Finance

Dick Smith prepares to slash prices by 70% after writing off $60 million in inventories

Eloise Keating /

 

Electronics retailer Dick Smith will need to tackle the underlying problems that have culminated in dramatic plans to slash prices just weeks before Christmas, according to two retail experts.

Fairfax reports Dick Smith is preparing to launch a “70% off everything” sale this weekend, sparking fears other retailers in the sector will be forced to also cut prices.

On Monday, Dick Smith told the market it will write down the value of its inventories by 20% or $60 million, admitting sales have not met expectations.

“Frankly we bought inventory in anticipation of certain sales levels – we didn’t achieve that sales level and that’s part of what we’re clearing up today,” a spokesperson for the company said on Monday.

“What we’ve done today will assist us in … marking down the value of inventory and making it easier to sell. We said at the AGM we wanted to generate sales and cash and this is part of being able to do that.”

David Gordon, retail expert and managing director at LZR Partners, told SmartCompany this morning cutting prices by 70% is “such a dramatic comment that the assumption is Dick Smith simply has far too much stock or a cash crisis”.

“That 70% potentially opens up a number of fundamental questions relating to the short-term health of the business,” he says.

“Discounting is a short-term answer to whatever issues they are facing.”

But Gordon says longer term, Dick Smith all “have to ask what caused the problems that led up to this situation”.

“And are they addressing those to sustainably deal with them?”

Brian Walker, chief executive of the Retail Doctor Group, told SmartCompany this morning there is now “a real question mark” over the acquisition of Dick Smith by private equity group Anchorage Capital from Woolworths in 2012.

Anchorage oversaw a rapid transformation of the Dick Smith business before floating it on the Australian Securities Exchange 12 months later.

Walker says Dick Smith had been “struggling” prior to the sale and the question now is if the “fundamental composition of the business has really changed”.

“Ultimately can a leopard changes its spots?” he says.

Gordon says Dick Smith opened 70 new stores in a period of three years to set itself up for the float and now operates close to 400 stores.

“It appears what happened is potentially a number of those new stores are not as profitable or performing as well as they would have hoped,” he says.

“You have to ask the question as to how a business balances between the need to set itself up for a potential sale or initial public offering and the need to keep the business in a sustainable, profitable mode going forward.”

“It appears subsequent to their listing, they are now having to address operational issues, specifically sales and stock, which could possibly relate to their opening or more than 20 new stores a year or two stores a month.

“And they are not small stores … they are stores that carry a substantial amount of stock.”

 

How will competitors react?

 

Gordon says other players in the electronics market “will have to react” to any price promotions from Dick Smith.

“What you will find is JB Hi-Fi and Harvey Norman reacting but not overreacting,” he says.

Gordon believes Dick Smith’s competitors, which he says also includes Officeworks, will likely continue promoting specific deals to customers in a bid to capture the customers looking for particular products during the Christmas period.

“There is a lot of consumer pricing in this sector and I think what the consumer will find is people like JB Hi-Fi will be more committed to price-matching but only if asked,” he says.

Walker agrees there will be flow-on effects to the rest of the market as “there is only a finite amount of money to go around”.

“It is not going to create incremental sales, it will just re-distribute them,” he says.

SmartCompany contacted Dick Smith but did not receive a response prior to publication. 

 

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Eloise Keating

Eloise Keating is the editor of SmartCompany. Previously, Eloise was news editor at Books+Publishing, the trade press for the Australian book industry.

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