While much of the media coverage of the retail industry now is urging us towards a recession, the reality in the electronics and technology sector is a little different, say the insiders.
We are all consumers of electronic products and enthusiastic embracers of the latest must-have technology. For many people technology is not a luxury, it's a tool for better management of daily tasks, a tool that broadens our horizons, and a badge of status. It's also a hugely competitive marketplace with big brands jockeying for position.
Dick Smith Electronics bears the name of one of Australia's most successful, and most well known, entrepreneurs. Currently the electronics shop is undergoing an 18 month revamp by owner Woolworths; it promotes itself on its website as primarily an online business supported by outlets. In the company owned set-up, just five franchisees exist with about 50 authorised dealers in regional areas. As the company did not want to comment for this feature, there is no indication whether any changes will be made to the franchise element.
Ed Butler, senior analyst at prediction company IbisWorld, suggests the biggest change will be a shift in products. "Tandy has been very niche in electricals and parts, it could be more specialised; the name has some respect and is quite valuable."
It could go down the TV and stereo route and compete with JBHiFi while Dick Smith could compete with Harvey Norman, and perhaps become more niche. "At the moment," says Butler, "it's just Dick Smith."
Strathfield Car Radios has dipped into the technology world beyond its original core product, but not necessarily for its own good. The recent departure of Gerard Frack, the CEO who took the business into profit for the first time in years, has cast a shadow over the retailer.
Strathfield chairman, Richard Poole, has reportedly cited Harvey Norman as one of the most challenging competitors, according to Inside Retailing. There had been a dramatic downturn in sales over the last four months according to Poole, but the company is expecting a boost with the launch of Apple's iPhone device.
Economies of scale have a lot to do with Harvey Norman's dominance over other franchised businesses like Strathfield, says Harvey Norman's relentlessly upbeat chief operating officer, John Slack-Smith.
"Our business is a large format franchised company - we have a business model that is integrated retail and property. We invest 'heavily in buying and developing our own sites. We have economies of scale for buying power and marketing."
But it is the very combination of big business with local focus that succeeds, he suggests.
"We have a go-to market model that is small business, the franchisees who are buying and marketing locally. It's a wonderful benefit franchisees bring to the operation. We have unrelenting marketing."
Although we're in a very different retail climate from late 2007, end it's simply tighter for retailers, he suggests the nature of franchising allows for a more positive outlook.
"A franchise business or where the brand has equity, overlaid with quality franchisees, invariably should be the last standing. Their livelihoods are at stake."
In recognition of this, Slack-Smith reveals Harvey Norman franchisees are showing positive growth for the full financial year.
Going up or going down?A big number of our franchisees are extremely capable retailers," says Slack-Smith. Thinking and acting locally, with a gobal backdrop, is the key to retaining business even in tough times. Yes, there might be a high ticket price on some technological and electrical equipment, but the market is continuing to grow he says.
"There are inflationary products, like groceries, and we've got deflationary products - technology, laptops, TVs. But if the consumer sentiment tightens it doesn't change the range or the product category. We talk about being highly desirable or exciting. Well, the uptake of plasma or LCD screens has been outstanding. There is a big range of activities for the family, home, the move to mobility and more schools buying technology. Technology products are guarded to a degree - consumers find ways to invest."
Consumer sentiment for electronics means it is slightly recession-proof and as technology moves forward products either become cheaper, or new products are developed and these appeal to top end customers. Butler reminds us that plasma screens have gone from $10,000 to $2000 in just a few years.
"It's a really competitive environment driven by demand, and companies can still afford to offer products at a good price and make a profit."
IbisWorld predicts growth of 5.1 per cent for the sector in 2008/09, still ahead of GDP.
"This is a luxury industry, it doesn't get affected by downturns as the consumers are quite wealthy. Economic slow downs hit lower income brackets."
If customers have to cut their costs, he predicts it will be the toasters and kettles that are now compulsory purchases substituted for a cheaper model leaving the consumer free to pay for the status brands in big ticket purchases.
While the middle class has lots of debt and is consuming heavily Butler assures the growth generated by the debt costs is more than it costs to service the debt.
Last year Harvey Norman announced the launch of a competitor to Officeworks. While Slack-Smith says even in the current climate there are no plans to change the Ofis launch and rollout, his boss, chairman Gerry Harvey, has emitted warning signs to the world at large that times are tough and brakes will be applied.
According to The Australian on July 5, 2008, Harvey said: "If things were booming we'd push it harder, but with things as they are, why would you bother?"
He admitted: "We haven't been affected as much as most of the others because we're the big brand, we're spending a fortune on advertising and so our market shares are improving, although our sales are not."
Harvey Norman was predicted by IbisWorld to have a $6.1 billion turnover to June this year; the revised figures suggest 5.8bn for the 10 months from April 2008. The following year expectations are around $6.2 billion.
