Dick Smith makeover shows early promise

It was good this past week to see the new public face of an iconic Australian company re-emerge. And it’s part way through a serious makeover. At the end of this transformation there’s little doubt that shoppers, and the markets, will say “You beauty!”

Dick Smith turns over $1.7 billion, and generated a little under $25 million in free cash in its last financial year as part of the Woolies group. Dick Smith’s new CEO is Nick Abboud. I met Nick when he was previously at Myer with Bernie Brookes, turning around a luxury department store with a 30-year-old point of sale and back office system, and a dependence on locally sourced, high priced brands from subsidiaries or distributors of international brands.

Dick Smith’s non-executive director is the legendary retailer Bill Wavish. I met Bill as a guest of Kochie and his family at a Sydney Kings basketball game, as both Bill and Kochie are owners of the Kings. Bill and Roger Corbett were the architects of Woolworths’ “virtuous double loop” of lowering costs and giving half to Woolworths shoppers in lower prices, driving higher sales, and giving the other half back to the shareholders.

Now, given both Nick and Bill’s backgrounds, it was interesting to see in an article by Sue Mitchell in The Australian Financial Review that there is a target of sourcing around $150 million in products via a Hong Kong buying office. Done well, direct sourcing of $150 million of product at cost is a little over 10% of Dick Smith’s total buying budget, but almost 20% of sales revenue, and closer to 30% of cash margin. Direct sourced products make good money for retailers.

With all the talk around the worry of rising prices for imported goods from a lower Aussie dollar, Dick Smith’s  sourcing strategy negates this impact by buying at lower prices than branded international manufacturers, via their own subsidiaries or distributors, who choose to supply Australia generally and Dick Smith specifically.

So what brands will Dick Smith buy via Hong Kong? Well, it doesn’t matter, so long as they buy well and manage those new brands into winners. Retailers want a point of difference; with brands they can price and promote without bumping up against other retailers. So retailers can launch and build third-party challenger brands. Costco does this each time it sees a new small brand or product. It trials it in the store before any other major retailer, and if it works, just keeps buying.

It’s also good to see the prominence of online in the Dick Smith makeover, as well as the emphasis on breadth of choice, offering four times more products at the online store than in the physical store. Online also helps retailers of very fast-changing and fickle technology products as it allows you to be first to market, and first out of market, holding less obsolete products.

OK, so what about competition? Can Dick Smith really compete against the consistently well run JB Hi-Fi? Well, there is space for Dick Smith and JB Hi-Fi. Very different brand ranges, very different shopper experience. Just as there is space for Masters and Bunnings. Very different brand ranges and very different shopper experience. Just as we see new and exclusive brands in Masters winning new shoppers, expect to see new and exclusive brands in Dick Smith stores as the sourcing strategy kicks in.

In the words of Sol Trujillo when he began the process of network investment at Telstra to support the future needs of a burgeoning Australian appetite for smartphone and wireless mobile broadband, “I’ve seen this movie before.” We’ve seen these turnaround movies before, and both Bill Wavish and Nick Abboud have played key roles in them.

Expect the completely made over Dick Smith to comfortably grow to a $2.2 billion retailer with annual profits of $150 million by January 31, 2016. That’ll give it a market cap of $1.5 billion at IPO, somewhat more than the $94 million paid. If you’re a supplier, go and talk to them. If you want to be part of a team that’s going to grow and win over the next three years, go and join them. If you like shopping, go and shop there.

CROSSMARK CEO Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores.