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The anatomy of Dick Smith's decline

It was a brutal white knuckle Christmas and New Year for the board and senior management of Dick Smith Electronics as they battled with the company's bankers in a desperate quest to provide the retailer with additional funds to pay suppliers and staff after the coffers had run dry.

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The $135 million loan the company took only six months earlier had been exhausted but the company took the view that with some extra cash it could trade its way out.

However, by Tuesday, the lenders, National Australia Bank and HSBC Australia, which were said to have been supportive earlier in proceedings, drew a line in the sand. There was to be no additional help and instead they would exercise their rights to take control of the company and deal with assets which had been used as collateral for the loans.

The Dick Smith board was aware that it could not legally continue trading as the company couldn't pay its debts when they fell due. Ultimately, this removed their right to an option around its future. The game was up.

Whether Dick Smith could have recovered is now academic. The carcass of the Dick Smith business will be sold and its directors will be hoping that they will be spared a class action by investors who have taken a multimillion-dollar hit on the value of their shares.

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For the time being at least, the stores will remain open and staff entitlements will be honoured. Customers with gift vouchers or deposits on Dick Smith goods won't be so lucky.

The post mortem.of the resurrection and then the demise of this high-profile retailer may provide some of the answers and ascribe plenty of blame.

Some observations about what went wrong are clear enough. The company had a cash flow problem in part as a result of wrong-footed supplier terms, and it had a product mix which made it too vulnerable to some categories that were not popular.

Its desperate attempt to trade its way out of a hole in December by embarking on a massive sale – described as suicidal by some industry observers – was probably the final nail in the coffin but not the root cause of its issues.

Managing cash flow, debtors and inventory was clearly a big part of the mix and the company's management and board failed miserably in this regard.

However, with all retailers, the key to success is having the product that customers want and are prepared to pay without resorting to heavy discounting. The management also failed in this regard.

The decision more than a year ago to move towards generic house brand electronic goods didn't sit well with customers but it was a strategy that wasn't cheap to implement.

One of the biggest competitors in the consumer electronics space is Harvey Norman. Its chairman, Gerry Harvey, questions this strategy.

"We virtually don't do any of that sort of stuff. I think there is room for some of that but if you are out there trying to establish a brand name with your company, you are better off doing it with other brand names as your partner . . . When you go to house brands, you are basically looking for margin and mostly looking at inferior products and you are mostly trying to sell it as being superior product, which it mostly isn't."

Bigger questions will be asked about whether Dick Smith's success in 2013 and 2014 – when it was being billed as the great Lazarus-like comeback of the retail world – was nothing more than an illusion or, at the very least, a product of some clever private equity financial engineers that had acquired the business from Woolworths and undertaken a renovation that made it look appealing on the outside but that hid the cracks that sat beneath the surface.

A chief proponent of the view that Dick Smith was broken before and after private equity moved in is one of retail's longest survivors, Gerry Harvey, founder of Harvey Norman.

"I felt it was broke all the way through. When it was resurrected and they [private equity firm Anchorage] sold those shares for $2.20 each, I wouldn't have given you 2¢ for one.

"I had no confidence whatsoever that the business could be resurrected; I just saw it as a 100 per cent loser.''

Harvey has not done any forensic assessment of the Dick Smith business.

Rather, he takes a longer-term view of the industry.

"Woolworths probably got very lucky in that someone came along and said, 'listen, we will take it over and have a go at reviving it', but they were probably on a hiding to nothing from day one because the business was not a viable business any more."

Harvey maintains that over a very long period, Dick Smith has been deteriorating.

"They have an awful lot of small shops mostly. They tried everything looking for new ways to try and resurrect it. But they just couldn't do it. A new mob has come in and said we'll have a go. They had a go, then they couldn't it either. Luckily for them, they managed to have it valued at $500 million from zero in no time at all. Then a year later, it was worth nothing."

Was it ever worth $500 million?

"Obviously not," Harvey says.

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