By Patrick Avenell

Gerry Harvey is placing the future growth of the Harvey Norman retail business in the hands of its struggling franchise business. Although the franchise system’s profit before tax has dropped by 36.5 per cent year-on-year (six months to 31 December 2011); Harvey said it is still “the most viable option to endure the current downturn in the retail sector”.

In his Chairman’s Report released this morning, Harvey continued to promote Harvey Norman’s franchise system, which is characterised by individual businesses operating out of stores owned by Harvey Norman Holdings. In most Harvey Norman stores, there are multiple franchisees running separate, independent businesses, such as Electrical, Computers and Furniture.

“We have approximately 700 franchisees operating as independent business owners within our franchise system,” Harvey said. “These independent business owners have access to a system that provides them with a well-established iconic brand, suitably located and well-maintained retail premises and access to supplier arrangements typically enjoyed by a large-scale retailer.”

“This enables our franchisees to concentrate on running their retail business to generate solid margins and returns in the face of aggressive competition and severe price deflation.”

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Harvey Norman reported a result before tax of $95.51 million for its franchising operations for the first half of the 2012 financial year, down from $150.36 million for the corresponding period of FY2011. This steep decline has been attributed to price and margin erosion in the AV and IT categories and the Australian dollar’s exchange rate’s adverse affect on international operations.

“Retail gross profit margins have suffered due to the strength of the Australian dollar, price deflation in the AV/IT category and intense competitive pressures in the flat panel and computer hardware categories.

“These factors have reduced franchise fees received.”

Despite this disappointing result, Harvey retains his faith in the franchise system, with no significant structural changes expected.

“Our franchisees are committed to driving sales growth and growing market share.”