Accounting for Managers: An Analysis of Dick Smith's Business Collapse

This essay provides a comprehensive analysis of the business failure of Dick Smith, an iconic Australian electronics retailer. It begins with a historical overview, tracing the company's evolution and identifying its success drivers, including expansion and financial milestones. The essay then delves into the major structural changes, such as acquisitions by Woolworths Limited and Anchorage Capital Partners, which shaped the company's trajectory. A critical section examines the reasons for Dick Smith's collapse, highlighting issues like ineffective inventory management, excessive reliance on rebates, poor product mix decisions, and the company's inability to adapt to a competitive market. The social impact of the collapse on employees, customers, and creditors is also discussed. Finally, the essay extracts key lessons for the business community, emphasizing the importance of effective inventory management, the potential pitfalls of private equity floats, and the crucial role of customer service in a competitive landscape. The essay draws on various sources to provide a well-rounded understanding of the Dick Smith case.

Running head: ACCOUNTING FOR MANAGERS
Accounting for Managers
Name of the Student
Name of the University
Author’s Note

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Assessment Task 1: Individual Essay on Business Failure of Dick Smith
Introduction
Over the time span of last 10-15 years, many companies have faced insolvency and
gone into liquidation due to certain financial difficulties and other reasons. It is an essential
aspect to understand the key reasons behind the business failure so that effective strategies
can be made for reviving the business conditions. The objective of this essay is to discuss
about the key aspects of Dicks Smith which was known for being one of the major retailers in
Australia. The undertaken aspects about Dick Smith in this essay are the company’s history,
success drivers, and reasons for collapse, lessons and others.
History of Dick Smith
In the year of 1968, a young electronics technician named Dick Smith founded the
brand named Dick Smith with an investment of $610. In the initial days, the company
focused on the installation and service of car radio; and then, the company opened the
business of ‘Dick Smith Wholesale’. By 1980, the company grown to 20 stores and
Woolworths Limited purchased 60% of the working shares of Dick Smith by paying AUD25
million(dicksmith.com.au, 2019). In the year 2012, the ownership of Dick Smith shifted from
Woolworths Limited to Anchorage Capital Partners through a consideration of AUD20
million (dicksmith.com.au, 2019). Therefore, it can be seen from the above discussion that
Dick Smith had a history of shifting ownership from one company to another company.
Lastly, Kogan.Com acquired the business operations of Dick Smith in the year of 2016 that
includes the acquisition of intellectual property, online services and brand names
(dicksmith.com.au, 2019).

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Success Drivers and Financial Milestones
Before the incident of business failure and liquidation, Dick Smith was famous for its
business successes and major financial milestones as well as achievements. The main success
driver of the business of Dick Smith was the introduction of new lines of businesses along
with the major expansion plans. Due to this, the company was able in expanding its business
operations from installation and services of radios to the electronic retail and wholesale
business. The management of the company strongly focused on profitability through the
increase in revenue which would led to the generation of major profits (dicksmith.com.au,
2019). These success drivers helped the company in fast expansion of the stores all over
Australia. Positive financial results helped the company in its expansion. For instance, Dick
Smith was able in achieving year-on-year revenue growth from 2013 to 2015 along with
steady gross margin. All these aspects together helped the company in gaining major
financial and non-financial success over the years (dicksmith.com.au, 2019).
Major structural Changes
The acquisitions of Dick Smith by Woolworths Limited and Anchorage Capital
Partners need to be mentioned when discussing about the major structural changes in the
company. Throughout the period from 1981 to 1983, Woolworths Limited acquired 100%
ownership of Dick Smith through two acquisition stages (theconversation.com, 2019).
Woolworths Limited continued to operate the business of Dick Smith for 31 years. In January
2012, as a result of a strategic review undertaken by Woolworth Limited, it took the decision
of closing 100 of its Dick Smith stores along with selling the outstanding of the business
(theconversation.com, 2019). During 2012, as a result of a sale campaign undertaken by Dick
Smith, Anchorage Capital Partners Pty Limited purchased the business of Dick Smith. On
November 26 2012, 100% ownership of DSE Holdings and subsidiaries from Woolworths

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Limited was acquired by Dick Smith sub-Holdings. At the time of this transaction,
Anchorage Capital Partners owned 98% ownership of Dick Smith and LMA Investments Pty
Limited owned rest of the 2%. Dick Smith received a payment of $94 million from
Anchorage Capital Limited due to its acquisition (nbr.co.nz, 2019). In addition, Woolworths
Limited was paid by $21 million for working capital adjustments which made the total deal
worth $115 million. On October 25 2013, Anchorage Capital Partners incorporated Dick
Smith as an Australian Public Company with the aim to raise capital by initial public
offerings of its shares. It was possible to source $418.2 million from this initial public
offering (mcgrathnicol.com, 2019).
Reasons for the Collapse
There were certain reasons responsible for the business failure of Dick Smith. The
management of Dick Smith used earnings management as a strategy for deliberately
manipulate the earnings figures which was aligned with the pre-determined targets
(businessinsider.com.au, 2019). More precisely, certain actions of the management of Dick
Smith were responsible for its failure and ineffective inventory management was one of those
(news.com.au, 2019). The issues related to inventory of Dick Smith started to appear during
the second-half of 2015 when the management indicates writing down their inventory values
by 20% (businessinsider.com.au, 2019). This inventory was bought by the company in
accordance with the estimation of a certain level of sales, but they failed to attain this level of
sales; and therefore, a clearance sale was declared by Dick Smith through decreasing the
value of stock by 70% for clearing the inventory and this was the situation when rebate came
into the picture. For Dick Smith, rebates acted like a drug. The company required rebates
from the suppliers for generating cash flow which is considered as a company’s life blood,
bur due to the decline in the company’s performance as a result of decrease in sales, Dick
Smith used rebates excessively for getting rid of low profitability level (afr.com, 2019). The

