Harvey Norman’s $355m marketing spend now double its net profit return

Special Report by Patrick Avenell

Harvey Norman's saturation advertising has failed to deliver a boost to revenues and the company is now spending twice as much on marketing than it is making in net profit, demonstrating the significant burden on margins for the iconic retailer.

Harvey Norman is noted for its ubiquitous and ceaseless marketing campaigns. The company runs TVCs across free-to-air and pay TV channels; newspaper ads in metro newspapers; distributes nationwide catalogues; and purchases high concept sponsorships, such as the rugby league State of Origin.

One of the reasons the effectiveness or otherwise of Harvey Norman marketing is so interesting is that Australian retailers indirectly charge suppliers for marketing services via the rebate system. Furthermore, part of any franchise business model is centralised advertising, often subsidised by franchisee fees.

Current.com.au is unaware of exactly how Harvey Norman Holdings Limited funds its advertising.

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Compared year-on-year, Harvey Norman’s FY2012 marketing spend actually declined, from $373 million to $355 million (4 per cent). As a percentage of total sales, however — $4.8 billion from the franchisees and $1.4 billion from the company operated ventures, for a total of $6.2 billion — marketing has increased from 5.63 per cent to 5.7 per cent.

In real money terms, Harvey Norman spent $18 million less in marketing during FY2012, while total sales declined by almost $400 million.

Of greater interest, however, is the proportion of advertising spend to profit after tax. During the 2011 financial year, marketing spend totalled 145 per cent of profit after tax ($373 million v $256 million). This percentage exploded during FY2012, to the point where Harvey Norman is spending more than twice as much on marketing — 201.6 per cent — as it is making in net profit ($355 million v $176 million).

To demonstrate how significant this change is, consider Harvey Norman’s FY2005 annual report.  That year, Harvey Norman spent $233 million on marketing and recorded a profit after tax of $171 million — the percentage is 136 per cent. As a percentage of total revenue, Harvey Norman’s marketing spend was 5.75 per cent in FY2005.

So, in the six years from 2005 to 2011, Harvey Norman’s marketing to profit ratio increased from 136 per cent to 145 per cent, then in the 12 months from 2011 to 2012, it increased from 145 per cent to 201.6 per cent.

  FY2012 FY2011 FY2005
Marketing $355m $373m $233m
Total Revenue $6.2b $6.6b $4b
Profit After Tax $176m $256m $171m
Marketing/Revenue 5.7% 5.63% 5.75%
Marketing/Profit 201.6% 145.47% 136.15%

Please note: 'Total Revenue' combines sales from franchisees and company operated stores. All data is taken from Harvey Norman reports to the Australian Securities Exchange (ASX).

Comment

The stability of Harvey Norman’s marketing spend as a proportion of its overall total sales, despite fluctuations in the spend amount, shows that while there is a direct link between advertising and selling, there is a disconnect between advertising and generating profits.

Harvey Norman chairman Gerry Harvey has been very vocal in his complaints about margin pressure, particularly in reference to the AV and IT categories.

Meanwhile, the Australian Federal Government has launched a bizarre inquiry into technology pricing, despite this article clearly showing that retailers are under unprecedented pressure to make money.

While Harvey Norman’s marketing could do with a rethink, with many younger Australians complaining about its incessant nature and low production values, the real message from this is for the Australian Government: end this price enquiry farce and let businesses charge whatever they have to in order to make money.

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