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How Harvey Norman tells you a recession is coming; Check the interest free offers.
Topic Started: 5 May 2012, 12:21 PM (3,870 Views)
genX
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Gerry Harvey is one of Australia's brightest businessmen, and one of the longest survivors. Retail is a harsh mistress, and yet Gerry Harvey has outlasted them all.

Some time ago I noticed that before every recession or correction, Harvey Norman would begin to offer interest free payment terms. 6 months interest free for a mild downturn, 12 months interest free for a mild recession, 24 months interest free for a longer recession.

The reason HN is able to see the recession coming (usually) is because they have a very good view of their sales numbers.

The reason why they go to interest free before a recession is because during a boom, retail is a margins game, but in a recession it's a cash flow game. Leases needs to be paid, lights need to stay on, good staff need to be retained, whether or not one is in a boom or a bust. In other words, make hay while the sun shines, but cover your ass when it's raining.

Of course, the game might have changed. It could be that HN is struggling against internet sales, JB HiFi, Good Guys, and their long run of top dog in that market is over. It could be.

Harvey Norman - 50 Months Interest Free
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TED BULLPIT
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Harvey Norman sales or profits down 24% in first quarter I think I read yesterday.
Yes its all over now ;)
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themoops
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Yes. Plus there's only so many tvs and computers one needs.
stinkbug omosessuale


Frank Castle is a liar and a criminal. He will often deliberately take people out of context and use straw man arguments.
Frank finally and unintentionally gives it up and admits he got where he is, primarily via dumb luck!
See here
Property will be 50-70% off by 2016.
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peter fraser
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genX
5 May 2012, 12:21 PM
Gerry Harvey is one of Australia's brightest businessmen, and one of the longest survivors. Retail is a harsh mistress, and yet Gerry Harvey has outlasted them all.

Some time ago I noticed that before every recession or correction, Harvey Norman would begin to offer interest free payment terms. 6 months interest free for a mild downturn, 12 months interest free for a mild recession, 24 months interest free for a longer recession.

The reason HN is able to see the recession coming (usually) is because they have a very good view of their sales numbers.

The reason why they go to interest free before a recession is because during a boom, retail is a margins game, but in a recession it's a cash flow game. Leases needs to be paid, lights need to stay on, good staff need to be retained, whether or not one is in a boom or a bust. In other words, make hay while the sun shines, but cover your ass when it's raining.

Of course, the game might have changed. It could be that HN is struggling against internet sales, JB HiFi, Good Guys, and their long run of top dog in that market is over. It could be.

Harvey Norman - 50 Months Interest Free
Gerry Harvey isn't a retailer, he leases space. Traditional retail is struggling, but the interest free offers probably come from GE (took over AVCO) and they make money because many people are silly enough to not pay off the debt during the interest free period, and then they get caught by the fine print.

I also suspect that the retailers who sell under the HN branding, give a kickback to GE because anyone can get a discount at HN, but not when you take their interest free offering.

I can't remember a year when these offers were not made, although GE did withdraw completely from any lending during the GFC when the couldn't raise capital.



Any expressed market opinion is my own and is not to be taken as financial advice
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genX
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Quote:
 
Gerry Harvey isn't a retailer, he leases space.

I lease space too, it's called my house. Does that make me the same as Gerry Harvey?
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but the interest free offers probably come from GE (took over AVCO)

I don't believe the finance company assumes the principal (I could be wrong), I think it is still a cash flow business. The servicing fees on the 'interest free' payments pretty much cover the basis risk.
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I also suspect that the retailers who sell under the HN branding, give a kickback to GE because anyone can get a discount at HN, but not when you take their interest free offering.
I can't remember a year when these offers were not made, although GE did withdraw completely from any lending during the GFC when the couldn't raise capital.

What changes is the duration. Consumer credit is now offered by all large retailers, but the duration of the debt changes relative to margins. Recently there has been margin compression in that market, indicating a squeeze on discretionary spend, which itself is a forward indicator of a contraction/recession.
If you already have the 500inch plasma's sitting on the showroom floor sucking up space and tying up capital in inventory, it makes sense to switch from margin to cashflow, especially when you can't move it out the door any other way.

But what do I know? Tell me Peter, what is your growth forecast for the next 24 months?
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Sydneyite
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genX
5 May 2012, 01:04 PM
I lease space too, it's called my house. Does that make me the same as Gerry Harvey?
Try again - Gerry leases space OUT to franchised retailers. That's his business.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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TED BULLPIT
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themoops
5 May 2012, 12:38 PM
Yes. Plus there's only so many tvs and computers one needs.
I have seen 42" plasmas go from 7k to $700 over ten years. All these things are a cut throat industry with little to no profits to be had. Printers , pc's , plasmas , its all the same now.
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peter fraser
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genX
5 May 2012, 01:04 PM
I lease space too, it's called my house. Does that make me the same as Gerry Harvey?


