By Pia Beukes (username: pbeukdeak)(215355582)
Photo: Peter Rae
There has been a lot in the news lately about the demise of Dick Smith. The electronics business was lauded by the chairman at its annual shareholders meeting on 28 October 2016 for its “strong and conservative business sheet” but placed into administration in January 2016, just two months later, despite the auditors at Deloitte not raising any big concerns. And its share price has been steadily moving downward from $2.20 at its IPO in December 2013 to just 35c when trading was suspended in January 2016. All 393 outlets will be closed and 3300 employees stand to lose their jobs.
Dick Smith’s shares price (Bloomberg)
So what happened?
Entrepreneur Dick Smith started the business in 1968 as a specialist electronics store and sold it to Woolworths in 1982 for about $25 million. Dick Smith Electronics was then sold to private equity firm Anchorage Capital Partners in November 2012 for $94 million. Anchorage floated 80% of the company on the share market for $520 million ($2.20 a share) in December 2013, just a year later, and sold the remainder of their share 10 months later. Forager Funds Management’s Matt Ryan called the IPO “one of the great heists of all time”.
Anchorage had slashed the value of Dick Smiths inventories and launched an enormous clearance sale after purchasing Dick Smith, boosting sales and working capital, but leaving the company short of stock, all prior to the IPO. Inventory was increased by the end of 2014, with the new shareholders paying for it, and at the end of June 2015 had risen again, forcing the company to take on debt to pay suppliers. Net profits fell year on year .
Ok, well that’s it then – creative accounting and poor management sunk Dick Smith. Well, not quite…
Gerry Harvey, founder of Harvey Norman, believes Dick Smith was broken before its acquisition by Anchorage.
Originally Dick Smith was a specialist electronics retailer that could command relatively high mark ups. They targeted the electronics enthusiast market segment (a niche market segment (Porter 1985)), selling parts and hobby kits, with a magazine promoting projects and the parts required for them. There was no competition. Through interaction with their customers via the magazine and specialist guidance given during purchases and afterwards, they built up a loyal and emotionally and intellectually engaged customer base, who learnt from and felt a sense of achievement as they completed each project.
When Woolworths took over, Dick Smith was changed into a company pushing generic house brand electronic goods with far smaller profit margins. This move placed Dick Smith in direct competition with the likes of JB Hi-Fi, Harvey Norman, Retravision, Betta Electrical, The Good Guys and many others. Yet, Dick Smith did not have the price leadership of JB Hi-Fi or the customer satisfaction of Betta Electrical, and they were the last to market. Further, they had thrown away their loyal customer base of enthusiasts who were now not interested in their new line of merchandise.
Customer satisfaction: Dick Smith compared to competitors (Roy Morgan Single Source (Australia), October 2014 – September 2015 (n=15,668)
When the market started struggling with the entrance of Apple and online shopping (not to mention a Global Financial Crisis), Dick Smith was the hardest hit. Woolworths closed more than 70 stores in 2012, before selling to Anchorage.
So Dick Smith Electrical completely changed its business and marketing strategy without due consideration of how this would influence the niche segment of customers it had been targeting or its competitor-less position in the market. In other words, Dick Smith threw away their uniqueness, their competitive advantage, and their brand, through changing their target segment and market positioning.
And just to prove that Dick Smith’s original business model and target segment are still alive and well, Jaycar Electronics, started by Gary Johnston (a former senior employee of the original Dick Smith) as a specialist electronics retailer, boasts 99 stores across Australia and New Zealand, and has made Mr Johnston a rich man.
Jaycar Electronics founder Gary Johnston. Picture: Renee Nowytarger
Porter, M., “Competitive Advantage: Creating and Sustaining Superior Performance”, Collier Macmillan, London, 1985; 2nd edn, Free Press, New York and London, 1998