By Patrick Avenell

SYDNEY, NSW: Harvey Norman's imminent entry into full-service online trading may be a necessary diversification, with industry analysts predicting significant challenges to the iconic retailer's destination store business model.

Formerly high margin and high profit categories, such as TV/AV and computers, have been so severely affected by price erosion that floor traffic has become essential for maintained revenues. Macquarie Securities analyst Rob Blythe said that Harvey Norman is bereft of a unique selling proposition, with rivals such as JB Hi-Fi attracting more customer flow through FMCG loss leaders and convenient locations.

“We have frequently voiced our concerns about Harvey Norman’s Australian franchisee business model,” Blythe said. “Harvey Norman is a destination brand lacking a compelling selling proposition in our view.

“The past few years has seen significant levels of price deflation and market penetration, resulting in many items in these categories [electrical and computing] lend themselves to the convenient, high foot fall shopping centre locations.”

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Harvey Norman last week announced total global sales (excluding Singapore) for the nine months to 31 March 2011 were up 1.4 per cent, while like-for-like sales were down 3.5 per cent.

“We have commented frequently in the past that given the significant price deflation that has impacted many of the electrical categories in Harvey Norman, it shifts what used to be high value, destination shopping decisions to convenient, high foot fall shopping centre locations which favour JB Hi-Fi and Dick Smith.”