Suppliers to Dick Smith were being stung millions with the former CEO Nick Aboud admitting to the NSW Supreme Court yesterday, that that they charged their trading partners up to “two to three times” what it actually paid for advertising space in catalogues. ChannelNews understands that Harvey Norman is also making money from overcharging vendors for marketing activities.
Nick Abboud who claims that he is “not working at the moment” told the court that Dick Smith substantially inflated the fees it charged suppliers for marketing. This is despite the fact that 24 hours earlier a former executive told the Court that the Company took the rebate money in as revenue but then stopped spending money on marketing.
The Court heard that obtaining money for so called marketing was Dick Smith’s “key strategy” for profit growth. He said that the practise was adopted at least two and a half years before the retailer collapsed with debts of over $400M.
Breaking his silence for the first time since the collapse Aboud confirmed that controversial practice which some say distorted the true state of Dick Smith revenues and profits was rampant at the mass retailer.
The public examination of Dick Smith Directors heard that Dick Smith faced financial difficulties as early as October 2014 — less than a year after its $500 million December 2013 float — when it was forced to lift a temporary Westpac overdraft by $15m.
At the same time it was also forced to increase a loan facility from Macquarie Group by $15m to pay for iPhones and other Apple products.Eventually Appple pulled the plug on the mass retailer.
Dick Smith’s receivers Ferrier Hodgson have alleged Dick Smith management “overstated profit” and “overstated the value of inventories” by aggressively chasing hefty rebates from suppliers.
Abboud was asked whether vendor rebates were a “key element for the company’s strategy for growth in margin and profitability” from July 2014.
He responded: “Yes.”
Nick Abboud former Dick Smith CEO leaves the NSW Supreme Court
When asked why, Mr Abboud responded: “Because it was part of the business.”
However, Mr Abboud denied he had developed a strategy whereby purchases were made on the basis of the level of rebates obtainable rather than the prospect of profitably selling those products. Mr Abboud defended the company’s practice of obtaining rebates, saying a “good buyer” would get support from the supplier to ensure it “sells through” to customers.
“Their position is as long as you buy, it’s great, I’ve done my job. So [a good buyer says] hang on, we’re not going to buy the stock, you actually have to promote the stock to sell it,” he said.
He said using rebates to clear inventory was a better strategy than when it was under the leadership of previous owner Woolworths, where the retailer was left in charge of clearing the inventory.
When asked whether vendor rebates distorted the buying decisions by the company’s employees, Mr Abboud said: “Their interest is buying the right stock. The outcome of that is, yes, do that which is great, but you have to sell out your product,” in defence of supplier rebates.
He said vendor rebate remained a key strategy for the growth of Dick Smith. “It’s part of the business,” he said.
The examination heard the company, with Mr Abboud’s approval, sought rebates as high as 7 per cent and Dick Smith’s cash gains from rebates soared from $2m in 2014 to $17m in 2015.
The size of rebates vary depending on the amount of goods purchased but suppliers typically provide about 3 per cent of the cost of goods purchased for the supplier to spend on marketing.
The public examination heard Dick Smith’s desire to use rebates to inflate its financials extended beyond product suppliers, with even the company paid to install lighting in Dick Smith outlets engaging in “price-inflated rebates” with the company.
A management email read out detailed how Dick Smith and the lighting supplier had a deal where the lighting supplier would issue upfront “inflated invoices” to Dick Smith and then pay back the additional cash at a later date.
Mr Abboud said he was not aware such activities had occurred.
