Significant Business Risk Factors Essay

Custom Student Mr. Teacher ENG 1001-04 13 June 2016

Significant Business Risk Factors

1. Limited Shelf Life

Empirical evidence suggests that retailers must adapt to new product style trends in order to satisfy consumers and other key stakeholders (Ryan, 2011). In respect to Harvey Norman (HVN), failure to adapt will entail lower consumer demand, hindering growth and profitability. It is important to note a limited shelf life of HVN’s products exists due to changing trends. This in turn gives rise to the risk of inventory becoming obsolete and rising excess stock in the warehouse. Therefore, HVN should further emphasise on its inventory management, in order to minimise inventory build up and overall expenses in the entity.

2. Increased Competition from online shopping

Studies reveal that Australian consumers have embraced online shopping, recording a 23% growth in 2012 (Irvine, 2013). In order to combat the fierce competition in the online market, HVN introduced its ‘Omni-strategy,’ which focused on the enhancement of its digital store. There is evidence of success from this strategy with the firm recently named as ‘The Best Multichannel Retailer’ in the ORIA 2013 awards (Chanthadavong, 2013).

Despite this acclaim, it is of paramount importance that HVN considers enhancing its distribution channels, especially its digital store through better pricing on delivery times for online purchasesand a greater focus on personalised services for internet empowered consumers. This will sustain consumer expectations and ensure the firm captures a greater portion of its target market (Chanthadavong, 2013). 3. Threat from domestic competitors

Despite being one of Australia’s retail giants, HVN in recent times has been battling it out in the domestic market due to growing competition. In 2012, HVN was labelled as the most expensive Australian electronic giant recording a severe slump in its pricing position in comparison to its counterparts such as Dick Smith Electronics and JB HI-FI (Jager, 2013). The underlying reason for the slump was predominantly due to the high costs from GST and compliance laws (Morley, 2013).

Additionally, three of HVN’s recently acquired subsidiaries failed during the 2011/2012 financial years. This proved to be a costly investment for the firm reduced its competitive position in the furniture and electrical goods industry (Coyne, 2013). Furthermore, the entity’s poor pricing position detrimentally impacted the electronics giant’s sales (-4.9%) and profitability (-2.38%) (Harvey Norman, 2012). This suggests that HVN may have inventory build-up, excessive discounting and price deflation due to staggering consumer demand.

4. Stagnating growth in the global retail industry

Stagnating growth in the global retail industry has resulted in lower consumer demand and expenditure. A study from IBIS reveals that Australian appliance retailing has fallen by nearly two percent (IBISworld, 2013). Additionally, declining consumer demand has influenced a fall in the Australian dollar (AUD), which has negatively impacted sales in HVN Australian and international stores such as New Zealand and Ireland (Harvey Norman, 2012). HVN’s 2012 Annual Report reinforces that the negative growth has inhibited a reduction of HVN’s profitability, revenue and thus increasing the risk of obsolescence of inventory.

5. Natural Disasters affecting Harvey Norman Stores

Recent natural disasters have damaged many HVN Australian and New Zealand stores. For instance, a fire in the storage area of Harvey Norman in Porirua New Zealand heavily damaged a HVN store earlier in June 2013 (New Zealand Herald, 2013). This has had detrimental impacts on HVN’s sales revenue in its New Zealand market (Harvey Norman, 2012 p. 10). It is important to note that these disasters increase time wastage spent on rebuilding stores and increases the risk of overstatement of assets, as they may not have been properly removed off premises.

6. Misleading advertising

It is of paramount importance that a company doesn’t engage in false and deceptive marketing; especially if the products fail to exist in the warehouse. HVN was recently fined through infringement notices worth $6,600 for advertising stock they did not hold in a bid to mislead customers. According to the ACCC, this act breached the Trade Practices Act in promoting material. Moreover, this has had financial and non-financial impacts for the company, specifically affecting future sales and brand image on reliability of the company’s stance to deliver with full efficiency. This is also known as operational and compliance risk.

7. Threat of the geographical location of franchises

According to the entity’s 2012 annual report, franchising is deemed to be HVN’s predominant source of its revenue. Whilst, HVN has franchise locations globally, its New Zealand stores attract the highest level of sales revenue (Harvey Norman, 2012). Growth in sales have peaked in stores located around the mining districts such as Western Australia, Hunter Valley, but have dropped in performance in the capital cities such Sydney and Melbourne. A financial risk of going on concern can be indicated from here as the need of consumers shift and with competition HVN may not be selling and trading as much in the cities leading to inventory overload and incremented liabilities affecting overall business performance.

8. Currency Fluctuations

During the 2012 financial year, the AUD fluctuated a significant amount against the most popular currency for trade (USD) by about $0.9544 to $1.1055 (RBA 2012). A fluctuation of $0.1511combined with trades amounting in millions would potentially lead to a large discrepancy to HVN’s Accounts receivable and payable accounts. Additionally, a lower AUD reflects that HVN would have to increase the retail prices in order to achieve the same profit margin (Campbell Phillips 2013).

Empirical evidence reveals that if the dollar drops to around $0.80AUD compared to the USD, Australian consumers can expect an increase in prices of about 25% (Campbell Phillips 2013). This increase can be counteracted through hedging of the currencies, however volatility of the commodity market could potentially reduce HVN’s sales. Specifically, if sales decreases the risk of inventory obsolesces and write downs through idol stock increases.

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