“Line in the sand”: Gerry Harvey blames retail troubles on low wage growth and falling housing market

Gerry Harvey

Harvey Norman chairman Gerry Harvey. Source: Supplied.

Harvey Norman chairman Gerry Harvey says a “sum total of an awful lot of things” are to blame for a slowdown in retail trade in recent months as the sector prepares for a competitive Christmas.

A downturn in the housing market and ongoing pressure on consumer wallets has tempered expectations for homewares and appliances retailers in the second half of 2018.

Harvey, who has been trading in the category for 57 years, tells SmartCompany market growth has slowed.

“Overall market growth is not there like it’s been over the last three-four years,” Harvey says.

“Some stores out there are behind last year, some are ahead … It’s a sum total of an awful lot of things.”

Housing prices have been in retreat in Melbourne and Sydney for a number of months now, and while Australia’s jobless rate fell to 5% earlier this month, Harvey says a lack of wage growth is biting retailers.

“There’s a line in the sand with wages because from my point of view I’d like to see everyone in the country get a 10% wage rise tomorrow.

“But if they do that then a lot of businesses will go broke, you just have to keep pushing the limits,” he says.

Retail industry expectations about the upcoming Christmas period have sobered in recent weeks, amid ongoing commentary about high petrol prices and the collapse of veteran menswear business Roger David.

Retail sales figures due out this week will be an important barometer of industry health heading into the silly season, but National Australia Bank’s closely watched indicator for the numbers is predicting a modest 0.2% rise in September.

Harvey says competition for consumer dollars will be fierce as traders fight to grab for dollars in the subdued landscape.

Torrid AGM ahead for Harvey Norman

Addressing recent concerns raised by the Australian Shareholders Association (ASA) over the governance of Harvey Norman, Harvey dismissed calls for more independent directors.

The ASA plans to vote against Harvey Norman’s remuneration report at its upcoming Annual General Meeting in November, which could present a first strike risk after a protest vote in 2017 delivered a near miss.

The association has criticised Harvey for disclosure relating to franchisee loans, investments in non-retail businesses and the independence of board directors.

Notably, in questions sent to Harvey Norman last week, the ASA said longstanding directors were not independent.

“No director on the board can be considered to be independent,” the ASA said.

Harvey says the ASA’s intentions might be good, but believes the expertise of Harvey Norman’s board should be preserved.

“I’ve had a push over the years to get rid of me as chairman, I own a third of the company, a pretty strong vested interest,” he said.

“I’ve been here all my life, I know all the people, all the real estate.”

Harvey dismissed a suggestion his recent investments or loan arrangements with franchisees were evidence more accountability was required.

Harvey copped criticism earlier this year for a $34 million investment in dairy company Coomboona Holdings, which has since collapsed.

The ASA queried Harvey Norman over losses related to a mining camp joint venture and an investment in a Byron Bay property.

Harvey says he plans to share literature on corporate governance at Harvey Norman’s AGM next month that “proves companies like us are the better companies”.

He argues his track record — excluding share price performance over the last 12 months  stacks up well against other listed retailers.

Harvey Norman’s share price has come under pressure this year amid sustained criticism over Harvey’s investments, down 24.6% so far this year.

A recent capital raise where Harvey Norman “inadvertently” contravened listing rules has also drawn the ire of smaller shareholders after it emerged Harvey had purchased one million of the discounted shares on offer himself.

Asked whether shareholders were entitled to redress, Harvey reiterated he was giving away the proceeds.

Asked again about the raise, Harvey says he believes the rule  which prevents directors from acquiring cheap shares without shareholder approval unless the raise is pro rata  should be changed.

Harvey argues the rule was not designed to cover the top-up shares directors bought.

“Whoever made that rule never had in mind that it was to be applied in this way,” he says.

Harvey has also been criticised for board diversity over the fact Harvey Norman only has one woman on its board.

Harvey says he’s seen no evidence boosting diversity would improve Harvey Norman’s financial position, reiterating the company’s defence that chief executive Katie Page is female.

“It’s only necessary because there’s a call out there that it’s what should happen … there’s no evidence that’s how companies should be run,” he says.

A 2018 study on board diversity carried out by McKinsey found that diversity in leadership correlates with better economic performance, while CLSA research from 2016 found companies with more than 20% women on their board outperformed the S&P/ASX 200 index by 2.45%.

NOW READ: Stockings filled with coal: As Roger David collapses, can retail survive until Christmas?

NOW READ: State by state: An update on Australia’s housing markets

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Jarrah3
Jarrah3
2 years ago

It’s always something…. for a decade it was the mantra that no GST on items under $1000 was killing retail. Completely ignoring the idea that if someone could order ‘x’ overseas and pay shipping and ‘X’ still arrived in this country at 10% to 20% less than they could purchase it here, then something is structurally wrong with the retail industry in Australia. It goes back to the pre-Internet days of protected master distributorships. They enabled distributors to sell product to their retail networks at a margin that anywhere else in the world would be considered a retail margin. Instead of a 10% to 15% margin, the distributors were getting 25%+ and sometimes way above that level. So end retailers then marked up again with a standard retail markup of 1 to 3 or 4 times what they paid for the item and the tag price was much higher than elsewhere in the world for the same item. But the Australian consumer didn’t know that unless they went overseas and then they bought up items to bring home. Once the world became a virtual single market, the Internet made Australian consumers aware that they were paying an extra premium for the same products sold elsewhere. Add in business practices that force a franchisee to purchase their product ‘wholesale’ only from the main organisation and you have a recipe for guaranteed franchise failure or, alternatively, a franchise outlet staffed by the owners and family because they can’t afford to pay employees. The idea of ‘managing’ for a few days a week while great employees handled the day to day grind was just a dream. Often one partner gets work (the mining boom sustained a lot of small retail businesses) with any available funds from that job going to prop up the retail business. Business owners working for less than they could earn if they got a job for someone else, but they can’t sell because the financials won’t convince anyone to become the next dupe, or they are stuck in a franchise contract or premises lease that would send them personally to the wall if they walk away. There can only be industry failure unless there is a major restructure. The GST on items under $1000 as a cause for retail woes was always a furphy.
And even if wages can’t magically be increased by 10%, Gerry Harvey could start the process off from the other end of the retail equation. Lower his own ‘wholesale’ prices to the franchisees that occupy his premises by enough that they can immediately lower all prices to consumers by at least 10% without those ‘independent’ businesses taking any hit to their margins. Then we can see if his idea about discretionary income levels has any merit – and, unlike the reverse of raising an entire country’s wages, this option is entirely within his own capacity to see happen…

Theodore Lillicrap
Theodore Lillicrap
2 years ago

Having had a bit of a look into the board composition matter, I can’t help but notice that women are underrepresented in director, partner, and management positions of both McKinsey and CLSA. Clearly there is nothing wrong with a woman holding such a position (and this, I would presume is a matter to be dealt with by a merit based selection procedure), but the fact that the companies that produced these reports haven’t addressed the very ‘problems’ they have highlighted suggests that there is more to the process of increasing board diversity than simply voting against high performing directors on non-merit based criteria.