How can an iconic chain such as Dick Smith Electronics — with $1.5 billion in revenue, 325 stores, 4500 staff and one of the best brand names in Australian retail — be worth just $20 million?
That’s the question that has left consumers and even some business experts scratching their heads. There might even be a few executives within Woolworths — who this time last year valued the business at about $440 million — wondering if they’ve done the right deal.
Of course, given Woolworths could never crack the Dick Smith code in 30 years of ownership, it does suggest the new owners, private equity firm Anchorage Capital, may have its work cut out for it.
Dick Smith’s net profit last financial year was down 15% to just $27 million, suggesting a profit margin of 1.8%. That was weighed down by some savage price cuts Dick Smith used to shift excess stock, but it still speaks to the very tough environment that electronics retailers operate under.
So how exactly did the value of Dick Smith fall so dramatically? Obviously, this didn’t happen in a year — here are five ways an icon stumbled …
Moving away from the nerds …
When Woolies first announced the sale of DSE, Dick Smith himself shared a fascinating fact about the way he initially set up the store. “It was a very different business selling components that had high margins. We didn’t sell anything you could compare a price on,” he told The Australian Financial Review.
The core customer base of the business was geeks (I mean that in the nicest possible way) who built their own electronics equipment such as CB radios. Smith said that positioning DSE as a specialist store with a specialist range meant profit margins were 26% compared with 2-3%.
The days of large numbers of hobbyists building their own radios or even computers is largely gone, and Smith admits things had to change. But Woolworths’ mass-market heritage meant pushing into consumer electronics and away from specialist areas — and specialist margins.
… but failing to shake the nerd image
Unfortunately, moving away from selling stuff to hobbyists didn’t necessarily change the perception that Dick Smith was a store for hobbyists. Woolworths has tried to change this by changing store formats, giving its chain the now traditional Apple-store-style makeover and dumping the man-with-glasses logo that was its hallmark for years. Has it worked? Perhaps not fast enough.
Slow to respond to an online push
Like many big-name Australian retailers, Dick Smith has been too slow to respond to the rise of online — perhaps not a surprise given Woolworths has been relatively late to the party as a company. Like the rest of Australian retail, the catch up is on.
Stuck in the middle on pricing
By turning itself into a general electronics retailer, DSE has found itself in that dangerous middle ground on pricing. At one end, you’ve got price-focused JB Hi-Fi. At the other end, you’ve got the deal makers of Harvey Norman. Beyond that, you’ve got the specialist home-theatre retailers. Where does DSE fit? From a pricing point of view, it was stuck in the no-man’s land of being neither cheap nor super high quality. As Clive Peeters, Colorado, Borders and Darrell Lea will tell: that’s a tough spot.
Too big for its boots?
Did DSE spread itself too far? That’s certainly one conclusion to draw from the fact that Woolworths has closed more than 70 stores this year. Anchorage says it won’t close any more stores, but surely the new owners will need to ensure every store remains profitable. Store sizes will also need to be looked at. DSE has tried (and subsequently moved away from) big box stores, but finding the right format may require more tweaking.
*This article was originally published at SmartCompany
This was my experience: As a “geek” I was pushed away from DSE after they removed all the specialist electronics products from their shelves, what was left was a range of products that seemed to focus nowhere in particular, and if a consumer needed good technical info on a product, the staff in the store were often unable to provide a quality answer.
The new owners have much work to do.
Rocco
The range of android tablets were too small, the mix of computers/laptops/networking gear seemed a little off kilter, home theatre stuff was generic and ordinary. My preference was to simply buy from online retailers at a cheaper price, not only do many online retailers carry a better range of product, they often have better pricing, stock availability, fast delivery and the bonus not having to visit a mall.
My mate who worked closely at senior levels of Dick Smith has two words to sum up what happened. Roger Corbett.
Pehaps that’s incorrect. The article does refer to the mistakes Woolworths made. Maybe Corbett as Woolworths CEO had no say. Maybe he delegated the strategy and approach of DSE. Maybe he was a good CEO who was dudded by his staff and its his not his fault that they’ve lost $380M. His record at Fairfax is so outstanding … oh … hang on a sec.
The nerd market is still there, it is just being serviced by former competitors and, more and more, by local eBay stores and international stores.
DSE effectively told the nerds to bugger off, so the nerds never go near DSE for anything, now.
How about positioning? In my town, the Dick Smith shop is in our Woollies “plaza”, with Big W underselling DSE on many items. These shopping centres also charge exorbitant rent (no local shops can afford to be there, only chains), so was DSE paying this rent, and will it continue to do so?
Otherwise, the article and commenters say it all: if you’re going to advertise yourself as “techxperts”, you need experts readily available in the shop (e.g. Apple Genius bars). If you want to sell well in a flat-profile market, you need to fill a niche, and do it well. DSE unfortunately does neither, and won’t employ the staff needed.
“At one end, you’ve got price-focused JB Hi-Fi.”
This is one of the biggest fallacies in the retail market. While JB HiFi competed on price initially, their margins have increased quite dramatically in recent years, while still giving the impression they are a budget operator through the deliberately dodgy fit out of their stores. Do some price comparisons…I think you will be surprised by how expensive they are.
As for saving Dick Smith, I think one of the first things they should do is change the name (Officially call it DSE…a bit like Kentucky Fried Chicken morphing into KFC). The brand has been tarnished by the man’s constant media stunts and extreme nationalism (which doesn’t quit fit with a store chain selling mainly imported high technology goods)