The real lesson from Dick Smith’s collapse

Forget the focus on private equity, discretionary retail isn’t easy. With Dick Smith (ASX:DSH) calling in the administrators, most of the focus has been on the role that private equity company Anchorage Capital played in its demise. Many investors think this is yet another reason to avoid buying stock in private equity floats, a position I’d largely agree with. There is, however, an even bigger lesson. Investing in discretionary retailers like Dick Smith is a tricky business. It is possible to make money from the sector but taking a buy-and-hold approach won’t work here. Michael Porter’s famous ‘five forces’ shows why. By looking at the level of competition and the pressure on profitability in an industry, Porter measures how attractive it is for investors. And bricks-and-mortar electronics retailing is as good an example of an unattractive industry you will find. It’s got the lot; voracious competition; low barriers-to-entry; suppliers opening their own stores; and shopping centre landlords charging a King’s ransom. Then there’s the customers that want the very latest products at the lowest possible price. Full article: (VIEW LINK)