The Dick Smith chain of technology and electrical goods shops is probably a poor example of the wider problems confronting retailing but its collapse this week is a reminder that the shake-out which has rattled the retail world over the past few years is far from over.
The Dick Smith chain of technology and electrical goods shops is probably a poor example of the wider problems confronting retailing but its collapse this week is a reminder that the shake-out which has rattled the retail world over the past few years is far from over.
A visit to most suburban shopping centres, especially the older strips running off railway lines such as Subiaco and Claremont, is a wake-up call for anyone who doubts that retailing is in trouble.
Consolidation into giant, regional, retail centres with their vast car parks and air-conditioned shops is one challenge for the owners of older shops, while the internet continues to eat away at already thin profit margins.
The problems at Dick Smith went beyond those sector-wide issues and included the sale of the business to a private equity firm in 2012 and its re-float on the Australian stock exchange in late 2013, apparently in better shape than when a division of the food-specialist, Woolworths.
What went wrong at Dick Smith will be the subject of several inquiries but the early indications are that a switch from electronic parts to consumer goods was a flop, with that mistake compounded by over-stocking in the hope of bumper Christmas sales.
In effect, Dick Smith went from being a brand with something different to offer to being a business fully exposed to online competition as well as competition from bigger and better-run rivals such as JB Hi-Fi and Harvey Norman.
Whatever the causes of the Dick Smith failure there are a number of lessons to be learned by everyone in retail, and that includes shop owners and investors in shopping centres.
One of those lessons is the ferocious pace of change in retailing which starts with the competition of the internet and flows into the effects of poor customer service in many shops caused by staff cutbacks which, in turn, drive more people to online shopping to avoid the frustrations of traditional shopping – a vicious circle if ever there was.
Declining in-store sales are one problem for shopkeepers but what makes reduced revenue even more painful is the challenge of servicing high, and in some cases, rising rents.
Why landlords would expect a shopkeeper to pay higher rents when sales are falling is a question in itself though it is obvious that rents are a factor in the increasing number of empty shops.
The rent question is a tricky one because property owners need reasonable rents to justify their investment while also providing the cash to maintain a property and perhaps undertake a bit of upgrading.
But, at some point, high rents become the issue which forces a retailer out of business, leaving an empty shop which adds another layer of customer disquiet with the traditional retailing experience.
One of the more remarkable examples of what high rents are doing to retailing was contained in a post-Christmas report in the Australian Financial Review newspaper when a snack-food chain opted to avoid big shopping centres for a tiny space in a laneway of central Melbourne.
The owner of the Brisbane-based Doughnut Time chain of shops, Damian Griffiths rented just 25 square metres of space in Degraves Lane for $90,000 a year on a seven-year lease.
One reason from paying a sky-high rent is the location, adjacent to the Flinders Street railway station which provides a constant flow of customers walking past his front door.
Another is that Griffiths did not want to rent space in a big centre with, in his words: “a controlling corporate operator and pay turnover rent”.
The Dick Smith failure and the action of an expanding doughnut business to avoid a traditional retailing address are just the latest in a number of warnings about the health of Australia’s retail sector.
The next test for retailing will be the release of national sales figures for the critically-important Christmas period with attention focused on the breakdown between in-store and on-line sales.
If, as expected, on-line continued to expand strongly and in-store was flat or down, then the scene could be set for much-wider disruption in the retailing world than the collapse of an electrical goods chain with an uncompetitive business model and inept management.