"It is a very strong brand, a market leader in the sectors it trades in and a really good business model even with its controversial interest free offers," says IbisWorld's senior analyst, Ed Butler. "Talking it down is just softening up investors and franchisees," he believes.
And so Slack-Smith is running with the baton of optimism. "It's an exciting opportunity. There's only one incumbent big box supersite and a market of 21 million people should sustain more than one company."
Accordingly between 10 and 15 group outlets will open this year across Harvey Norman, Domayne and says. The company is working on the top line and like for like growth.
"Not many retailers stand the test of longevity. Looking at the Australian economy over the last 20 years, companies have been lost through poor brand equity and poor managers. "If you were starting out now, and this is a gross generalisation, one in two will fail. THe challenges around for potential franchisees, well it's an advantage to have had retail experience, an appreciation of the width of the operation, to be using the brand as effectively as possible."
Franchisees need to be providing outstanding customer service seven days a week, directly selling and merketing, being creative locally.
"We have a philosophy of being honest and forthright, and we want this to resonate, it's most important it resonates, on the shop floor. We win or lose on how we treat our customers, how we handle people and how professional we are."
A recent Authentic Brand Index which tracked consumer response to brands was released by brand strategy consultancy Principals and researcher Synovate, according to Principals planning director Wayde Bull.
"Harvey Norman has got a degree of brand reputation which is pretty strong. It does well on origination and momentum and is seen to be more popular, a brand on the move. Factually the brand is growing but also seen as becoming more popular. Considering how big the brand is, it's quite aggressive with branding and marketing," Bull says.
More than 4500 consumers participated over a two month period. The sincerity dimension was a key finding; not letting the customer down, encouraging staff to help customers solve their problems.
"It was included in a group we call original thinkers – it erates as an innovative concept, harder to do as brands get bigger. Harvey Norman's success is connected to technology, which makes it a top of mind brand."
In the overall top 10, there were four technology brands: Google and Microsoft heading the list, with Nokia and Sony listed too. That the company is quoted as a retailer with the trait of sincerity in the authentic brand index, is a bonus, Slack-Smith says.
"If some see us that way, that's tremendous. But the company's ongoing challenge is to sustain this.
"It's so hard to build a brand but it's so easy to let it go." For Ian Brown, general manager of the
Betta Stores Retail group, of which Betta Electrical is a part, maintaining market share is the mantra for the brand's success. "We also offer superior service levels to our customers and keep firm control of our overheads."
Another major factor in bucking any economic downturn and increased costs is the location of many stores in regional areas. "Those areas are either near strongly performing mines or prospering because the improved weather conditions which have broken the drought in many parts of regional Australia and have boosted the outlook for the agricultural sector."
And he remains confident about the electrical division. "We we can maintain market share."
How to Grow?Brown has hinted at further developments in the pipeline which may benefit franchisees but is keeping the plans under wraps. He announced a net profit before tax of $800,000 in its financial results, performing as expected for the year to March 31, 2008. And total income increased from $9.1 million for the five months to March 31, 2007, to $19.7 million.
Butler says the brand is starting from a low base and the target is the cashed-up middle class. "They could face a challenge in 2010 but they are growing strongly, they are well recognised and establishing the brand well."
Consumers welcome a new brand in the market if it establishes itself well early on, he believes. For development, acquisition is difficult in this sector – the stores are big, so it's a big investment.
Companies are more likely to get growth from building their own shops outright – it's often cheaper, says Butler.
"Then they end up with a state-of-the-art shopping experience in the new growth areas where new households are eager to purchase goods. When it comes to establishing a new division, Harvey Norman has set the standard. It's proven a dedicated department store approach works."
While this may be the track BSR takes, it is unlikely to be within two years, suggests Butler.
Another player in the franchise field is Bing Lee, a well established Sydney based firm. Says Butler: "Bing Lee is quite small, the focus is on developing the brand. The name is coming out in Victoria, they are trying to generate organic growth."
Bing Lee was unwilling to comment on company progress for this feature.
New on the scene later this year will be Costco, an American 'pile 'em high, sell 'em cheap' general retailer with a membership base for customer sales. According to Butler, if the outlets follow the US lead and stock just about everything, people will be tempted to try it out.
Their commitment to buy "will have an almost immediate impact on the market, but remember that Coles and Woolies have been selling TVs cheaply and its had little impact. TVs and stereos are a status purchase, people want to show them off, like luxury cars."
He adds that public perception of the economy is worse than it really is: unemployment is low, inflation is still low.
"In 2010 we expect a bit of a dip, until then it's more of a softening, slower growth than we have seen. The Australian economy will still grow. It's difficult to have a recession in Australia."
13-Oct-2008