billion off e-commerce in 2018 - boom!

This approach by Harvey Norman infuriates shareholders due to gifting sales to e-commerce players like Temple & Webster, Matt Blatt, etc. and other competitors.

Change 2: Warehouse & Distribution

The group operates 195 franchise complexes in Australia consisting typically of separate franchises for Computer, AV/IT, White Goods, Furniture, Bedding and often Homewares. Attached to these complexes are warehouses that service franchisees in the complex.

Leaving aside central distribution warehouses anyone who has visited these on-site warehouses to pick up their purchases will notice a lot of them are poorly run and filled to the rafters with new and aged stock.

We estimate there are tens of millions in savings and productivity improvement if a whole of business approach was adopted to these warehouses.

Change 3: Franchisee Committee System

Harvey Norman is run by a committee system of the top franchisees being involved in group-wide initiatives. This works well especially with innovation and new product development because the franchisees are close to the customer, are on the shop floor and are close to changing trends.

Where the system doesn't work at all, in my opinion, is with group-wide cross-functional processes, systems, and initiatives including technology, warehouse adoption of best practices, sales force management & benchmarking, training, WHS etc.

With the committee system and independent franchisees, their strength is their entrepreneurial local hero status, the downside is inconsistency in delivering the customer experience, snail pace adoption of change and often protection of the status quo.

Change 4: Brand Refresh

The retail business needs a brand refresh to format, systems, layout, and marketing. Other than the new Auburn complex recently opened the other 194 complexes they operate out are looking tired and a tad old fashioned. With the over 40 working population declining by 20% over the next 6 years like most retailers Harvey Norman will need to attract more millennials and Z generation. A brand refresh is well overdue. I have written extensively about a homewares brand that is showing the way here and globally called Few & Far, perhaps a store visit is in order.

A media refresh is also needed, in 2019 the group spent $391m on marketing expenses with a heavy emphasis on traditional media and sponsorship. This type of spend is wasted on the younger generation.

Change 5: Management & Board Room Changes

In my opinion, retail family-run businesses are at a disadvantage in a new retail world as they tend to run autocratically, top-down " it's my way or the highway" style management. This is not conducive to the rapidly changing retail environment where innovation, data and analytics, and the customer experience drive success.

I am not sure the current Board and Management Team have the right balance of skills and capability to manage the future, however, unless Gerry and Katie are willing to hand the business over to safe hands like John Slack-Smith, I think we can expect more of the same at future AGM's.