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COMMENT: Is the Dick Smith retail train in trouble? According to their latest financials, the consumer electronics division of giant retailer Woolworths has only managed 4.1% growth in the consumer electronics business in its first 2010/2011 quarter ending October 3, 2010. This is only 0.9% up on the prior quarter.

 
In comparison, Officeworks, which is owned by arch competitor Wesfarmers, managed 9.1% growth while JB Hi Fi pulled in a 12% increase in sales. A recent Merrill Lynch analyst report said that Woolworth’s consumer electronics business, which is Dick Smith, has been “particularly disappointing”.
Its earnings have halved over the past three years, while the industry has been strong and JB Hi-Fi’s earnings have more than doubled.
During the past 18 months Woolworths have tipped millions into refurbishing their Dick Smith stores, yet despite this significant capital investment and the opening of new stores there is little growth coming out of this investment. 
Jaycar, a store group that is mimicking the success of the original Dick Smith operation by selling electronic accessories which the new Dick Smith operation rejected, in favour of similar brands to what Officeworks, JB Hi Fi and Harvey Norman sell, and is showing significantly better growth after the opening of their 71st store.
In New Zealand sales declined 2.3%. 
The dilemma for Woolworths is that their Dick Smith operation is fast becoming a lame duck. A combination of small stores, “twee” branding like the use of the word Techxperts, which is more a throwback to a past PC industry, and a product portfolio which is not much different than what is being sold by their mass market competitors and the hundreds of corner store PC shops. 
Even local convenience and petrol stores are taking business away from Dick Smith stores by selling prepaid mobiles, flash storage and accessories. Even within their own group the company is coming under pressure with BigW selling games, DVDs and pallet loads of TVs. Earlier this year, BigW had the #1 plasma TV, a 50 inch model that was selling at sub $1,000.

 
Back in 2008 the consumer electronics division of Woolworths which includes Dick Smith and Powerhouse, booked a 5.7% increase in earnings to $40.8 million.
At the time Woolworths CEO, Michael Luscombe, said there was room to improve. He said that the company was planning to conduct a review of the Dick Smith business in order to gain the same kind of market leading position that the rest of the company’s chains enjoy.
“There will be significant changes in Dick Smith stores in the coming months,” he said.
Today the growth he anticipated has evaporated with the board now facing the dilemma that after tipping millions into the Dick Smith chain they are seeing little return on their investment.
Unlike Gerry Harvey at Harvey Norman, or Terry Smart at JB Hi Fi, Deborah Singh the CEO of Dick Smith refuses to discuss her operation or which direction the company is going in. 
Several analysts believe that Woolworths made a mistake in not buying the JB Hi Fi Group two years ago with the company now facing the real prospect of further business being stripped away from the Dick Smith group due to high levels of margin erosion and increased competition from not only the mass retailers but the likes of Telstra and Optus who are looking to expand their retail operations.
Telstra has already sold over 60,000 T Box media players via their own stores during the last quarter. Next week Telstra launch a $299, 10 inch, Android Tablet as well as several new Smartphones. Optus is offering $1 a day pre-paid packages.  
It appears that Dick Smith is struggling to identify which category they want to compete in with several of their stores failing to deliver profits because of size and product ranging.

 
On the upside, Dick Smith has seen 65% growth selling online despite this being from a small base, but as Australians develop an appetite for online buying there is every possibility that they could become an online force if the operation is marketed properly.
Kogan Online is a classic example of an online operation that Dick Smith could compete against, with private label brands while also offering a range of known brands that the likes of Kogan struggle to get access to.
For Woolworths, the strategy of eliminating their Tandy and larger format Powerhouse stores and rebranding them as Dick Smith appears to be an exercise that is sucking up capital while delivering little, if any, future. 
Today Dick Smith is, as one analyst said, a “massive issue for Woolworths”.
 
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