Fashion-savvy department store David Jones has inked a deal with Dick Smith to all but sever its exposure to the electronics category in a novel deal that has united the top end of town with a business that makes its money selling DVDs, computer games and gadgets.
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.