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Dick Smith Quit Investing In Advertising & Catalogues Despite Getting Money From Suppliers

Neil Merola the former marketing director of failed retailer Dick Smith has failed to explain why he stopped advertising and the publishing of product catalogues when his company was raking in millions of Co-Op dollars from suppliers.  

Former Dick Smith chief financial officer Michael Potts yesterday told the New South Wales Supreme Court that the company ditched investing retailer rebates in advertising and marketing because management believed that this form of marketing was “ineffective”. At the time Merola a former senior Myer executive was the Marketing Director responsible for marketing and marketing decisions.

“Rather than trying to promote product through the press or catalogues it was a better bang for the buck just taking it (the rebate) off the price,” Mr Potts told the hearing.

Merola is now spruiking his services as a retail consultant.

Dick Smith receivers Ferrier Hodgson alleged the chain’s management and directors used rebates to improperly inflate the group’s financial position by maximising rebates, effectively “borrowing” profit from future periods.

Potts told the court that the action was taken not because it was seeking to overstate its financial position.

The court has also heard that Optus helped to prop up the struggling retailer who collapsed with debts of over $400 million when they provided a $1m “credit note” to Dick Smith.

At the time it appears that Optus was desperate to retain a major retailer selling smart phones that connected to their network. JB Hi Fi is Telstra’s biggest retail partner.

Potts told the court that the action was taken to allow Dick Smith to remain an Optus customer while it faced cash flow difficulties.

It is alleged the chain, from July 2014, ordered more stock than it required in order to book associated hefty incentives which made its position look better than it actually was.

“The combined effect of these practices, together with inadequate provisions and write-offs, was to overstate profit, overstate receivables and overstate the value of inventory,” Ferrier Hodgson has said.

The examination heard a February 2015 board meeting noted there was a higher than projected level of stock.

Mr Potts said he recalled the issue but could not remember specifics, other than there was a discussion of “getting it back down”.

The examination was read emails which showed Dick Smith was in financial difficulty as early as November 2014, with the group in need of more funds after it maxed out a $45 million loan facility with Westpac.

When asked whether Dick Smith needed more cash than it could obtain from its “own sources” at that time Mr Potts replied “yes”.

Earlier this year ChannelNews revealed that buyers at Dick Smith used a whiteboard to write up how much rebate money buyers and management had been able to extract from suppliers.

The examination heard Dick Smith management had been criticised by the company’s auditor Deloitte over the process where it would record the level of rebates it secured from suppliers on a whiteboard that was wiped each week.

Mr Potts said the whiteboard method, overseen by supply chain director John Skellern, was abandoned in November 2014 after the auditors raised concerns.

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