Retail in his blood

Managing a retail business that turns over more than $1 billion in sales revenue would most certainly seem like a daunting task for most people, but Harvey Norman's new IT boss, Rutland Smith, relishes the challenge.

"It's an exciting role - you're exposed to all the exciting things about the industry. We've got interesting plans for international expansion and I work with a good bunch of people. It's a fun industry to be a part of."

Over recent years, the big retailer's computer business in Australia has gone from strength to strength to the point where so many competing IT resellers and retailers have found it so difficult to compete.

Pre-dotcom bust, it seemed as though not a week went by when Harvey Norman's former IT retail boss, wild and wacky retail supremo Tony Gattari, was not gracing the pages of the trade and mainstream press passing on his words of wisdom about the future of computer retailing in Australia.

John Slack-Smith, who was recently promoted to chief financial officer at Harvey Norman, eventually took over from Gattari in July 1999, presiding over the retailer's computer business and growing it to a point where it captured around 40 percent of Australia's retail market.

In November last year, Slack-Smith was replaced by Smith, who compared to the two before him, particularly Gattari, is more introverted, and you can hear the cogs turning as he carefully considers his choice of words when asked questions relating to one of the fastest growing areas of business for the retail empire.

Smith has been involved in IT retail his whole working life. He began his career as a retail merchandiser at Apple Computer Australia while studying for a commerce/law degree at the University if New South Wales, eventually deciding to drop the law component and earn a commerce degree.

A stint as retail manager at IBM's PC company (now owned by Chinese giant Lenovo) followed. "At both those places, Harvey Norman was my biggest customer," he recalls.

Smith then joined the Harvey Norman franchisee network as the proprietor of a store in Marion, South Australia, the first of the retailer's stores in that state.

"I was a franchisee there for a little under three years before moving to the Maribyrnong store in Victoria, where I was a computer franchisee before coming to Flemington."

At Flemington in Sydney, he was the Australian business manager before taking on the role as computers head honcho, managing a computer business that employs 1500 people.One of the key pillars of the retailer's IT business of course is hardware sales, but not far behind is the imaging business (digital cameras and processing), while software, gaming and communications also feature strong in the retailer's IT sales, Smith says.

"One of our strengths is having a diversity of ranges, because quite often when one's down, the other is up.

"Digital cameras will continue to be a large business. It won't grow significantly because of a decline in sell prices. The digital camera is a mature market - I don't think it will go backwards but I don't think it will be one of the big growth markets. Notebooks will be a big growth market. We'll see a reinvigoration of the desktop market through the programs in place by Intel and Microsoft who are driving the digital home with [Intel's] Viiv."

Like most retailers, Smith sees Viiv as a good business opportunity and the company is training its staff to ensure they can explain and provide to customers the new technology. "I think it's a very difficult concept to explain in the advertising medium but I think it's a very good concept to demonstrate. We are putting a lot of our energies behind demonstrating the product itself.

"We have a natural advantage. Because of our electrical business, we are able to display the product with things like plasma televisions, and when the customer can see what the solution looks like in their home, it becomes much more meaningful to the customer.

"I think we are getting some good results so far and I am comfortable we will get some better results over the next 12 to 18 months. Desktops have become commoditised in the last year or so and it's reached a level of maturity, which means it has been flat."

Nonetheless, these new technologies are giving retail customers a reason to buy again, he says. "We'll see people upgrade within the next 12 to 24 months because of the digital home and what it has to offer. "I think at the moment most people don't understand what's possible. There won't be a revolutionary overnight change in the business but over the next couple years it will evolve and people will embrace the digital home concept."

Consumers are also buying HD TVs as they want HD quality content. Media Centre PC products also remain strong. "We launched Media Centre nearly two years ago and Microsoft told us that we had the most successful Media Centre launch of any retail partner in the world.

"It became a significant part of our total PC line-up from day one and that percentage has continued to grow. It's still early days, but there is demand for the product and it's becoming more a part of our mainstream computer sales."

This Christmas, Smith expects the PlayStation 3, gaming and MP3 businesses to boom. "Prices of notebooks and desktops have now got to a point where they are in the price range of being a Christmas present. In the old days, when computers were $3000 - people don't spend $3000 on a Christmas present. Now you can buy a notebook for $999 - that's affordable as a Christmas present even though it's at the upper end of the range."

Like most retailers, Harvey Norman has dipped its toes in the sub-$1000 notebook price war, which over the past 12 months has been driven by a handful of notebook manufacturers looking to pick up market share.

"A lot of the price erosion in this market is being driven by one supplier and that supplier can only afford to do it for so long, and when they pull back and re-evaluate their strategy, I'm comfortable that the market will stabilise and move back up. I think the price is starting to hit rock bottom. Road maps I have seen mean that pricing will not get any lower. Potentially it may even go back up," Smith says.

While the cheaper notebooks do generate traffic, it is important that the customer buys the right product, he says. "If consumers bought nothing but entry-level price point you'd go outside and everyone would be driving a Hyundai."

Discount stores

Smith believes there is no place for the retailing of IT products in discount stores, saying he has been disappointed to see vendors take their brand into mass discount chains such as Kmart, Target and Big W.

These channels by their nature offer no service other than price, he says. "I don't understand why a vendor would do that to their brand given that most vendors make their profit based on a very healthy mix of business and those channels can do nothing but deliver a detrimental piece of business.

"I think we have seen less activity from the Big W channel in recent times. I think that those channels are realising that selling PCs requires support services and it's very important to have inventory control mechanisms in place. And I would be very surprised if they are making a profit from the PC business and I suspect it's making them rethink their strategy. I don't think it's good business. I think there are a lot of channel partners who are driven on price.

"I think Harvey Norman has provided vendors with a healthy mix of business. We are very good at selling new technology and we hold a much greater market share of the high-end products than we do of the low-end products.

"I don't think it's ever always been about price, it's just some channels haven't worked it out yet."

Future of IT reselling

Smith disagrees that the traditional IT reselling model is fading away, despite the fact that many in the industry would disagree.

"People have been saying for 10 plus years in the industry that the traditional reselling model is going to finish. It hasn't got any less strong than it's always been," Smith says.

"I think it comes back to basic business rules. If you're a good business person then you'll be successful. If you don't run your business well, then it will be easy to blame things like commoditisation and mass merchants, but genuinely that's not the real reason that those businesses fail. It's just a function of how you run your business.

"The business is consolidating in many ways but when you look at much more mature industries, like the clothing business or fast-moving consumer goods or the food business, then the IT business is still a young and vibrant business by comparison."