I don't believe the finance company assumes the principal (I could be wrong), I think it is still a cash flow business. The servicing fees on the 'interest free' payments pretty much cover the basis risk.


What changes is the duration. Consumer credit is now offered by all large retailers, but the duration of the debt changes relative to margins. Recently there has been margin compression in that market, indicating a squeeze on discretionary spend, which itself is a forward indicator of a contraction/recession.
If you already have the 500inch plasma's sitting on the showroom floor sucking up space and tying up capital in inventory, it makes sense to switch from margin to cashflow, especially when you can't move it out the door any other way.

But what do I know? Tell me Peter, what is your growth forecast for the next 24 months?
As per Sydneyite's post above - yes I should have been clearer - Gerry owns space and he leases it out. A lot of retail is really rental space in disguise.

When you visit your local woolworths or coles, you will find that some companies get a more prominent space in the shelves - at eye level etc - that is not by accident - that space is paid for. Bread is a good example.

A retailer can extend credit and probably charge account keeping fees, but only an ASIC registered lender can charge interest on this scale. All of this was done on what is referred to as "white label" by AVCO years ago, and GE took them over. I'm assuming that GE are behind this as well as they re-enter the lending space in Australia, it could be another group, but I doubt it.

You will find that the consumer credit offered by retailers is mostly outsourced these days - Amex, Mastercard etc. Virgin credit cards are owned by Westpac, Myers cards are Amex - etc etc etc.

It's not a secret - retailers go to some lenghts to make credit more readily available to shoppers, toss in some loyalty points or benefits, and profits increase. Predatory - perhaps, but no one makes anyone spend.

I've never indulged in one of those buy now pay later deals, but the last time that I looked the interest rate was about 28% - Buyers Edge was used a lot (owned by GE)

Growth forecast - I assume that you are talking about house prices - I've been a bit negative on house prices for some time now. Looking back I think it was in mid 2010 when it started to change, but we didn't notice it then, when the floods hit in Jan 2011 it quickly became evident. I would say down about 10% this calendar year, which will be more than 10% from peak in some areas, but less than that in other areas, although if we get rate cuts which are passed on by the banks, with a variable rates of less than 6.00% available to most borrowers, I would expect a slight pick up. I really don't expect to see any decent gains for at least two years, although it's so patchy it will occur in some areas. longer term, maybe good gains in about 5 years, but nothing will surprise me in this market. Some buyers will get bargains, but most will miss out while they wait.

I don't expect the 40% falls that most bears are counting on, although in the tourist areas of Qld they have already happened, but it was our booming dollar and only partly the GFC that was responsible for that.

Not expecting armegeddon makes me a bull over at MB.

Lunch calls....





Edited by peter fraser, 5 May 2012, 01:52 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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genX
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Quote:
 
Gerry owns space and he leases it out. A lot of retail is really rental space in disguise.

Who owns the brand? Who collects the franchise fees?

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Growth forecast - I assume that you are talking about house prices -

No, GDP growth. But w/e.

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I don't expect the 40% falls that most bears are counting on,

Best not to count on the market doing anything, whether that is going up or down. I am expecting[1] prices to go down by 15-30% by one of two ways. Either in nominal terms, or in real terms (relative to my wages).

If we get caught in the same liquidity trap as the rest of the developed world, then it will be in nominal terms.

If the RBA and the FedGov choose to inflate our debts away, then it will be in real terms.

The former would be better for the future of Australia. Short term pain, relatively quick recovery. The latter will be extremely destructive for the future of Australia, and so I give it better than 2 to 1 odds that the current crop of muppets in Canberra and Sydney will choose it, since they only care about the current election cycle and lining their own pockets.

I also expect rents to climb. At some point there will be a convergence of those two trends and it will be an obvious entry point for myself (roughly a 1.2 ratio of mortgage to rent on a 80% LVR is my entry point, obviously prefer parity :lol ).

[1] Expecting, but not counting on.
Edited by genX, 5 May 2012, 04:43 PM.
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genX
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Sydneyite
5 May 2012, 01:15 PM
Try again - Gerry leases space OUT to franchised retailers. That's his business.
Don't you get tired of hiding in other people's skirt tails?
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