You can imagine there are currently a few very pained expressions on the faces of the investment bankers and advisers that Woolworths has charged with the job of selling its Dick Smith chain.
News that collapsed Queensland electronics retailer Wow Sight & Sound will shut its 15 stores and cut 580 jobs is a pretty good illustration of the state of this retail sub-sector.
Here was a business with strong brand equity in Queensland and a seemingly good retail footprint. It had a $20 million bad debt attached to some property deals it had done, but surely the administrators (and creditors) must have thought there was an OK retail business somewhere beneath the rubbish.
Wrong. It seems there was no-one seriously interested in picking up the chain. This is one sector that even the bargain hunters want to stay away from.
While there are clear differences between Dick Smith and Wow – the most notable being the fact that unlike the Woolies-backed Dick Smith, Wow was probably too small to have much real purchasing power – the bankers trying to offload DSE must be wondering what level of buyer interest they are really going to get.
Would you buy into a sector where margins have been crushed and continue to fall? Where the threat posed by online players is growing all the time? Where big retail footprints are no longer an advantage with all the overheads they bring? Where labour costs continue to rise? Where a strong brand appears to matter about a thousand times less than price?
I suspect some private equity player will eventually pick up Dick Smith, but the price will be very, very interesting to see.
As Gerry Harvey keeps telling us, the biggest problem in electronics businesses is plasma televisions. Not only has demand fallen (partly due to fragile consumer confidence and partly due to the fact that most people have one or more big tellies and aren’t inclined to get another) but price deflation is so severe that margins are shot.
The situation is unlikely to change – the huge number of TV makers operating around the world will keep cutting prices to keep volumes up and so will keep prices down. Indeed, things have got so bad that Harvey Norman is dedicating more of its floor space to bedding and furniture and less to electronics.
The only short-term boost these retailers are likely to get is from that shiny bit of kit released today by Apple – the iPad 3.
While I’m not sure what retail margins are like on Apple products – I suspect they might be skinny given the fact few retailers are prepared to discount – the new iPad will be a guaranteed and much-needed winner for chains such as Harvey Norman and JB Hi-Fi.
Not only will the product itself be a smash, but the accessories will sell well and people will come in store for a look and a play.
One iPad does not a retail recovery make, of course. But management at Harvey Norman, JB H-Fi and Dick Smith will take any little boost they can get right now.