Senior Executive Claims The CE Industry Does Not Need Dick Smith, Discount War Set To Create Problems
Major consumer electronics vendors who are concerned that the sale could be extended into the peak Christmas New Year selling period, have told Channel that a lot of the products ranged in Dick Smith “don’t have a 70% margin” in them which would result in big losses for the retailer.
Other consumer electronics and appliance Industry executives have told ChannelNews that they would prefer that Dick Smith fail as there is “not enough room” in the market for another mass consumer electronics retailer.
A former senior LG executive said “Woolworths could not make a go of Dick Smith and that organisation threw millions into trying to get growth from the brand. The reality is that the market does not need Dick Smith”
“We only have 23 million people in Australia and several big retailers are serving this market with CE and appliance products. Harvey Norman, JB Hi Fi, The Good Guys and Officeworks deliver massive spread across Australia, then we have organisations like Aldi, BigW, Target and K Mart, selling house brand CE products and appliances. On top of this there is the specialist channel, online and fringe retailers like Bing Lee. This is overkill for a market the size of Australia.
“The best thing that could happen is that Dick Smith fail then both vendors and distributors can cut the cost of servicing yet another mass retailer”.
Several Companies including the likes of Panasonic and Samsung have already put Dick Smith on credit hold. Insurance Companies who offer trade protection are telling vendors not to offer any more credit or supply to Dick Smith until they have been paid for the stock already shipped top their stores.
It was only a few weeks ago that Dick Smith made a move into appliances, several suppliers have told ChannelNews that they now regret supplying the mass retailer.
An employee at the Dick Smith George Street store in Sydney, which Dick Smith Marketing Director Neil Merola said was a “flagship appliance store” told ChannelNews last week that the category was “struggling”.
They said” We are not getting enough traffic through the store for consumer electronics let alone selling an appliance”.
Analysts are concerned that the move by Dick Smith to start a discount war, weeks out from the peak buying period could have major repercussions across the industry, with rival chains JB Hi-Fi and Harvey Norman forced to follow suit in order to protect sales and market share.
The company, which Anchorage Capital bought from Woolworths for $94 million in 2012 – and later floated on the ASX for $520 million – this week told the ASX it had launched a review of its stock inventory following a poor October trading update, while November was “below expectations”. Value of inventories was written down by $60 million.
Those revelations saw Dick Smith’s share price tumble on Monday to just 28c, down from $2.28 earlier in the year. Yesterday it recovered slightly to close at 35c, giving it a market cap of $82 million.
Dick Smith who has a $120M line of credit with the National Australia Bank has already drawn down $70M of the facility however ChannelNews understands that the NAB are now looking at whether they will allow the full draw down.
Deutsche Bank analyst Michael Simotas said in a report to investors,’ We expect DSH to move quickly to try to clear its inventory problem and the timing is most unfortunate given it will likely result in heavy industry discounting over the key Christmas trading period. Much of Dick Smith’s, problem is likely in private label accessories which should impact less on JBH but they will be difficult to clear. We fear the Group will be forced to discount branded hardware in an effort to attract shoppers to its stores which could force JBH to follow suit. Despite this risk, we remain neutral on JBH and note that in the long term, the pressure on DSH could be positive given it could prompt substantial store closures which would add to JBH’s share”
“We have not adjusted our sales estimates for JBH but have reduced our gross assumptions. We previously forecast modest gross margin expansion”
“While Harvey Norman was also affected by the difficult conditions in 2011-12, we expect it will be largely unaffected this time around given the majority of its growth is being driven by homemaker categories so it is less reliant on AV/IT. We expect sales growth to remain strong for some time, and it is being driven by higher margin products which combined with operating leverage and benefit from efficiency measures should drive rapid earnings growth. HVN remains our top pick in the retail sector”.