It was Australia’s biggest business collapse in 2016. Poorly planned processes, inventory purchasing failures and expensive expansion strategy were the main reasons behind the collapse of Dick Smith.
About the Company: From Boom to Bust
Dick Smith, which is now known as Dick Smith Holdings Limited was a prominent Australian chain of retail stores that deals in selling electronics goods, electronic project kits, and a much more. The company had been in the great years, and they expanded their business successfully into New Zealand. This new expansion was a success, but they soon reached several other countries without any preparation and market research – this unplanned step took them to the path of demise.
In the initial years, Dick Smith was remodelled with new ideas and stood strong in the competitive electronic business market. They focused on imported electronic components and finished goods and opened a fully-fledged Dick Smith Wholesale business. The owners served their services to electronics hobbyists to meet the specific needs of their commercial customers. They even went overseas to study the new concepts of merchandising for better market exposure.
In 1970, the company generated revenue from the CB radio boom, and by the end of the decade, they expanded their business all around Australia and New Zealand. They had more than 300 stores in Australia and New Zealand. It was going great – they renovated its flagship store in New South Wales to sell a larger range of gaming tools, televisions, Windows computers and Macintosh computers in 2008. But due to lack of short-term and long-term planning, the company collapsed drastically. They entered the global market without any preparations, raised funds but unable to repay them on time, and that’s the reason why they went into the voluntary administration.
Causes of Collapse
In early 2016, Dick Smith Electronics decided to shut down all 363 stores in Australia and New Zealand. This decision left hundreds and thousands of Australians disappointed because they were one of the great local retailers in the electronics industry. According to the reports, poor management of inventory was one of the main reasons behind the collapse of Dick Smith Electronics. They had around 12 years’ worth of batteries in their stock. They keep on buying the excess inventory to offset weak sales, but this whole scenario dragged them backwards and slashed down all their profits. They went insolvent and applied for the voluntary administrator.
McGrath Nicol had been appointed as an administrator who made some findings on the collapse of Dick Smith Electronics. In his investigation, he revealed that the company failed to pay their outstanding debts of more than $260 million to their creditors. The banks would get some money back, but there was no prospect of anything for unsecured creditors. The appointed administrator made some revelations on the causes of the collapse:
A rapid change in the market
The consumer electronics market in Australia is highly competitive. The constant changes in the demand patterns of consumers played a significant role in the demise of Dick Smith Electronics.
Expansion without Planning
Expansion of any company requires a financial commitment, thorough planning and enough cash resources. Dick Smith Electronics lacked in all these aspects while growing their dimensions in other countries. They borrowed money from banks and other financial institutes to meet expansion coasts such as buying new premises or machinery. Other than that, increased production output automatically declined the quality of their products, which led to a lack of sales.
Being a business owner, it is vital to understand that growth and expansion can be a disruptive force. It can downturn your revenues, leave you in the scenario of financial troubles, and put a strain on your staff and resources. This is why proper planning is needed to retain longer in the global market. Dick Smith Electronics made some wrong decisions during the expansion phase and became the victim of insolvency.
Poor inventory management
Dick Smith was left with inactive and obsolete stock. They made some drastic inventory decisions without even understanding the changing customer demand patterns. They didn’t track the inventory age and have had 12 years’ worth of batteries in its inventory. Retailers need to understand the age of their inventory because the demand of customers keeps on changing with time. It is vital for the retailers to track their inventory as well as customer demand pattern to sustain longer in the market. Instead of buying excess inventory, try to sell out all the stock as soon as possible.
While Dick Smith Electronics’ poor inventory management contributed to their collapse, other vital factors played a crucial role in their insolvency. It had a larger store network than its competitors, which led to a declining market share, and the brand was not aware of these trends in consumer electronics. Instead of opening more than 300 shops, it is better to remain viable with 100 shops. This can save you from sudden failures and let you focus on the targeted goals.
Dick Smith went into voluntary administration due to the lack of management skills, poor inventory management and expensive expansion strategies.