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​Taking stock - How Dick Smith died on its shelves

​Taking stock - How Dick Smith died on its shelves

Failings of collapsed retailer exposed.

Burdened by countless varieties of USB devices, a multitude of cameras and an army of remote controls, the bulging shelves of Dick Smith shed an unflattering light on the retailer’s demise.

Buckling under the pressure of excess stock, the failed electronics provider held 141 months worth of AA batteries, enough to supply the Australian and New Zealand markets for 12 years.

Also, the company would have finally ran out of last longer AAA batteries in 2026, with over 131 months worth of stock, spanning over a decade.

In short, Dick Smith was simply selling “too many products”, as admitted by former chairman, Phil Cave, during a Supreme Court grilling in Sydney this week.

Specific to Australia, the company operated over 330 stores nationwide during 2015, yet alarmingly, only carried out 62 stock takes, contributing to $400 million worth of debts to creditors.

Amidst an era of organisations examining masses of internal company data to uncover hidden patterns, correlations and insights, Dick Smith’s lack of analytical nous is now playing out in the courtrooms of Australia.

“Standard inventory systems would have stated what Dick Smith’s inventory was and would have provided a historical sales forecast,” Data Science Institute founder, Kevin McIsaac, told ARN.

“Predictive analytics can be a little bit snappier than that and can provide predictions about what you are going to sell.

“There’s a lot you can do with analytics in the retail space. If you’re operating specifically in electronic goods, fashion, baby-related products or homewares - the use of digital is now incredibly important.

“And if digital is important, then predictive analytics data must be important.”

According to Sydney Morning Herald reports, there was a “spike” in Dick Smith’s inventory at the turn of 2015, with company stock raising to $350 million.

Yet according to counsel for the receivers, Jeremy Giles, SC, the sweet spot in terms of inventory would have been in the range of $260 million to $280 million, up from the $170 million of stock held in June 2013.

Representing a serious mismatch in terms of analysing stock levels and customer behaviour, Dick Smith’s inability to manage its inventory levels points to a much wider issue for the collapsed company.

Rebates

In light of boardroom concern regarding excess stock, and its recurrence throughout court proceedings, the company’s flawed rebate strategy has also been exposed as a “vulnerable model”.

During examination this week, former Dick Smith CFO, Michael Potts, admitted that “rather than trying to promote product through the press or catalogues it was a better bang for the buck just taking it (the rebate) off the price”.

“I would say that there was a strategy within the business to maximise rebates,” Potts said during the examination, as reported by News Limited.

“That was part of the prospectus when we went to market. We talked about improvement in the profitability of Dick Smith - that was largely through negotiation for additional rebates and support from suppliers.

“If we were able to achieve additional rebates and support from suppliers and improve the profitability of the business, then that was good business.”

Delving deeper, it’s been revealed that the retailer adopted a “whiteboard process” for accounting, which quite literally amounted to recording rebates on a whiteboard in a company office.

Consequently, and as more details emerge, McIsaac told ARN that irrespective of whether data analytics had been in place, based on reports of the investigation so far, the company appeared doomed from the start.

“It’s a failure of governance and a failure of management,” McIsaac said. “You can have all the great tools in the world and the most brilliant IT in the world, but with poor management and poor governance, you will continue to fail.

“There’s an old adage that says ‘a fool with a tool is still a fool’. Even if they had the world’s best predictive analytics, would they have used it properly?”

Kogan model

According to McIsaac, Dick Smith underestimated the value of its online presence, representing a “missed opportunity” for the company.

In March, Australian e-commerce entrepreneur Ruslan Kogan bought Dick Smith's intellectual property, revamping the company as an online-only consumer electronics retailer.

“If you think about someone who has really disrupted the retail industry over the last ten years, then it’s Ruslan Kogan,” McIsaac said.

“He was one of the first to have a digital only model and everything was sold online. But he was also very clever with his strategy.”

As alluded to by the Australian Financial Review (AFR) - “at least someone appears to have benefited from the Dick Smith disaster.”

Kogan relaunched the online store ahead of schedule on May 4, leveraging the same back-end logistics and supplier arrangements as Kogan.com.

The revamped store now stocks over 5500 products, with more than 1800 products available for fast dispatch.

“Ruslan would think of a product that people might want to buy and then he would find a manufacturer in China who would build it based on a spec and tell him what the cost was,” McIsaac explained.

“He would then advertise the product online before he built it and after seeing what the demand was through his website, he would bankroll the development of the product.”

McIsaac said an online experience is driven by data, which is personalised by predictive analytics.

“An example is being able to ensure you are optimising advertising,” he explained. “There are predictive models around that such as attribution that help you get your message in front of people at the right time.

“But also, when customers visit your website do they see an enormous catalogue which is impossible to work through? Or does it have smart searching and recommendation systems? This is something which Netflix and Amazon are very famous for.”

In addition, McIsaac said Dick Smith could have utilised analytics to gain deeper insights into its customer base, from a lifetime value perspective.

“For example, if you knew that a customer was worth $10,000 over a lifetime, which could be seven years, wouldn't a business be happy spending $1000 on advertising up front even though they might only buy $500 worth of goods?” McIsaac added.

“There is a school of thought that says the value of your business is actually the future value of all your customers.”

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