Harvey Norman driven from shopping centres

To combat a combination of falling demand for electrical goods and increasing rent prices, billionaire Gerry Harvey has conceded that his Harvey Norman (ASX: HVN) stores may be better suited as stand-alone centres, as opposed to remaining within major shopping malls.

Norman revealed to The Australian that his stand-alone stores, located in regional hubs, were returning greater profit margins for the company than those located in malls owned by corporations such as Westfield Group (ASX: WDC) or Lend Lease Group (ASX: LLC) – his rationale being that the “shops (are) a lot smaller or the rent is a lot higher” in the shopping complexes.

In 2012, Harvey Norman’s occupancy expenses accrued to $242.99 million – an increase of 11.6% on the previous year – an amount that Gerry Harvey admitted “we can’t pay”.

Whilst shop rents are on the incline, Harvey Norman has also felt the pain of falling revenues and profits. In its half year report, Harvey Norman recognised a 16.1% fall in revenue and 39.1% decline in net profit after tax (NPAT), blaming “unprecedented price and margin deflation” in its television and devices categories, as well as falling property values.

Aside from specializing in the sale of electrical goods, the company’s property portfolio is a “critical element” to the Harvey Norman name. Currently, the company owns $2.12 billion worth of property assets – accounting for around half of Harvey Norman’s overall assets. In addition to closing stores located within major shopping centres, Mr. Harvey wishes to expand his company’s competitive advantage through the purchasing and redevelopments of a number of properties. As property values begin to increase, so should the value of his company.

Harvey Norman isn’t the only retailer reconsidering their future within major shopping malls. In its 2012 annual report, Westfield Group boasted a 2.5% increase in average rents, prompting other companies such as Myer Holdings  (ASX: MYR) and David Jones  (ASX: DJS) to express their concerns about the climbing costs. Both companies have closed a number of their stores and will reconsider extending any lease agreements should costs remain so high.

Currently valued at $2.91, Harvey Norman shares have risen by 47% since this time last year.

Foolish takeaway

Whilst a number of brick and mortar retailers have shown signs of recovery since their lows last year, increasing rent prices are preventing these companies from ramping up competition levels with online retailers. In order to increase profit levels, it seems that fleeing shopping centres for stand-alone stores could become a more viable option.

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