How Big Brands Squeezed Dick Smith After Rebate Debacle
As Dick Smith buyers lined up to extract as much as they could out of suppliers running into Xmas 2015, big brands such as Apple, Microsoft, Samsung, Sony, Panasonic and Hewlett Packard were moving to deny supply by putting the mass retailer on credit hold the NSW Supreme Court hear last week.
By Christmas 2015 more than 20 brands had dumped the mass retailer who eventually collapsed with debts of $400M+.
At the same time CEO Nick Aboud was getting frustrated with store managers who were blaming Aboud and his team for the downturn in sales, they claimed that the stores lacked the brands and products that consumers “wanted to buy”.
Even in the lead-up to Christmas 2014, management were asking buyers to “use your relationship to push payments out until at least January 2015”.
“Can we get an update on O&A [rebate] support, what can be pushed out and what other support do you need,” Mr Abboud wrote to head of buying Rod Orrock who is now the CEO of Best + Less.
As Dick Smith was pursuing these “opportunities”, a series of emails emerged during the examination that show management was applying continuous pressure on the buying team to extend credit terms from the suppliers.
Neil Merola the Companies Former Marketing Manager who often lied about the Companies performance was also forced to accept marketing help when the NAB Bank digital marketing team moved in and started making marketing recommendations because the previous strategy developed under Merola’s leadership was not working.
After attending a presentation by NAB’s digital marketing team, Dick Smith started using Facebook and Google to spruik its products, which stunted its store foot traffic and sales in October.
Receiver Ferrier Hodgson is looking for answers from the former management and board as to the retailer’s spectacular failure and is accusing them of chasing supplier rebates at the expense of product mix and long-term profitability.
In late 2015 Dick Smith acquired an extra $20 million credit from HSBC and NAB because it wanted to adopted a digital marketing strategy recommended by NAB, the strategy did not work.
Throughout the examination, bank-appointed receiver Ferrier Hodgson tried to wrangle answers out of executives and directors as to who was to blame for Dick Smith’s demise, not many though highly of Nick Aboud.
Non-executive director Jamie Tomlinson gave damning evidence of the CEO who he considered to be “out of depth” and whose actions at the very heart of the collapse.
The receiver is accusing Dick Smith’s management and board of deliberately buying too much stock and booking upfront rebates from suppliers as profits to inflate short-term earnings. Liquidator McGrathNicol says supplier rebates were the main culprit for the inventory build-up and poor product mix.
The Financial Review said that over the course of the examination, lawyers poked and prodded the issue of rebates. Were rebates good? Were they bad? If they were good in moderation, at what point do they become bad?
The flogging of a $115 million business that was cast off from retail giant Woolworths for $520 million on the share market has been derided by investment fund manager Forager as “the greatest private equity heist of all time”. Phil Cave, the private equity man behind the Dick Smith float, has copped labels such as “greedy” and “unethical”.
But Cave told the examination that the problem of rebates was already brewing when Anchorage bought Dick Smith from Woolworths, which had been managing the electronics retailer since the early 1980s.
Last month, former Woolworths CFO and board member Bill Wavish bragged he taught management the “skill” involved in squeezing rebates. According to chief financial officer Michael Potts, any “street smart” buyer would try to steal rebates from competitors JB Hi-Fi and Harvey Norman.
Former Lion CEO and current Metcash chairman Rob Murray took over the board in March 2015, replacing outgoing chairman Cave, he told the Court that the company’s reliance on rebates was becoming dangerous. Writing to future board member Tomlinson, Murray said the company faced “classic retail challenges,” including its reliance on over-and-above supplier rebates.
Although Abboud denied ever encouraging buyers to purchase products for the sake of getting rebates, it is apparent buyers were groaning under the management’s direction to meet the company’s new 7 per cent rebate target and were exploring every way of maximising rebates.
At Dick Smith, the buyers’ rebate target and results were on full display on a giant whiteboard in supply chain director John Skellern’s office. On each row were the names of the buyers and their categories and each column, their sales and rebate target against the actual result. The whiteboard would be periodically wiped clean and new numbers would appear, tracking the progress of every buyer.
“As part of the process, teams would get together and celebrate wins. Mr Skellern used it as a way of educating the group of how people were getting some good outcomes,” Abboud explained.
The “whiteboard process” was eventually replaced with a more sophisticated system of accounting – but it persisted long after the company became an ASX200 company.