How understanding what killed Dick Smith can help you find a bargain

ONE of the most interesting stories in Australia’s recent retail history is the contrast between JB Hi-Fi and Dick Smith.

ONE of the most interesting stories in Australia’s recent retail history is the contrast between JB Hi-Fi and Dick Smith.

On the surface the two big electronics retailers with black and yellow branding looked much alike. Except one went into administration while the other is announcing profits of over $150 million.

There were many differences below the surface — involvement of private equity in Dick Smith is one, and drama in the executive team is another. Dick Smith was also relying extensively on rebates from suppliers.

But one story that hasn’t been examined closely yet is the difference between the stores at the customer interface, where the rubber hits the road.

Dick Smith ended up with a lot of old stock on hand. Things nobody wanted to buy cluttered the stores, like own-brand TVs that even the company director of admitted he would not buy.

JB Hi-Fi operates differently, and one reason is that they pay very close attention to making sure items move out the door before they get so old nobody wants them.

Understanding exactly how they do that can also help you get a bargain.

THE HI-FI HAGGLE

Anyone who has shopped at JB knows the salesperson will often knock down the price if you ask. They have a little handheld computer that spits out numbers. Those numbers are based on a series of prices — the price tag, the variable “Go price” which is usually slightly lower, and the even lower cost price.

Sales staff can receive different types of commissions depending on the price for which the items is sold. Commissions may, in practice, differ from store to store, but the general set-up is this.

1. For sales at the price tag, commission is 10 per cent of the difference between the price and the cost price. i.e. 10 per cent of the gross profit.

2. For sales above the Go price, commission is also 10 per cent of the gross profit.

3. For sales below the Go price but above cost price: commission is 4 per cent of gross profit. Sales staff will therefore often be reluctant to go below the Go price. (There is no commission for going below a price when an item is already discounted.)

A source with knowledge of JB’s practices confirmed that sales staff may make their first offer slightly higher than the Go price, in order to allow the customer to continue to haggle, and still preserve a 10 per cent commission and a reasonable profit margin for the company.

“In practice, Go is usually enough for 75% of customers. The psychological satisfaction of simply getting a discount often is enough,” they said.

But there is an exception to the above rule. And that applies to what the company calls Q-stock. (Q stands for quit). Q-stock is special, as the source explains.

“Company jargon for ‘Get rid of this at all costs, it’s rapidly losing value and has to go,”’ they said.

“I call this the Dick Smith killer — if their ‘sales’ guys had this power, they might still be here today.”

For Q-stock, the commission works differently. Sales staff are able to pocket two per cent of the total cost of the item as commission so long as they sell it above the cost price, making it more lucrative. (The cost price generally includes the cost of operating the store, etc, and is higher than the wholesale price.)

In the fast-moving world of consumer electronics, JB moves items into the Q-stock category fairly quickly. In categories with high rates of new product release, items that came out just months ago can count as Q-stock. This means pressing for a bargain on a slightly older item might yield impressive results.

And the company will happily give it to you, because if they hang on too long to items that are losing their lustre, they might easily go the way of Dick Smith.

Jason Murphy is an economist. He publishes the blog Thomas The Thinkengine. Follow Jason on Twitter @Jasemurphy