How Woolworths fumbled the Dick Smith transition

Crikey

Once a haven for CB radio builders and the like, Dick Smith eventually became a store that was not sure where it fitted in. And it has cost Woolworths dearly.
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 per cent to just $27 million, suggesting a profit margin of 1.8 per cent. 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 per cent compared with 2 to 3 per cent.

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 first appeared on SmartCompany on September 28. Republished with permission.