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administrator of Dick Smith, Joseph Hayes, mentioned that the management of Dick Smith
was making decision what stocks to buy on the basis of rebate involved to the stock, instead
of demand of the customers. This led to build-up of inventory while contributed to ineffective
product mix decision. Since rebates only provide short-term incentives, excessive use of
rebates by Dick Smith slowed down inventory turnover rate because of the less popularity of
products to the customers (afr.com, 2019). This was a major reason for the business failure of
Dick Smith.
There were many other issues that also contributed towards the business failure of
Dick Smith. Dick Smith used to operate in the retail market of Australian and New Zealand;
and the highly competitive and increasingly price-based nature of this industry affected the
market share and profitability of Dick Smith (theconversation.com, 2019). During the year
2015, Dick Smith was holding 9% of the market share after its well-resourced and effective
competitors like JB Hi-Fi, The Warehouse, The Good Guys and Harvey Norman. In addition,
Dick Smith failed to capture the online shopping platform. In this situation of losing marking
share, the sales of Dick Smith was declining by an average of 8.8% between 2015 to 2016
which made Dick Smith unable to response to the competitive pressure (mcgrathnicol.com,
2019). Even in this situation of decline in the sales in core business, Dick Smith continued its
strategy to expand stores. From 2015 to 2015, there was a fall of $113,000 in the sales of the
existing stores; and the decline in the sales from the new stores compensated this situation. It
could be seen that a total of $83 million was invested by Dick Smith from 2013 to 2018 in
capital expenditures related to the new stores and debts. The management of Dick Smith felt
the negative effect of this capital expenditures when the sales from the new stores started to
decline(mcgrathnicol.com, 2019). Although, Dick Smith was able in reducing the excess,
obsolete and end of life stocks with the help of clearance sale in 2015, the inventory or
product mix of the company failed in meeting the customer demand at that time of the year.

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The main reason for the ineffective product mix was significant challenge faced by Dick
Smith regarding suppliers, cash flow deficiencies and the depiction of both popular and
unpopular products in the clearance sales (mcgrathnicol.com, 2019). All these aspects
together majorly contributed towards the business failure or collapse of Dick Smith.
Social Impact of the Collapse
The business failure of Dick Smith created certain social impact on both its internal as
well as external stakeholders. The employees of Dick Smith were the major internal
stakeholders who lost their jobs after the business failure of Dick Smith. It needs to be
mentioned that the collapse of Dick Smith caused 2460 Australians and 430 New Zealand
staffs lose their jobs which was a major negative impact. Bill Wavish and Philip Caves from
Anchorage Capital Partner were two major internal stakeholders (abc.net.au, 2019).
Customers were the main external stakeholder and they were affected due to the business
failure of an iconic retail company like Dick Smith. Another crucial external stakeholders
was the creditors as Dick Smith owed $390 million in debts, $250 million unsecured loans
and $140 million secured loans. The large number of shareholders of Dick Smith was another
affected group of shareholders that demanded compensation after Dick Smith’s collapse
claiming that they already knew the inventory issues (abc.net.au, 2019). Apart from these
stakeholders, the business failure of Dick Smith affected the business society in negative
manner due to the adoption of unethical business practice for increasing profitability and
showing the business as in good condition.
Lessons from the Collapse
The collapse of Dick Smith provides the business community with certain lessons that
are useful for the effective running of businesses. One major lesson from the collapse of Dick
Smith is that the companies are needed to ensure effective management of inventory as it is

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an essential aspect (news.com.au, 2019). Dick Smith had to face major inventory problem
which started from second half of 2015 and the company declared to write down 20%
inventory value worth $60 million; and this write downs was quickly followed the large
clearance sale of the firm. This was a major reason for Dick Smith’s collapse. Therefore,
effective management of inventory is essential for the companies to ensure survival
(smartcompany.com.au, 2019). Another crucial lesson from the business failure of Dick
Smith is that the private equity float are not always profitable as they seem. The part of
private equity group Anchorage Capital Partners in the business failure of Dick Smith
provide significant background to the collapse of the retailer and demonstrates that private
equity floats may not be as profitable as they seem (indaily.com.au, 2019). Other companies
like Myer and Collins Foods also lost the shareholder’s money from private equity floats, but
they were not as remarkable as Dick Smith. At the same time, the collapse of Dick Smith
shows the importance of customer service in a highly competitive market. The Australian
electronic retail market is a competitive one in the presence of a handful of noticeable
players. Dick Smith came under fire in December when an annoyed customer on Facebook
claimed the non-delivery of online order for weeks and the customer service representatives
of the company has hung up the phone on those who had rang for complaining. The
inconvenience caused to a large number of customers by the poor service of Dick Smith was
a major reason for the collapse of the company (news.com.au, 2019). Therefore, the
companies are needed to ensure effective customer service to make their business sustainable.
Conclusion
The above discussion states that Dick Smith used to be an iconic electronic goods
retailer in Australia; and new product lines as well as expansion strategy were the main
success drivers behind the success of Dick Smith. Two major structural changes in Dick
Smith were the acquisition of the company by Woolworths Limited and Anchorage Capital

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Partners. It can be seen from the above that certain reasons contributed towards the collapse
of Dick Smith; they are ineffective management of inventory, excessive misuse of rebates for
increasing profitability, poor decision regarding product mix, lack of effective customer
services, market related factors, decline in sales, ineffective expansion strategy and others.
The business failure of Dick Smith affected both internal as well as external stakeholders of
the business along with the vast business strategy. Certain lessons learned from the business
failure of Dick Smith are effective management of inventory, stop excessive reliance private
equity float, and ensure efficient customer service and others.

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