Harvey Norman’s March quarter comparable sales increased by 1.5%. With the larger listed retailers reporting a strong bounce in activity for the quarter we are not impressed and it confirms our view of the competitive headwinds and structural challenges facing the company. Both Woolworths and Wesfarmers continue to report strong sales growth as they capture a growing share of the consumer dollar by using their purchasing power to deliver the best in everyday value for customers across a broad range of product categories. Many of these categories, such as white goods, now overlap directly with Harvey Norman’s product range.
Convergence of technology continues to take hold with many unaware how quickly the market for technology has evolved. Only a few years ago, you could enter any technology store and be presented with an array of different products in categories including video cameras, mobile phones, digital cameras, MP3 or iPod music devices, computers and handheld game consoles. All these products are now converged into the smart phone.
The crucial ingredient in the purchase decision is now largely dependent on arranging the best mobile plan to include required data usage and the handset is thought of as a secondary addition to the monthly bill. This convergence is taking consumer traffic away from traditional electrical retailers and into telecommunications outlets. These stores continue to report strong sales growth for tablets and phones and a demand for mobile broadband. The tablet computer is expected to surpass sales of both desktops and laptops by 2015 as it increasingly becomes the product of choice in accessing and interacting with the internet.
The warm summer weather, combined with falling interest and rising equity values, fueled consumer spending in the quarter. It also coincided with the release of a number of new product launches as manufacturers optimised their technology to take advantage of the release of Microsoft 8. The combination of a favourable environment and release of new technology made fertile ground for technology retailers and we would expect to see a sharp snap back in sales activity, hence our disappointment in the 1.5% increase. Harvey Norman has been shifting away from technology products and building inventory in bedding and furniture and we expect this gradual shift in focus is also apparent in the weak sales performance.
The surge in consumer confidence during the first quarter of 2013 has lifted sentiment within the retail sector. This appetite to spend has waned with consumer confidence taking a step backwards in April, down 5% from 110 to 105. Consumers view the interest rate cycle to have now bottomed and we expect them to curtail expenditure as they view the next move in rates could possibly be up. Last year Dick Smith was aggressively shrinking its store base and clearing stock.
Price deflation also constrained comparable revenue growth as overcapacity in the flatscreen market led to sharp price declines. This year discounting and promotional activity stabilised and Harvey Norman should be making hay while the consumer finally returns to the shops. It is difficult to disengage the impact of cyclical weakness or structural threats, as consumers turn to online alternatives. Online consumption today still represents a small amount of industry retail sales, but we expect the biggest losers in any shift online will be the sellers of commoditised products.
Price becomes the key differentiator and the lowest-cost supplier will generate the highest returns and take market share. Amazon in the U.S. provides a chilling example with its highest selling product, flat-screen televisions, destroying the returns of high-street electrical retailer, Best Buy.
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