The lessons of Dick Smith and why retailers will never learn them

DICK Smith’s stores plunged into an inexorable death spiral because its leaders failed at this one core retail requirement.

A NSW court case last week has been like an autopsy on failed retailer Dick Smith Electronics. It opened the corpse from head to toe, revealing a wide array of frightening pathologies inside, from a chairman who wants to sack the CEO to some very surprising accounting.

Most of those illnesses could have been survived. There was one disease that mattered. A disease that ate away at Dick Smith Electronics and shows why retail collapses will continue to happen in Australia, time and time and time again. Dick Smith made many unhealthy choices. The only fatal one in retail is to stock things customers don’t want.

The Dick Smith saga is long and fascinating. From an independent store it became part of the Woolworths empire, and was eventually savaged by the rise of online electronics retailers. Woolworths then sold it — for just $20 million in cash upfront — to private equity.

The private equity firm managed, after a short period of very clever accounting, to sell it on the stock market for $520 million. Thereafter came the terminal phase, as CEO Nick Abboud led the company to its demise in February 2016.

That last period is the one we’ve seen examined in court last week. Choice snippets include emails showing the chairman plotting to oust the CEO even as the company goes up in flames. Not to mention a document that shows Dick Smith contemplated buying things from suppliers at 98 cents, selling them back to the supplier at 78 cents, and buying them again at 77 cents. To improve “profit.” (Yes, it is mystifying.)

A lot of the court proceedings have been about dodgy practices that saw inventory levels rise and rise. Dick Smith was buying products because the suppliers would give them rebates. For example, they buy $10,000 of stock, the supplier gives them $1000 in rebates, they put that in the accounts as profit.

That may well be legal. But the problem for the survival of the business is not the accounting. The problem is letting rebates distract you from what retail is actually about.

Retail is ludicrously simple on one level. Buy something, move it somewhere more convenient, sell it for more than you paid. Easy, right?

The complexity is those pesky customers. The perennial problem of retail is predicting in advance what customers will want. The fast moving world of consumer electronics is like fashion retail — prediction power is the heartbeat of the business.

You can be dreadful at everything else, but if you can stock something we will really, really want, you can succeed. In this context, CEO Nick Abboud’s decision to not promote Apple products seems like madness.

Dick Smith was trying to sell TVs with its own brand. It could have been a good idea if the Dick Smith brand was desirable. But it ain’t. Even Tomlinson, a member of the Dick Smith Electronics board, admitted he wouldn’t touch the rubbish they were selling.

“I myself wouldn’t buy a Dick Smith TV. I also observed products like phone brands and the like — I just don’t know who was going to buy them,” Tomlinson told court .

Retail is ultimately not about accounting or inventory control rebates. It’s about understanding people. If you can read them well enough that you know what they will want, you will thrive. Buy 12 years worth of own-brand batteries (like Dick Smith did) and you will fail.

And this is why retailers will continue to go bust in Australia. The business of business is challenging and interesting: accounting, inventory management, cost control. It is tempting to get excited about focusing on that. But the most fundamental job is even harder — to understand your customers and predict what they will want. If you lose focus on that, everything else is irrelevant.