Betting on Dick Smith's future

After announcing yesterday that it would look to sell-off consumer electronics chain Dick Smith, Woolworths said it had already received a number of unsolicited approaches for the business. The question is, who would buy it?

It would be easy to write Dick Smith off as one of the many retail businesses facing extinction due to its unwillingness to adapt to change. But in the case of Dick Smith it's not that clear cut.

Woolworth's says its recent review found the company's main strengths are in larger format multi-channel segments. It even called out an example of its multichannel business as Cellarmasters and Dan Murphy's where it says “Customers switch between in-store and online,"

Anyone who's visited a Dick Smith store in recent years will know they're a far cry from the glamour of Apple, the size of Costco or the prices at JB Hi-Fi. But fewer probably realise you can buy Apple products on the Dick Smith website, which is far more user-friendly than many of its competitors.

Woolworths says Dick Smith is a profitable business, has been experiencing strong sales growth and has a strong brand position. All of which are good selling points for a potential buyer to consider.

But Woolworths is clearly making a bet on the future, a future that even the brand's namesake says is not likely to contain growth.

Dick Smith told Fairfax he's amazed Woolworths has kept the business he sold them more than 30 years ago for so long. "I think this is a sign of extreme capitalism coming to the limits of growth,” he said.

Smith speaks as if there's a finite amount of growth available to any business and once it runs out, that's it, but Apple watchers would have to disagree.

“Silly as Gerry Harvey”

Online entrepreneur Ruslan Kogan, who predicted another consumer electronics chain would fall after the demise of Clive Peeters, says a buyer could revive the Dick Smith brand, but it would take “Someone as silly as Gerry Harvey was when he bought Clive Peeters”, to step up to the plate.

Harvey Norman was unable to turnaround the tarnished Clive Peeters business which it bought from receivers for $55 million, despite what chairman Gerry Harvey called a “hard bloody fight”.

Kogan isn't completely negative on bricks and mortar retailers however, arguing there is a place for stores that can differentiate.

“Technology and consumer electronics have become a commodity. People know exactly what they want, they know the model number, the exact specifications, and they often just search for the best price,” Kogan told Technology Spectator.

And the reality is, Kogan says, the best prices for consumer electronics will always be online.

“Over the last 20 years, bricks and mortar stores have simply been screaming about their prices and sales. Their strategy needs to change. Those that can adapt their strategy to give consumers a clear value add for coming into their store, which is something other than price, will remain in business.”

JB Hi-Fi could snap up Dick Smith to help accelerate its store roll-out strategy and instantly boost sales, but unless it can break out of the price competition cycle that is already squeezing its margins, it would be doomed to fail in the long term.

JB Hi-Fi flagged consolidation in the sector when it downgraded its profit expectations in December, but now that Woolworths has signalled its intentions for Dick Smith, it may prefer to ride out the consolidation period rather than participate in it.

It's unlikely Harvey Norman would be willing to go down an already fraught path – we know Gerry Harvey tends to be once bitten, twice shy from his experience with online retail.

Private equity contenders

With the two most likely contenders a little doubtful, private equity could come into play

Dick Smith has vowed to fight any sale to offshore interests, but since he hasn't had any monetary interest in the company since he sold the last of his shares to Woolworths in 1982, his protests should fall on deaf ears.

Smith has threatened to rubbish the business should it be taken over by offshore interests, but perhaps he's overestimating the value of his brand.

The fact is Dick Smith lost its point of difference years ago and today sells the same imported products customers can get at any number of online or offline retail stores.

Without Dick Smith to guide it, the business became just another me-too brand. Any buyer will need to find a new point of difference to relaunch the brand with.