Case studies, Inventory Management

Dick Smith Electronics: From boom to bust

BY Vera Lim 23 Nov, "16

In early 2016, Dick Smith Electronics announced they would be shutting all 363 stores in Australia and New Zealand. For a homegrown brand that grew out of rented premises in a suburban carpark, the closure of Dick Smith Electronics stores has left Australians disappointed to see the demise of a once great local retailer.

As reports around the beleaguered electronics retailer emerged, it became clear that every attempt they made to salvage the business left inventory levels spiraling out of hand. Here’s one example of the bizarre inventory situation: Dick Smith Electronics had 12 years’ worth of batteries in its inventory. When the company secretary was asked to explain the rationale behind carrying so much batteries, he said it was to prepare the company for “higher marketing activity in the lead-up to Christmas”.battery-1821.jpgIn truth, they were buying excess inventory in order to offset poor sales.

By buying more products from their suppliers, Dick Smith Electronics would be able to claim rebates from suppliers that they would put into their accounts as profit. As a result of the company’s reliance on rebates to keep the business afloat, buyers started purchasing stock based on supplier terms instead of following consumer demand in order to hit their 'rebates' target.

Poor inventory management played a significant role in the collapse of Dick Smith Electronics. However, a better idea of their inventory data could have helped them avoid overstocking and dead stock. Here are three key metrics similar businesses can monitor to avoid these issues:

  1. Know your customer demand

    A member of the Dick Smith Electronics board told the court I myself wouldn’t buy a Dick Smith TV… I just don’t know who was going to buy them. The fact that a stakeholder in the company wouldn’t buy Dick Smith Electronics products emphasizes the extent of the problem they had with an inventory full of undesirable products, which resulted in the buildup of dead stock.

    Dead stock describes products that sell poorly, if at all, and these items take up valuable space in storage facilities that could be used to store more popular items. In the case of Dick Smith Electronics, their decision to allow rebates instead of customer demand to drive their inventory purchases resulted in acquiring too much unwanted stock that the retailer couldn’t sell. To further underscore the management’s complete disregard for customer demands, the CEO of Dick Smith Electronics decided to stop promoting Apple products in spite of the brand’s popularity.

    While Dick Smith Electronics’ batteries were likely one of their top selling products, accumulating 12 years’ worth of batteries over four years suggests that the company had little idea of their sales data. Instead of placing new orders when the current stock hit its reorder point, the company instead opted to continually place new orders for batteries without any knowledge of how quickly they were selling.  
  2. Know your costs

    Many articles about Dick Smith Electronics mention a document that reads: “Sell private label product bought at 98 cents, back to the supplier at 78 cents, and rebuy it at 78 cents or even 77 cents... generate cash and make a profit.” It’s left readers confused, as it looks like the brand making a loss on their purchase.

    Cost price is only a part of a retailer’s total inventory costs. After purchasing the products, the retailer then needs to think about storing their inventory. This means paying for inventory equipment, rent, utilities, and labor costs, all of which need to be covered by retail prices.

    Carrying costs should be balanced and justified by the customer demand, as the inventory should be paying for its storage and upkeep. However, in the case of Dick Smith Electronics, they were already making a loss even on the cost price of their product alone.
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  3. Track the age of your inventory

    Not tracking inventory age means that a business doesn't know what's selling well so they can't use this information to dictate future purchases. If the electronics chain had been aware of the number of the batteries they had on hand and their expiry dates, they wouldn't have had 12 years’ worth of batteries.

    Retailers need to know the age of their inventory across individual products because inventory aging reports can offer insights into top sellers and indicate which products are slated for the clearance shelves. However, as retailers grow, they’re likely to start acquiring more products. With more products on hand, keeping track of inventory becomes more challenging.

    According to Gorilla Lab, who specialise in helping eCommerce businesses create their dream store, “It’s easy to think you are making money when you have high volume in sales and easy to forget that you have dead stock sitting on your shelves”

    If dead stock is a concern for your business, it's worth considering inventory management solutions, especially if your products have expiry dates. With an inventory management solution, you’ll be aware of products nearing their expiry and can subsequently focus on moving old stock.

While Dick Smith Electronics’ mismanagement of their inventory definitely contributed to their demise, there were other factors at play. It had a larger store network than its competitors, a declining market share, and the brand was unaware of trends in consumer electronics.

Dick Smith, the founder of the brand summed up the fiasco when he said “(As) a consumer electronics business it probably could remain viable with 100 shops. But when you have the utter greed of modern capitalism, when they opened 300 shops… it’s going to go broke.”

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See also:

Goodbye Guesstimates! Business Intelligence is your key to the future

Out of stock problems? Walmart, Nike and Best Buy had them too, but here’s how you can do better

Zara supply chain analysis - the secret behind Zara's retail success

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