Could we have seen the Dick Smith crash coming?

Could you have seen it coming for Dick Smith Holdings Ltd (ASX: DSH)? The stock has crashed 87% since the start of the year and the last thing shareholders want to hear is someone singing “I’ve told you so”. I won’t be doing that… okay maybe just a little, but it’s for a good reason (you just need to read to the end of the article for it to become obvious).
Brendon Lau

Vantage Point Partners

You see, the reason why I’ve never bought into the Dick Smith hype is because it reminded me too much of the failed US chain Radio Shack, which finally fell on its sword early this year.


If you have ever walked into a Radio Shack store, you will know where Dick Smith got his idea from when he started the business in 1968.


Radio Shack spent nearly a century in existence and its last few years was like a slow moving train wreck. Most could see it coming but yet no one questioned the IPO of Dick Smith in late 2013 even as Radio Shack was starting to crumble.


While there are distinct differences in circumstances between the two businesses, the factors that forced Radio Shack to the wall are more similar than dissimilar to the headwinds buffeting Dick Smith.


For one, Radio Shack had lost its way and no one knew what the brand stood for. The same can be said about Dick Smith.


Both businesses thrived in the early days because they appealed to geeks – or armature electronics hobbyists. But Radio Shack alienated its biggest supporters as it changed it focus. I can’t help but think that about Dick Smith as I walk past the few aisles it had set aside for transistors and chips.


The other key factor behind Radio Shack’s collapse is its product mix. It had a pretty eclectic assortment of products. I feel the same way about Dick Smith whenever I go into one of their stores.


The product mix challenge is a particularly big risk for small-format electronic retailers like Dick Smith when compared with larger rivals like JB Hi-Fi Limited (ASX: JBH) or Harvey Norman Holdings Limited (ASX: HVN) because of its limited floor space.


Having a much smaller area means it becomes even more critical for Dick Smith to get the right range of products in its stores. Trying to compete against larger discount retailers like JB Hi-Fi when it comes to everyday consumer products just won’t work because Dick Smith probably has a higher cost base from having many small stores compared with fewer large stores. Just think about the logistics!


Radio Shack was also very slow at embracing eCommerce. Dick Smith is at least a little better on this front as management is getting aggressive online with multiple promotions on websites like eBay, although I wonder if it is too little too late?


Does this spell the end of small-format electronics stores? Embattled shareholders of Dick Smith will be grateful to hear that this isn’t necessarily the case – just look at Apple Stores.

Dick Smith shouldn't become a mini- JB Hi-Fi or Harvey Norman.


While Dick Smith can’t be in the same fruit bowl, the real key to predicting the survival of Dick Smith is whether or how management repositions the business. If Dick Smith’s answer to its misfortunes is to go harder against the like of JB Hi-Fi, I would bail.


Dick Smith needs to find its own market voice – the brand needs to stand for something again if it wants to remain relevant to shareholders and consumers. So far, I am not hearing anything.

Brendon Lau
Brendon Lau
Associate Director - Investor Relations
Vantage Point Partners

I am with Australia's leading small caps investor relations and media relations firm, Media & Capital Partners. I worked as a small caps analyst and journalist prior to MC Partners. Views are my own and should not be regarded as advice or...


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