DJs remakes retail landscape
In a strategic partnership that may be the first of many for department stores, David Jones on Monday revealed it would hand over day-to-day running of its loss-making electrical floor space to the private equity owners of Dick Smith.
The new retail banner, to be called David Jones Electronics Powered by Dick Smith, will be established at 29 David Jones stores. Dick Smith will also be responsible for the department store's electricals website offer.
DJs' exit from electrical ends a horror run for the business. The consumer electronics operations, covering categories such as televisions, computers, tablets, home office and audiovisual products, is responsible for more than half the group's sales declines in 2012-13.
It is a huge coup for Dick Smith, which was offloaded by Woolworths last year to private equity group Anchorage Capital Partners in a $20 million fire sale, and is one of the deals aimed at giving Dick Smith the revenue base and economies of scale it needs to be flipped into an initial public offering as early as 2014.
DJs is, however, keen to protect its image as Australia's most exclusive department store. DJs boss Paul Zahra argued it had the whip hand in the new relationship and would govern the way Dick Smith was advertised and marketed across its stores.
"We have a strict agreement with Dick Smith, where they will be operating under our brand principles, which includes the staffing and the look and feel of the marketing and visual merchandising in store," he said.
Mr Zahra said David Jones was especially fortunate that the boss of Dick Smith, Myer veteran and one-time executive general manager Nick Abboud, had an understanding of how department stores operated.
"Equally we have clauses in our contract that if we weren't to get to a resolution on any issue we could terminate [the deal]. But I don't think we will ever get to that."
Dick Smith would also not be allowed to creep into other category offerings from within its David Jones enclosure, such as whitegoods and small appliances.
Under the three-year deal, which will kick off on October 1, Dick Smith will acquire DJs' electronics inventory, fixtures and fittings, and front-line David Jones staff will also go across.
David Jones will book a one-off charge of $5 million to $10 million as it writes down the value of stock and pays for some redundancies to back-office staff.
"We think this is a super deal for all involved," Mr Zahra said. "It has transformed what was an underperforming category into a profit contributor."
The concept of a store-within-a-store should generate positive returns for David Jones within 12 months.
Mr Abboud said the relationship would put his retail brand in front of a demographic that previously it was unable to reach. "David Jones plays in the 'A' demographic and the 'American Express' customer; it's a great opportunity. We don't have that customer, so it's sort of all new business for us," he said.
David Jones shares rose 13¢ to $2.74 on Monday.
Frequently Asked Questions about this Article…
David Jones has struck a three-year strategic partnership with Dick Smith to operate its loss-making electronics floors. The new retail banner, called David Jones Electronics Powered by Dick Smith, will be rolled out in 29 David Jones stores and will also handle David Jones' electricals website, effectively transferring day-to-day running of the category to Dick Smith.
David Jones said the electronics business had been a major drag on sales — the consumer electronics category accounted for more than half of the group's sales declines in 2012-13. Management believes outsourcing to Dick Smith will transform an underperforming category into a profit contributor and generate positive returns within 12 months.
Under the deal David Jones will take a one-off charge of between $5 million and $10 million to write down stock and cover some redundancies in back-office roles. Management expects the arrangement to reduce the earnings drag from electronics and make the category a profit contributor.
Front-line David Jones staff working in the electronics area will move across to the Dick Smith operation. Dick Smith will acquire David Jones' electronics inventory, fixtures and fittings, but David Jones will control how Dick Smith is advertised and marketed inside its stores, including staffing, look and feel, and visual merchandising.
Yes. The agreement prevents Dick Smith from expanding into certain adjacent categories inside its David Jones enclosure — for example, it will not be allowed to 'creep' into whitegoods and small appliances — so the partnership stays focused on core consumer electronics.
The agreement is a significant win for Dick Smith: it gains access to David Jones' high-end customer demographic, a wider revenue base, online exposure via David Jones' electricals website, and physical floors in 29 stores. The move is part of broader plans to build scale after Dick Smith was bought by private equity group Anchorage Capital Partners and positioned for a possible IPO as early as 2014.
Yes. David Jones' chief executive Paul Zahra said the contract contains strict clauses, including the right to terminate the deal if the parties cannot reach a resolution on key issues. David Jones also retains control over marketing and brand presentation within its stores.
On the day of the announcement David Jones shares rose 13 cents to $2.74, reflecting investor approval. For everyday investors, the deal signals management action to address a major underperforming category and potentially improve profitability, but they should watch execution, the three-year timeframe, and the one-off charge when assessing medium-term earnings impact.
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